Chinese Solar Stocks — from Bad to Worse (STP, YGE, TSL, JASO, LDK, FSLR, SPWR)

Suntech was the largest maker of solar panels in the world, with annual capacity of around 2,400 megawatts of production capability. Yingli Green Energy Holding Co. (NYSE: YGE) has 1,700 megawatts of capacity, and Trina Solar Ltd. (NYSE: TSL) and J.A. Solar Holdings Co. Ltd. (NASDAQ: JASO) are not far behind. Total global capacity was around 59,000 megawatts in 2012, about twice as much as was installed last year. Something had to give.

First it was the higher cost companies in Europe and the United States, but the rapid expansion of Chinese capacity has now caught up with Chinese makers no longer able to get cheap loans from either the central or local governments. The Chinese government decided last year that it would not bail out its solar players, even though it had provided the funds for most of the expansion.

Now the government may cut back on the massive solar projects it has on its drawing board for this year. Bloomberg News reports that an official with the China Renewable Energy Society has said that the government may abolish subsidy programs for some of its largest solar projects and redirect the funds to smaller installations. That doesn’t sound like it would hurt particularly, but the manner in which the subsidies would be paid is the catch.

Under the current rules, developers selected by the government get a subsidy of $0.88 per installed watt provided the project is completed on time. This rapid payment scheme is what is at risk.

Smaller solar installations are awarded a feed-in tariff that pays off over 20 years at an above-market rate for the electricity generated. Staunching the flow of immediate payments will severely sharpen the pain caused by overcapacity.

LDK Solar Co. Ltd. (NYSE: LDK) may be the next casualty. The country’s second largest wafer maker has been scrambling for investors as it continues to post quarterly losses. Gross margins were negative in the third quarter of last year and are likely to be negative for the fourth quarter when the company reports earnings, currently scheduled for the end of April.

A cut to the Chinese government’s solar subsidies will hit all the Chinese companies hard. U.S. solar makers First Solar Inc. (NASDAQ: FSLR) and SunPower Corp. (NASDAQ: SPWR) are less vulnerable to a shift in Chinese subsidies, and their relative strength in designing, engineering, and installing solar PV systems has helped them ease the pain of falling module prices.

Since the beginning of the year, SunPower’s shares have more than doubled while First Solar’s shares are off about 12%. Of the Chinese solar makers, only J.A. Solar shows a gain (about 1%) since the beginning of the year. And there are more hard times ahead for the Chinese companies.