Once again dark clouds have returned over the Chinese solar sector following a bright spot towards the end of last year. In the past 14 days solar giants Yingli Green Energy (NYSE.YGE) and Trina Solar (NYSE.TSL) have both forecast lower shipments for the first quarter. Yingli projected a 30% fall on lower domestic demand and delayed delivery to Algeria; Trina flagged problems in shipments to Europe, a major market. That triggered another run on related China solar stocks late last week, although there has been a mild recovery in recent days. The overall outlook on the sector is patchy. Keith Li, a Hong Kong-based analyst with CIMB, on Thursday said that he has been “neutral” on solar stocks since the beginning because the market has been “overly optimistic” on new installation figures for this year. That is partly because of weaker additions in Japan and China, which combined accounted for half of new installations globally last year. Tokyo is slashing feed-in tariffs for solar and restarting some nuclear power plants. In China, forecasts for solar installations growth are closely linked to distributed power, but few such projects have actually taken off. “Even though China and Japan will grow, they will not be able to grow as rapidly as people expect,” Li said on the phone. Still, there are some dark horses in solar stocks. Li said China Wind Power Group (0182.HKG), United Photovoltaics Group (0686.HKG) and China Singyes Solar Technologies (0750.HKG) are all “interesting” as downstream solar power plant producers are still enjoying good rates of return and this is unlikely to change in the next one to two years. No need to turn the lights out just yet.
China Mobile’s painful long-term evolution (LTE)
The glazed expressions of Chinese commuters riding the subway as they stare at their screens indicates the ubiquity of smartphones in big cities. But until last year, it seemed dominant mobile operator China Mobile (0941.HKG) was at risk of missing out on that particular train. The mobile carrier was caught napping by its competitors, who took advantage of China Mobile’s negligence and quickly upgraded their networks to service higher data volumes – a shift that has ripped into China Mobile’s once lucrative text-messaging revenues. Responding to declining profits and the external threat in a manner befitting a state-owned colossus, the carrier unleashed huge investments into building its 3G and 4G networks. This has, however, taken a toll on its bottom line for the last few quarters; the company reported this week that first-quarter 2014 earnings were its lowest in five years on high investment costs. But this spending should be a reason to stay optimistic on the company. More of the company’s subscribers are switching from 2G to 3G and at a faster pace, a trend that should help arrest falling profits by 2016, UOB Kay Hian analyst Victor Yip said on the phone from Hong Kong. Although earnings continue to disappoint, Yip said China Mobile’s valuation was “not expensive at all” relative to its competitors. Also, a new value-added tax recently imposed on the telecoms industry was more likely to hurt China Mobile’s competitors than the company itself. UOB Kay Hian has a “buy” rating on China Mobile.
Qualcomm gets tag teamed in trans-pacific probes
It’s hard to ignore the royalties that Qualcomm (NASDAW.QCOM) collects on almost all 3G and 4G handsets via the patents the US company holds on the equipment for those networks. Growth in China’s smartphone market is slowing, even stalling, in 2014 but that hasn’t stopped it from continuing to buy up more devices than any other country in the world this year. Investors should be happy with that. As the innovator of CDMA, the most widely used global 3G standard, the company picks up a royalty of 3-4% of the phone cost for every purchase. “As more and more 3G-capable smartphones hit the market and carriers expand their 3G networks, we think Qualcomm is poised for strong licensing revenue growth over the next few years,” Morningstar, a research firm, said in a note this week. Yet, investors shouldn’t ignore the potential probes closing in on Qualcomm on both sides of the Pacific. In February, China’s anti-monopoly regulator said the company was overcharging and abusing its position in the market. Then, this week, Qualcomm divulged in a filing that not only had it been accused of violating the Foreign Corrupt Practices Act, but that its own investigation had found that its China unit had been gifting people at state-owned enterprises. The tag-team probes don’t bode well for Qualcomm’s business at home or abroad. The company’s share price fell by 4.3% in aftermarket trading on Wednesday when profits in a quarterly report didn’t match analysts’ expectations. Investors should keep up with the latest accusations before adding it to portfolios.
As reported last week, fabrics producer Wing Tai Holdings (1400.HKG) will hold its Hong Kong IPO today. There are no other listings of China-linked stocks in the city or the US this week. On Monday, the China Securities Regulatory Commission posted draft IPO prospectuses for 18 mainland firms but there is no sign that listings will resume anytime soon following a two-month hiatus as each firm still needs to get approval. China seems no closer to moving to its long-awaited registration system that would make it easier for firms to go public on the mainland.