In September, Stephen Yu Zhang compared the solar manufacturers he covers to contestants in "The Hunger Games." Some of the world's solar-panel makers needed to die off, in his view, like contestants in the popular book and movie.
His thesis was that demand for solar panels wasn't an issue. The problem was supply. "There is just so much supply in China," he says. To figure out who will survive requires a sophisticated examination of debt payments, not technology advantages or even cost. "You have to pay attention to loans," says the 40-year-old. "You can have an operation where costs are low, but guess what? Next month you have a $100 million loan due."
This dim view of the sector led to a well-timed sell rating and a bevy of holds, which pushed Mr. Zhang, an executive director of China International Capital Corp., to the top of the alternative energy sector in the Best on the Street survey.
In March, he slapped a sell on LDK Solar Co., and the stock lost 71% of its value throughout the year. He put a hold on Suntech Power Holdings Co., once the world's largest solar-panel manufacturer, and a company lavishly praised by some of Mr. Zhang's competitors. In March of this year, a subsidiary of Suntech filed for bankruptcy protection in China after it failed to make a loan payment.
The story around solar power is enticing. Costs of solar power keep falling and, in some parts of the world, are quite competitive. But Mr. Zhang points out that falling costs mean "you make no margins and you can't pay back your loans." Avoiding the temptation to fall in love with solar, he says, is a key to covering the industry.
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He doesn't think a turnaround for solar companies will happen in 2013. Mr. Zhang, who covered power utilities for Sanford C. Bernstein until relocating to China in 2010, says he believes the market will stay oversupplied into 2015. He is keeping a close eye on cash flows, loans and bankruptcy potential.
The solar competitor who survives, he says, may be China's ReneSola Ltd., which he praises for having a good profit potential and low risk of bankruptcy.
Overall, he doesn't see many opportunities to buy solar stocks. Indeed, if a solar stock price rises on market news, he sees that as an opportunity to wager it will go down. "If any policy puffs the stocks up, that's a short opportunity," he says.
"One day, given the speed of innovation and the cost reduction, solar energy will be on par with other sources" of electricity generation in many markets, he says. But until that day arrives, Mr. Zhang warns that investors should be cautious about solar stocks and keep a close eye on loan payments that could trigger a bankruptcy filing.