S. 945 “Holding Foreign Companies Accountable Act”

The senate unanimously passed this act yesterday. It’s amazing to believe the most polarized poltical body in the United States could agree to something so wholeheartedly. This amendment will have a material impact on the ADS (american depository securities) of foreign companies specifically Chinese companies. The major requirements of the bill are two fold

1. The PCAOB must be able to regulate the company in subject’s auditor
2. The Company must demonstrate that they are not owned by a central government

While many companies will be able to adhere to the first stipulation the bill was designed to exclude all Chinese companies from adhering to the second requirement. Considering the only position I currently possess is a Chinese security what does this mean for me.

Firstly, institutional investors will liquidate their equity shares in Chinese companies as a precautionary reaction to this bill. This will inevitably depress the share price of these companies significantly. Secondly, the uncertainty around the passage of this bill will lead to an immediate devaluation by the financial community of any Chinese security and will persist for sometime until the political reality becomes clear. Both of these reactions do not bode well for the short term performance of Chinese companies ADS price and cast doubt on their long term performance.

In reaction to this political escalation by congress I only have one option. Which is to liquidate my recently acquired position for a nominal change in value and be done with this affair. I do not like this option because I firmly believe Jinko Solar is well positioned to capitalize on the World’s transition to renewable energy. Their ability to manufacture high efficiency solar panels at extremely low costs represent a competitive moat that is difficult to overcome. Additionally the company is currently the largest manufacturer of pv-modules and would probably extend this lead over time. I also believe their relatively inexpensive panels represents an ability to strengthen margins over time and become increasingly more profitable over the next five years or so. Also by divesting from the actual solar projects themselves and focusing solely on the production of pv-modules they are focused on doing what they do best. It is an unfortunate political escalation which has both dramatically clouded their long term prospects and led to a real reduction in their market value.