
| A slowdown in solar installations in China, like this one in the country's Ningxia Hui autonomous region, have weighed on the stock prices of solar companies, analysts said. |
Solar stocks took a beating at the end of September as concerns mounted over the outlook in China, underscoring the outsized influence that the world's biggest solar market continues to wield even as the industry diversifies geographically.
The Invesco Solar ETF, which is based on the MAC Global Solar Energy Index, fell 1.3% in September compared to an increase of 2.4% in the value of the S&P 500. Solar's September slump is striking in light of the sector's outperformance the rest of the year; the Invesco Solar ETF is up 58.3% in 2019, compared to an 18.7% increase in the S&P 500.
Analysts blamed the slide on darkening forecasts for solar demand in China and Beijing's decision to tweak how power prices are set.
"[Data] points around near-term China demand and pricing were worse than expected," Goldman Sachs analysts wrote to clients Sept. 25 following meetings at a solar industry conference in Salt Lake City.
While growth in the global solar industry this year was expected to be propelled by up-and-coming markets, China still demands the attention of executives whose companies may not have direct exposure to the country. China is expected to account for between 39% and 44% of global solar demand in 2020 and 2021, according to analysts at Credit Suisse. The country accounted for nearly half of solar installations in 2018.
China "represents a substantial amount of global demand and a weak quarter ... may drive marginal pricing lower," Philip Shen, a senior research analyst at ROTH Capital Partners, said in a Sept. 27 research note.
Solar investors had largely been ignoring headwinds in China, but market conditions there are likely to be "factored more and more into stocks ahead," Shen said.

Low gear
China's solar market has been stuck in low gear since the government took steps in 2018 to slow the pace of project construction and reduce subsidy costs. With new policies in place, observers and market participants have been waiting for a rebound that has been slow to materialize.
During the first half of 2019, China installed just 11,000 MW of solar, Goldman Sachs analysts said. That is less than a third of the capacity that some observers expected to come online in the country in 2019.
"China's growth cadence is incredibly uncertain," analysts at Cowen Equity Research said in a Sept. 25 client note. That echoed comments by the International Energy Agency, which recently said solar demand in China "remains the biggest uncertainty" in its 2019 outlook.
"Installations are expected to pick up in earnest in October ... however, our checks around pricing suggest that trends are further weakening" heading into the fourth quarter, Goldman Sachs analysts said. "[We] believe a meaningful supply chain pricing rally into year-end looks fairly unlikely with pricing at risk of further weakness next year should China demand be lighter than expected."
Analysts at Credit Suisse blamed the sell-off in solar manufacturers on changes China announced in the way power prices are set. The country calculates solar subsidies based on a benchmark power price, so any change in the benchmark "could potentially impact China solar project [returns], module gross margins, or demand," the analysts said
However, Credit Suisse said the "underperformance was overdone as benchmark power pricing was better than feared."
With the sector "up so much" this year, Shen speculated that solar stocks might also have been hit by investors selling shares in order to lock in profits.

