Research firm Axiom upgraded its rating on the solar energy sector two notches to Overweight from Underweight. China's decision to reduce solar subsidies could cause global solar prices to jump in the first half of 2017, the firm stated. In conjunction with the note, the firm upgraded several Chinese solar energy companies, raising its ratings on Yingli Green Energy (YGE), Trina Solar (TSL) and JA Solar (JASO), all to Buy from Sell. The firm also upgraded solar energy system seller SolarCity (SCTY), which has agreed to be acquired by Tesla (TSLA), to Hold from Sell.

SUBSIDY CUT SEEN SPARKING DEMAND: China's decision to cut solar subsidies as of January 1, 2018 could spark a surge in demand for solar installments in the country, wrote Axiom analyst Gordon Johnson II. In past years when Beijing cut subsidies, projects connected by June 30 were eligible for the higher subsidy, and solar demand in the first half of the year jumped as project developers looked to ensure that they received the higher subsidy, the analyst noted. If the same pattern occurs next year, solar demand in China should jump to about 25 gigawatts, or GW, in the first half of 2017, Johnson believes. The strong demand in China could cause global demand to come in at a run rate of about 78.3 GW in the first half of the year, versus Johnson's 2016 estimate of 58.1 GW, the analyst stated.

HIGHER PRICES: The stronger demand will cause the prices of all kinds of solar equipment to surge, Johnson believes. As a result, many solar companies' margins and multiples will jump, he contended.

OTHERS TO WATCH: Other publicly traded companies in the space include Canadian Solar (CSIQ), First Solar (FSLR) and SunEdison (SUNEQ), and SunPower (SPWR).

PRICE ACTION: In late morning trading, Yingli added 1.3% to $3.92, Trina rose 0.9% to $10.34, JA Solar climbed 5.5% to $6.95, and SolarCity dropped nearly 2% to $19.67. According to the companies' merger, each share of SolarCity common stock will be converted into the right to receive 0.11 shares of Tesla common stock, which is also down 3.5% to $201.18 this morning.