Key Takeaways:
- ReneSola has encountered recent headwinds due to Covid-related lockdowns in China and withdrawal from a major U.S. project
- Company looks better positioned than peers from other industries due to accelerating focus on renewable power construction in the west
By Doug Young
Its inclusion in a couple of solar promotion programs powered solar farm builder ReneSola Ltd. (NYSE:SOL) to a market-beating performance on Tuesday, defying a bigger selloff that saw the S&P 500 index drop into bear territory. Despite that market-defying performance, ReneSola itself is also a bear based on its performance this year, losing about a quarter of its value since January, including a 12% decline in the four days since announcing its latest quarterly results.
For the record, a stock or broader index is defined as entering bear territory when it drops by 20% or more from a recent high.
Just about every sector is facing numerous macro headwinds at the moment, caused by inflation that is leading to a rising interest rate environment and ongoing supply disruptions created by the global pandemic. Those disruptions are particularly harsh in ReneSola’s home China market, where local governments have consistently shut down parts of or even entire cities for prolonged periods in pursuit of the country’s “zero Covid” policy.
In its first-quarter results announced last week, ReneSola said the steady string of China lockdowns has “caused severe supply chain disruptions” for the company. As a result, it said, it was revising the target for construction of its self-operated China-based solar farms this year to between 50 MW and 70 MW. In the previous quarter, it had said it had 114 MW in mid- to late-stage projects in its pipeline in China.
The company’s U.S. operations also suffered a setback when ReneSola abandoned one of its major projects in the market due to grid connection issues, bringing its mid- to late-stage projects under construction in the market to 552 MW at the end of the first quarter. That was a sharp downward revision from the previous quarter, when it had 728 MW of mid- to late-stage projects in the market.
To put that in perspective, ReneSola had around 2,000 MW in mid- to late-stage projects in its global pipeline at the end of March, meaning the abandoned project was equal to about 10% of its total. Easy come, easy go.
Truth be told, the new energy sector is probably one of the best positioned to weather the latest global economic turbulence due to a separate macro trend that is seeing western countries accelerate their building of solar and wind power. ReneSola is among the better positioned companies within that group, since it builds and then sells solar farms, meaning it doesn’t hold any long-term assets that could rise and fall in value with the usual market rhythms.
That positioning is reflected in the company’s trailing price-to-earnings (P/E) ratio that stands at a lofty 46 right now. That’s higher than the 35 for leading solar panel maker JinkoSolar (NYSE:JKS), and the lowly 3 for polysilicon maker Daqo New Energy (NYSE:DQ). Such a high valuation is especially impressive when one considers ReneSola is quite a bit smaller than the other two, with a market cap of about $300 million compared with $2.8 billion for JinkoSolar and $4.3 billion for Daqo.
Slow quarter
Despite the individual setbacks in China and the U.S., ReneSola’s first-quarter results and announcement of its inclusion in a couple of government-sponsored solar promotion programs in the U.S. both point to a company that’s well-positioned in its specialized area as a solar farm developer.
We’ll start with the solar promotion programs, which look more promotional themselves than financially significant for the company. That development saw ReneSola announce on Tuesdaythat one of its solar farms in New York and another in Illinois, both with about 20 MW of capacity, were awarded with Renewable Energy Credit (REC) contracts.
ReneSola can sell such credits to power distributors to help them meet government-set mandates to provide specified percentages of their electricity from renewable sources. It can also sell such credits to environmentally-conscious organizations, which can use them to show that they are getting their power from renewable sources.
Such credits do have some value, which can add to ReneSola’s revenue. But that revenue is probably more symbolic than substantive, showing the company enjoys strong support from both the government and also society as a whole.
That leads us into ReneSola’s actual first-quarter results, which look quite modest due to what appears to be mostly cyclical reasons. The company reported its first quarter revenue plunged 85% year-on-year to just $3.5 million. Most of that came from the sale of power from its China solar farms, which is typically much smaller than the sums it gets from the sale of those farms to long-term operators.
As a result of that big drop, the company slipped into the red with a $1.7 million loss for the quarter, reversing a $0.8 million profit a year earlier. But it indicated its business would pick up through the year, reiterating it still believed it would generate between $100 million and $120 million in revenue for all 2022.
The accelerating revenue should help to bring the company back into the black, with ReneSola forecasting it would post a profit of $9 million to $10 million for the year. On a valuation basis, that profit would translate to a forward P/E ratio of around 32, roughly comparable to JinkoSolar’s current valuation.
ReneSola spent a considerable amount of space in its latest earnings report pointing out how macro trends are in its favor, especially in Europe where the EU is accelerating its recent drive to wean itself from Russian oil. It noted that the EU recently boosted its target for renewable energy to 45% of its total by 2030, from a previous target of 40% set just last year.
At the end of the day, ReneSola may be in a bearish state right now, but it still looks far better positioned than companies from many other sectors. It’s likely to face more headwinds in the months ahead, especially in its critical China market, unless Beijing modifies its zero Covid policy. Many are predicting such a modification could happen in the next few months. If that happens, it could provide some nice upside for the stock as Beijing looks for a better approach between balancing epidemic control and supporting the country’s economy.
