(Bloomberg) -- Shares of Chinese solar manufacturers surged this week amid optimism the government will step in to curb production and help rein in an output glut.
The sector rallied after speculation began Tuesday that the Ministry of Industry and Information Technology may publish rules to limit the production of polysilicon. Shares gained even as analysts from Daiwa Capital Markets and Citigroup said they were unconvinced.
Solar names have dominated the list of best performers on the CSI 300 Index over the past five days. Xinjiang Daqo New Energy Co. led all constituents with a gain of 48%, while Trina Solar Co. jumped 35%. Xinyi Solar Holdings Ltd. beat all its peers in the Hang Seng Index with a surge of 32%.
In Friday’s premarket session, Daqo New Energy Corp.’s American depositary receipts rallied 12%. Canadian Solar Inc. and JinkoSolar Holding Co. gained 3.9% and 4.4%, respectively.
“The recent news has addressed the supply-side problems of the solar industry,” Tebon Securities analysts Peng Guangchun and Bai Xin wrote in a research note. “Improving risk appetite may provide greater room for solar stocks to gain, bringing investment opportunities.”
A number of solar stocks have climbed back above their highs set on Oct. 8, the peak of the trading euphoria driven by China’s announcement of new stimulus measures. In addition, shares of sector heavyweights such as TCL Zhonghuan Renewable Energy Technology Co. and LONGi Green Energy Technology Co. have formed technical patterns that point to further gains.
The change in policy, if true, may speed up the retirement of less-efficient polysilicon plants, and also ensure that capacity that has already been suspended isn’t restarted, said Dennis Ip, an analyst at Daiwa Capital Markets Hong Kong Ltd.
There’s also anticipation of a meeting by a high-level official with the China Photovoltaic Institution Association, triggering expectations for significant policy changes, he said.
Some investors remained unconvinced. “The range of outcomes remains very wide” as profit margins at companies across the solar supply chain face heavy pressure, said Ginny Chong, head of Chinese equities at Mondrian Investment Partners. “We still don’t see the risk-reward as being compelling for much of the value chain.”
Talks about capacity restrictions aren’t new, and “none of the rumors really changed the fundamentals,” said June Lui, a portfolio manager at Polen Capital. With the overall industry capacity still expected to increase in second half of the year, it’s difficult for any industry player to fix the price at current levels, she added.
Solar shares have had a tough time in recent years as industry overcapacity sapped their earnings outlook. TCL Zhonghuan Renewable Energy Technology and LONGi Green Energy Technology both slid by almost 50% last year alone.
Nevertheless, optimism started building this month when the industry body said at a meeting with major firms that undercutting competitors by bidding at a loss may amount to a “breach of the law.”
--With assistance from Wojciech Moskwa.
(Adds share-price moves and investor comments from the fourth paragraph.)
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