MEMC Electronic Materials (WFR), a global leader in semiconductor and solar technology, is another top holding in CGAEX. It gets technology efficiencies from its semiconductor business and also has a history of strong ESG and EHS (environmental, health and safety) practices, Donge says.
Solar manufacturers that ignore the risks of the highly-toxic hard metals they use could face long-term consequences, she notes. In September, a major protest was held outside a Jinko Solar Holdings factory in China that polluted a nearby body of water.
Ridiculous Valuations
The folks at the Guinness Atkinson Alternative Energy fund believe that alternative energy companies across the board have been unfairly punished during the recent sell-off in global equities. And none more so than solar stocks.
They note that, at least among certain solar companies they follow, the dynamics are different from 2008 when solar stocks went down the tubes. They say the better companies have stronger balance sheets with more cash and less debt than in 2008, coupled with larger manufacturing capacity at lower cost, improved inventory management, better brand management, and stronger distribution relationships.
"We therefore believe that recent market volatility has led to a select number of solar companies becoming significantly undervalued," the fund's managers said in a September report.
"We are referring here to lowest cost Chinese solar manufacturers which are taking market share from Western peers," co-portfolio manager Matthew Page said in a follow-up email.
He cites Trina Solar as an example. It trades at a price-to-book ratio of 0.5, has $630 million on the balance sheet and trades at a P/E multiple of 9 times expected 2012 earnings. "They make very high quality modules and have established sales channels into key markets," Page said.
Yingli is another example. It trades on a price-to-book ratio of 0.4, has $887 million in cash and trades on a P/E of 13 times 2012 earnings expectations. "It is integrated across the manufacturing value chain," Page noted.
"Given their low costs structure and market share we believe they will weather the current turbulence and should be trading on more reasonable valuation metrics when sentiment turns," Page said.
Cautious Optimism
London-based Climate Change Capital Ltd. (CCC), an investment manager and advisory group specializing in opportunities created by transition to a low-carbon economy, also remains enthusiastic about solar.
"As costs continue to fall, the size of markets where solar is cost competitive with fossil fuels will grow larger and larger," says Ben Caldecott, head of policy at CCC. "This is very exciting, especially in least-developed countries, where decentralized energy is essential for development."
He adds that a significant attraction of solar--whether PV or thermal--is that it's a scalable technology that can be deployed in a range of ways to suit local needs; whereas wind is not nearly as flexible, especially at a smaller scale.
Nonetheless, Caldecott says investors need to consider several factors. For starters, solar needs continued and significant real cost reductions from technological improvements, not structural oversupply. And comparative advantages between solar producers arise--and then vanish--faster than in many other industries. Additionally, Chinese state-owned banks are providing ample sources of cheap capital for that country's domestic solar industry.