From CS yesterday:
Solar Snippet
SECTOR FORECAST
Italy may have installed 6GW in 2010 –
concerns of an eventual cap could increase
Bottom line. The Italian interconnect agency GSE has noted on its website that Italy may have up to 7GW of cumulative installations completed by the end of 2010. If this news is true, then ~6GW of panels were likely shipped into Italy, possibly ~5GW in 2H10 alone. This would imply Italy was running at over 40% of total panel shipments in 4Q10, a similar run-rate as in Spain before the government capped the installations in 4Q08. We think this news significantly increases the risk of a cap in Italy to curb the high rate of installations. We would caution that the cap is not YET in place, and until a cap is placed companies could continue to report strong earnings. We would also caution that the only source of this news is the information on the GSE website, and we have not yet had an opportunity to verify this further. This news is consistent with our view that risk/reward is skewed to downside on the sector, with Italy and Germany accounting for over 50% of the installations, and demand likely to be constrained by policy actions versus responding to elastically to panel price cuts as we move through the year.
Supply and lack of visibility added issues. Compounding the issue is the possibility that solar panel suppliers do not have a precise idea of end-use of their panel shipments – shipments into Germany for example could be diverted to Italy which are not clear to the panel suppliers – suppliers think their demand is geographically diverse, while in reality it may not be as diverse. Even markets like the US where demand has been strong, has shown recent signs of order cancellations and weakness, increasing the risk of overdependence on Italy. Solar suppliers are also adding wafer and cell capacity at a very significant pace, which further increases the risk of margin compression due to over capacity. Most of the solar companies directly or indirectly have exposure to Italy, SPWRA and WFR have downstream project activities in Italy. FSLR does have a solid pipeline outside Italy, but does trade at a higher multiple, and can be exposed to derivative risk if Italy imposes a cap.
Details. The information was announced by the GSE during an informal hearing before the commission. GSE estimates that in 2010 up to 1.85GW was actually connected, but there are “communications” received for another 55,000 plants with a capacity of 4000MW which are in addition to this level. The agency notes that though not all connections have not been made, at the end of 2010 there could be 7000MW of installed capacity for PV versus 1142MW at the end of 2009. The agency also notes that in 2011 we may have already reached the 8000MW target for the years up to 2020.
Germany analogy. Recall that back in August, there was news that Germany installed 2.1GW of panels in the month of June alone – this drove a sell off in stocks initially, and eventually led to the German government reducing FiT by up to an additional ~15% starting in July 2011 (which has already been questioned by some CDU/CSU quarters). This overhang of policy response in Germany drove solar stocks lower in 4Q10, along with an increasing concern of supply growth. The Italian strength also explains why Germany may have appeared to have weakened in 4Q10, which is also consistent with our thoughts on what happened in Germany in 2H10.
Spain analogy. In 2008, Spain was ~2.4GW, representing a total of ~40% of the total market of ~6GW. Spain was running at over 40% of total supply in 2008 – if you look at Italy at 6GW in 2010, our total 2010 demand would increase to ~20GW – implying Italy would have been ~30% of total demand. While Spain shipments were 1H weighted in 2008, Italian shipments were 2H10 – implying Italy was running likely at a similar run rate in 2H10 as Spain was in 1H08.
Companies Mentioned (Price as of 24 Jan 11)
First Solar (FSLR, $156.40, NEUTRAL [V], TP $137.00)
MEMC Electronic Materials Inc. (WFR, $11.52, OUTPERFORM [V], TP $15.50)
SunPower Corp. (SPWRA, $14.47, NEUTRAL [V], TP $15.00) |
