Strategic trade
Trade view / 02 July 2015 at 4:27 GMT

Jinkosolar radiates as A-Shares feel the freeze

China Watcher / Shanghai
China
Instrument: JKS:xnys
Price target:
Market price:
Background

The volatility in China’s domestic A-Share market has affected US listed Chinese ADRs, and has caused a notable decline over the past three days. Chinese solar energy firms have been particularly hit as oil prices have fallen.

The problem is that the relationship between oil and solar demand is very weak, because oil accounts for a small percentage of global electricity output. Nevertheless, this irrational decline presents an opportunity for investors.

As I have argued previously, the strongest firm in China’s solar energy industry is Jinkosolar. It isn’t crippling under debt like other rivals, and it has begun to operate an overseas manufacturing plant in order to avoid the anti-dumping tariffs that are applied to Chinese manufactured solar panels.

Since June 24th, Jinkosolar’s share price has fallen 9.5% to yesterday’s close of $28.82, despite there being no company-specific reason for the decline.

The firm is set to announce its second quarter earnings in the third week of August, which will be an important insight into the state of domestic demand in China. The first quarter is seasonally slow for China’s solar energy firms, and management discussed how there was a bottleneck of solar projects in China, which the government should have resolved during the second quarter, and this is likely to have seen the firm record notable growth in its downstream business.

Jinkosolar - five year chart

Jinkosolar's 5 Year Chart
Source: Stockcharts.com - Create your own charts with SaxoTrader. Click here to learn more 

China had previously classed carbon emission control as an internal issue, but on Tuesday, Premier Li Keqiang met with French President Francois Hollande and announced that China will aim to reduce its carbon dioxide emissions per unit of GDP by 60-65% by 2030.

This is a major change from China’s prior reluctance to discuss its emissions control at an international event, and investors should see this as a further long-term driver of Chinese solar energy shares. Although the government had pledged to increase the usage of renewable energy sources in domestic press releases, this represents the first time that China has made such pledges on an international scale. 

Management and risk description

China’s A-Share market looks set to experience more volatile trading over the next week, and investors should expect that this would affect shares in Chinese firms such as Jinkosolar. The government has been cracking down on excessive margin trading, and the general consensus in the market is that this has been achieved.

In addition, to provide support to equity markets, the government has pledged to invest more of the state pension fund into equities. The result of this should be that the number of large declines in the Shanghai Composite index will be minimized.

The earnings release in the middle of August will be the major driver for this trade view, and as such, I have set the time horizon to two months. Investors should be aware that basing a trade view around an earnings release has inherent risks, and that given the volatility of US listed Chinese firms due to the domestic A-Share market, the thesis of the trade view may not transpire as expected.

Parameters

Entry: $28.82

Stop: $26

Target: $32

Time horizon: Two months

— Edited by Adam Courtenay

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