Morningstar Rating: Suntech Power Holdings Co., Ltd. STP
Thesis 01-11-08
We believe Suntech Power has established itself as
China's premier crystalline solar manufacturer, having
quickly become the world's third-largest supplier of
photovoltaic (PV) modules. Suntech has been able to
leverage China's low-cost manufacturing base and
favorable tax regime to meet blistering worldwide
demand. What has set it apart from other Chinese
competitors is its technological edge and growing
reputation as an innovative, high-quality manufacturer.
Suntech focuses its manufacturing on the back end of the
PV chain, beginning with silicon wafers and transforming
them into energy-producing modules. This concentration
has allowed the firm to build scale where technology has
the greatest value. While we believe the majority of
existing crystalline manufacturing techniques are quickly
becoming dated, with little differentiation, Suntech might
have a unique twist. Its new Pluto cell manufacturing
technology promises to deliver cell efficiencies that are
10%-15% better than competitors' offerings. This
technology advantage manifests itself on the
manufacturing side as well, promising a lower realized
cost per watt. Further differentiation on the technology
front comes from Suntech's acquisition of MSK, a thin-film
solar manufacturer. While many experts predict thin-film
solar technologies will gain increasing market share in the
coming years, few Chinese solar firms have any technical
expertise in thin-film manufacturing. With a 50-megawatt
plant coming online in late 2008, MSK should afford
Suntech a roadmap to the next generation of PV. This is
especially critical for higher-margin building-integrated
PV, where thin films offer distinct advantages.
Finally, Suntech has garnered a reputation as the
highest-quality and most reliable Chinese PV firm. This is
a result of its commitment to building a strong worldwide
distribution network and offering quality product support.
This is evident in many of Suntech's distribution
arrangements with integrators such as Akeena Solar,
where Suntech's solar panels are the basis for innovative
designs that promise to bring down overall solar system
costs.
However, while Suntech's focus on the back end of the PV
manufacturing chain has helped exploit its technical
prowess, it could prove to be its Achilles' heel in the short
term. The crystalline solar industry's shortage of raw
polysilicon, its main ingredient, has forced manufacturers
to secure polysilicon at historically high prices and on
unfavorable terms. We believe Suntech's risk for silicon
procurement is heightened as a result of increasing
dependence on startup silicon producers. This is in sharp
contrast to competitors with more vertically integrated
business models. In addition, Suntech and all other
crystalline manufacturers are susceptible to emerging
solar technologies that promise dramatically lower
manufacturing costs.
Valuation
We are raising our fair value estimate to $80 per share
from $32. We believe that as the premier Chinese solar
module manufacturer, Suntech will continue to benefit
from increasing solar demand and is exhibiting a clear
manufacturing path toward expanding gross and operating
margins. We anticipate revenue increasing more than
80% in 2008, to more than $2.5 billion, as Suntech
increases its installed capacity by 85%, to 1,000
megawatts. While we anticipate strong but declining
sales growth beyond 2008, growth projections looking
three years out are subject to a high degree of variability
in this nascent industry. Gross margins should continue to
expand through 2010, peaking at 27.5% as continued
increases in production capacity build scale efficiencies
and lower contracted silicon pricing comes online.
Operating margins should follow suit and approach 20%
over the next three years. Despite longer-term margin
erosion beyond 2010, we believe continued strong solar
demand will translate into healthy free cash flow
generation. We expect the company to generate returns
on invested capital north of 25% over the next several
years.
Risk
The procurement of stable silicon supplies continues to be
a major concern for most crystalline PV manufacturers.
Suntech will be especially vulnerable to disruptions at
startup silicon suppliers such as Asia Silicon for a large
portion of raw-material supply in the coming years.
Significant manufacturing capacity expansion creates a
high level of execution risk as well. Further, as new and
existing thin-film technologies begin to scale in the
market, it is unclear how traditional crystalline modules
will stack up on a cost-per-watt basis in the long run.
Finally, with large government subsidies being the biggest
driver of PV adoption in the near term, any appreciable
decline in reimbursements could significantly affect the
industry.
Bulls Say
Suntech is on track to become the largest PV
manufacturer in the world.
Suntech's rapidly expanding manufacturing base will
drive greater scale efficiencies that lead to decreased
costs per installed watt of solar power.
The solar industry is experiencing rapid growth as
government subsidies around the world fuel adoption.
With Chinese firms becoming the low-cost
manufacturers of choice for crystalline-based solar
panels, Suntech Power is well positioned to supply this
market.
Bears Say
Suntech's proposed production increases dependent on
several new silicon suppliers, many of which have
limited operating histories.
The solar market depends on large subsidies for roughly
50% of total installed system costs. Any pullback in
worldwide subsidies could have a profound effect on
demand.
Emerging thin-film technologies could introduce
dynamically lower manufacturing costs versus the
traditionally more labor-intensive crystalline
manufacturing that Suntech employs.
Financial Overview
Growth: At the end of 2007, Suntech Power had
production capacity of 540 megawatts, with plans of
increasing to 2,000 megawatts over the next three years.
Megawatt expansion will be bolstered by increased cell
efficiency via new manufacturing technology. In addition,
the company continues to expand its customer base to
include new European and U.S. customers.
Profitability: Suntech is solidly profitable, with gross and
operating margins of 21% and 14%, respectively. As the
company ramps up capacity expansion, we anticipate
economies of scale to drive gross margin expansion to
nearly 30% on an adjusted basis, with correlating
operating margins north of 20%.
Financial Health: Suntech is sitting on roughly $600 million
in cash versus $900 million in debt. Operating cash flow
turned positive in late 2007 for the first time since the firm
came public. Aggressive capacity expansion has caused
the firm to burn cash overall.
© 2008
Close Competitors
Suntech Power Holdings Co., Ltd.
Kyocera Corporation
Evergreen Solar, Inc.
Energy Conversion Devices, Inc.
[I am replacing my previous, duplicate posting with this] |
