Guard Against Solar Cell Burns

By JAMES SIMMS

Getting too close to the sun can singe your wings, investors in the solar-panel sector are sure to learn.
Beijing's pledge to subsidize up to half of the cost of installing solar panels raised euphoria in the sector to a new pitch this week. On Thursday, New York-listed shares of Chinese solar-cell companies surged. On Friday those gains continued in shares of solar-panel makers from Mumbai to Tokyo.
This short-term excitement belies some key long-term risks. Namely, the rush of companies entering panel production is reminiscent of the now oversupplied flat-panel and semiconductor markets. Companies in those sectors are losing money faster than they can raise it.
In Japan alone there are over a dozen manufacturers of solar cells and modules, including Sharp, Hitachi, and Honda.
The space is growing crowded. Sharp is building a plant that could increase production by as much as 69% when it comes online in about a year; Korean electronics giants Samsung and LG are looking to enter on a large scale; and India's Webel-SL Energy said Friday that it is investing in a second factory.
That's not to mention the many Chinese firms already in the game. By one count there are at least thirty listed solar cell and module makers globally.
None dominates. China's Suntech Power, Sharp, and Germany's Q-cell each control around 10% of the market, according to Macquarie Research.
That isn't yet translating into profits for Sharp. In the year ending next March, Sharp will lose over $150 million at the operating level on nearly $1.6 billion in solar-cell revenue because of flat demand and a 40% drop in yen-based prices, Credit Suisse forecasts. Red ink is expected also for the following year.
This week, China's Solarfun Power Holdings posted a fourth quarter loss of $61 million because average solar-cell prices fell 17% on soft demand and high inventories. Suntech too posted losses, and warned the current quarter could be worse than the last.
News of China's subsidy trumped all this. Solarfun's shares rose nearly 42%, and Suntech's 43%. Elsewhere, Webel rose 11%, and Hong Kong's Solargiga Energy jumped 21%.
But this sensitivity to subsidies can also bite. In Japan, nearly 90% of demand is for residential use and extremely sensitive to installation costs. When photovoltaic subsidies ended there in 2006, sales nose-dived 27% the next year, Macquarie says.
This is one investment best made with a thick layer of protection.
Write to James Simms at james.simms@dowjones.com