BUY OR SELL-Solar stocks: weak market, but big promise

By Nichola Groom

LOS ANGELES, June 18 (Reuters) - Solar power companies have been hit hard this year by a lack of access to financing for new projects and a global oversupply of panels that has sent prices on their products into a freefall.

But despite a struggle to preserve profits, many solar manufacturers have seen their stocks log double-digit gains this year on investor optimism that government incentives in China and the United States will kickstart demand for solar and unleash dramatic growth opportunities in two massive markets.

Is the promise of big Chinese and U.S. demand down the road enough to keep up the momentum in solar stocks, or will falling panel prices, sluggish credit markets and a weak global economy eventually put the breaks on the runup in share prices?

Three analysts from around the world weigh in:

BURT CHAO, ANALYST AT SIMMONS & CO IN HOUSTON:

"The message we're imparting to our clients is still caution. There is a lot up ahead that could really help solar out, like the subsidy environment in China. It has the potential to be a very big market. The Chinese government has said that they want to do it .... However, we just don't know the magnitude of the potential move. Most people have started focusing how they are looking at the market onto 2010. The question becomes how much growth do you see in 2010?

A lot of people are looking at Chinese companies as cost leaders. The question is who can join First Solar Inc (FSLR.O) (as a low-cost maker of solar panels) .... There are some of these Chinese companies like the Suntechs (STP.N) of the world and the Yinglis (YGE.N) and the JA Solars (JASO.O) that have a very low cost structure. Suntech, they are somewhat the Wal-Mart of solar at this point. They have a quality product and they have the largest amount of scale. First Solar for the forseeable future has the low cost advantage, but one thing that may be challenging is access to the Chinese market. The management team there is smart enough that they are starting to ask questions about how they can access China."

Some of the companies with higher costs -- some of the European competitors -- they can't compete on a cost basis. This is not a death sentence for these companies, but they start a little behind in this next race. A lot of the European companies have historically enjoyed low-cost polysilicon contracts. Now in an environment where everybody can access low raw material costs, the inability for these companies to decrease their processing costs will become even more pronounced. Now that they are able to access lower priced silicon, the Chinese rapidly gain a price advantage."

KARSTEN VON BLUMENTHAL, ANALYST AT SES RESEARCH IN HAMBURG, GERMANY:

"The solar market is still in a very difficult situation. Chinese companies are slashing prices and there is no short-term easing in sight. Add to this the slump in the Spanish market, and it is clear why 2009 will be tough and I actually expect a rather slow recovery. I'd see winners in companies that are big enough to survive such as Q-Cells (QCEG.DE) and SolarWorld AG (SWVG.DE), who are also taking advantage of economies of scale. I'd refrain from making an investment in smaller production companies. The end of the value chain seems to be doing rather well and companies such as Phoenix Solar AG (PS4G.DE) and Payom Solar AG (P1YG.DE), that are actually installing photovoltaic systems, are likely to benefit from falling module prices."

CHARLES YONTS, SOLAR ANALYST WITH CLSA IN HONG KONG "If we see a pullback (in stocks) overall, regardless of anything else, solar will sell off. Now, (China subsidy news) that's the counter to that. We will continue to see more news leak out of China ahead of the official announcement in August and that's going to serve as some sort of a floor to keep share prices relatively buoyant." (Reporting by Nichola Groom; Additional reporting by Christoph Steitz in Frankfurt and Leonora Walet in Hong Kong; Editing by Richard Chang)