JinkoSolar Over Everyone Else? How Morgan Stanley Is Playing Chinese Solar Stocks

• Shares of JinkoSolar Holding Co., Ltd. JKS have gained more than 16 percent year-to-date, despite Tuesday's near 10 percent decline.
• Analysts at Morgan Stanley named JinkoSolar as a top pick within the China solar space.
• JinkoSolar is expected to expand its margin profile in the third and fourth quarter and the company would also benefit the most if the Chinese FiT payment is approved.

Solar stocks were plunging on Tuesday but Sheng Zhong of Morgan Stanley said the Chinese solar market remains "attractive."

Zhong is expecting "solid" solar product demand over the next two quarters, driven by 1) U.S. order strength prior to the expiry of the U.S. solar investment tax credit (ITC), and 2) a likely reduction in China's solar feed-in-tariffs (FiT) in the first quarter of next year. The analyst stated that midstream module makers are "positioned to reap the benefits" of these tailwinds.

JinkoSolar Reiterated At Overweight

According to Zhong, JinkoSolar has a "strong order flow" for the rest of 2015 and into 2016. The analyst suggested that the company could achieve "solid" profit growth in the third quarter and fourth quarter, up 32 percent and 21 percent quarter-over-quarter, respectively, due to U.S. rush orders. In fact, the company is likely to be the only China-based name to achieve margin expansion in the bottom half of 2015.

Related Link: Solar Stocks Are Plummeting: Here's Why

Zhong said that if the FiT subsidy payment is resolved in late 2015 or early 2016 (as expected), JinkoSolar would be the "greatest beneficiary" and could receive a power generation subsidy of up to Rmb600 million that could "support" its balance sheet and potential investments.

Shares were maintained with an Overweight rating with a price target slightly reduced to $33.40 from a previous $34 and was named as a preferred investment within the China solar group.

Trina Upgraded To Overweight

Zhong upgraded shares of Trina Solar Limited (ADR) TSL to Overweight from Equal-Weight with a price target slightly lowered to $11.70 from a previous $12.60.

Zhong noted that Trina's asset-light strategy will result in "strong" module shipment growth and the company will maintain its No. 1 position in terms of sales volume. The analyst added that the company's external module shipments will be close to 4.5GW through 2015 which will result in a third quarter net profit of $17 million and a fourth quarter net profit of $18 million.

Zhong also pointed out that Trina will roll out its Thailand based manufacturing plant that would allow the company to enable U.S. shipments without trade dispute tariffs in 2016.

Canadian Solar Initiated At Overweight

Zhong initiated coverage of Canadian Solar Inc. CSIQ with an Overweight rating and $30.50 price target.

Zhong argued that he expects Canadian Solar to sell downstream projects rather than operate under a Yieldo – a thesis that is contrary to consensus expectations. The analyst noted that if the company were to sell its projects beginning in 2016, it could generate $600 to $700 million in gross profit through 2018.

In addition, Zhong suggested that Canadian Solar's module gross margin should expand to 17.6 percent in 2017 from 14.5 percent in 2015 given its more in-house vertical production and potential capacity in Thailand.