Renewable energy might be set to suffer in the short term, but the recent oil price crash may well serve as a turning point for the clean energy transition.
Carbon emissions have been falling sharply due to coronavirus. Such far-reaching impacts have stirred global action in accelerating our transition away from reliance on fossil fuels.
In recent years, clean energy has been growing increasingly competitive. The shift towards climate awareness, economies of scale, and green technologies have made “green stocks” attractive in the market.
Chinese solar stock
Xinyi Solar Holdings Ltd (SEHK: 968) has been one of the beneficiaries from this fast-growing sector. It is one of the largest global solar glass producers in the world and currently contributes around 30% of market share in the China market.
Its business principally engages in the manufacturing and sales of various types of solar glasses. Over the past few years, as we see global renewable energy investments acquiring prominence, global trends in renewable energy can be reflected from the rapid scaling up in development from market dominators.
Xinyi Solar is a good example. Its stock price has soared and its 52-week high was sitting at $7.04.
In its latest financials as of FY 2019, the company’s sales and net earnings surged by 18.6% and 29.7% year-on-year, respectively. Such growth seems consistent with the company’s high Return on Equity (ROE) of 19.64%.
On the other hand, its gross margin was up by 4.4% year-on-year. This was mainly driven by reviving offshore demand in solar investments that saw an upward trajectory in the selling price of solar glass in 2019.
I believe such upside in the business’s performance should also be worth accrediting to the synergies generated from the spin-off of its now listed subsidiary – Xinyi Energy Holdings Ltd (SEHK: 3868).
In a nutshell, Xinyi Energy owns, operates and manages solar farm projects that were initially developed and constructed by Xinyi Solar and as of today, Xinyi Solar still owns a 52.7% stake in Xinyi Energy.
The spin-off of Xinyi Energy in May 2019 not only assisted the group to expand its investor base, but also strengthened its future financial capabilities.
For example, its net gearing ratio improved significantly from 66.2% in FY2018 to 24% in FY 2019. A lower gearing ratio indicates lower business financial risk.
The reduced gearing was derived from the disposal gain from selling solar farm projects to Xinyi Energy. This created cash inflows that enabled Xinyi Solar to become more financially capable on research and development for new projects.
Likewise, it provides greater comfort to investors, as well as greater funding opportunities to the company from healthier credit ratings.
The spin-off also allowed Xinyi Solar to stay specialised on its three core businesses – solar glass, the development and construction of solar farms, and its highest-revenue generating business, the engineering, procurement and construction (EPC) business.
To absorb greater market share, the group diverted part of its R&D into niche markets (i.e. thinner glass products, namely – bifacial and double-glass solar modules). It also upgraded its production facilities for mass production to differentiate its position from competitors.
Furthermore, the group has been actively taking initiatives to capture market growth opportunities by progressively expanding its production capacity in Malaysia, Tianjin and Anhui to align with market demand.
Such strategic movements have enabled the group to fulfil overseas orders more flexibly and efficiently. This has resulted in year-on-year revenue growth of 17.7% and 33.7% in the PRC domestic market and overseas market, respectively.
The company will face challenges in terms of having to delay its capacity expansion plans as well as global solar farm installations in 2020 amid Covid-19 worries. Prices on solar glass will continue to fluctuate on demand needs.
Yet, the fundamentals of Xinyi Solar have done well in the last year. Despite all the uncertainties that lie ahead, the company’s future performance should gain momentum in the long term.
This is on the back of the fact that the company is financially healthy and as global sentiment shifts towards climate awareness and green technologies.