April 28, 2010 (Chinavestor) Volatility for Chinese solar companies have increased in the past six month - and a good part of it is due to the ever increasing effect of the value of the dollar. Canadian Solar (NASDAQ:CSIQ) became oversold lately despite an upward revision of first quarter shipment target. Share price of industry leaders, Trina Solar (NASDAQ:TSL), Suntech Power (NYSE:STP) and LDK Solar (NYSE:LDK), have been basically flat in 2010 while some smaller cap solar plays like Yingli Green Energy Holdings (NYSE:YGE) and JA Solar (NASDAQ:JASO) are in the red - despite an increasing demand for solar products.
Just how much solar stocks depend on the price of the dollar is striking. Investors know that solar stocks and the price of oil correlate. The higher the oil the pricier the solar shares. Reason being that demand for solar is on the rise when energy prices soar. This is 101. But here is the trick. Strong dollar means cheaper oil prices, as the dollar buys more oil. So a strong dollar is not good for Chinese solar makers.
EURO-USD vs. Train Solar (NYSE:TSL) last six month
But there is another, less known, factor that is dollar related and is effecting Chinese solar makers: net foreign exchange rate related losses. What's this? This is an increasingly significant loss Chinese solar makers incur as the dollar gets stronger against the euro.
Europe, Germany and Spain in particular, is the largest foreign market for Chinese solar companies. When they collect revenues in euros, their income in dollar shrinks as the dollar firms up. So while they make the same amount of sales in euro, net sales in dollar is just less when the dollar gets stronger. So the strong dollar not only pulls oil prices down, making solar less desirable, but cuts into the top and bottom line of all Chinese solar makers as their revenues in dollar gets less.
How significant this net foreign exchange loss is, one may ask. Take a look at Canadian Solar (NASDAQ:CSIQ). The company issued an upward revised PV shipment outlook for the first quarter of 2010 on April 20, yet fell -8% thanks to a projected loss of $18-$20 million from such losses. Canadian Solar (NASDAQ:CSIQ) said in the statement that "The Company expects to incur a material net foreign exchange loss for the quarter, estimated at US $18 million to US $20 million pre-tax, due to the significant depreciation of the Euro against the U.S. dollar during the quarter."
Considering that Canadian Solar (NASDAQ:CSIQ) reported a net profit of $15.0 million in the last quarter of 2009, the projected $18 - $20 million foreign exchange loss may push the company back in the red.
And don't forget, Canadian Solar (NASDAQ:CSIQ) is not the only Chinese solar maker exposed to this effect. Suntech Power (NYSE:STP), Trina Solar (NASDAQ:TSL) and LDK Solar (NYSE:LDK) are vulnerable, not to mention smaller players like Yingli Green Energy (NYSE:YGE) or JA Solar (NASDAQ:JASO).