Daniel
That's a tough question to answer right now. I'm totally out of the solars and have been since Dec of 2008. I bought in big time when the ITC was increased in October of that year but gave up very quickly when the markets went into the tank.
I'm very, very bullish on solar power going forward (PV and Thermal) as it really is the solution to our energy problems in the long run and we are already at grid parity in many markets around the world. The problem is conventional generating sources of electricity are just too cheap, especially in the U.S. When our economy picks up those prices should start rising again. Of course the cost of PV generated electricity is declining rapidly and crossover should occur in most markets in the next few years. The question is what do we do in the meantime? I'm waiting. It's like chinese water torture.
Anyway I got a report on the solar markets in Germany from Credit Suisse a couple days ago that pretty much sums up the problem:
CS report dated Febuary 21 2010:
Panel production slipping into oversupply
Bottom line. We have been concerned on increasing subsidy risk in Germany. In this note, we express additional concerns on a growing imbalance due to rapid panel supply and panel inventory growth in the industry. We remain constructive longer term from a penetration perspective, but think that solar panel stocks will struggle to work as panel utilizations start to decline.
Downgrading TSL to Neutral.
We are downgrading Trina Solar (TSL) from Outperform to Neutral. In a bearish scenario for demand, we can see panel utilizations reaching prior trough levels of 50% in 1Q09, when investors were more focused on book multiples rather than earnings multiples. Solar stocks still have 30% downside to reach 1x book multiples.
Thoughts on FSLR.
On FSLR, we like company’s diversification strategy and solid management; but have maintained stock will price in risks closer to $90- $100 levels. The main debate has centered around Germany and the Euro – we do not think there is added risk to our estimates, but do think as oversupply sets in, there can be debate and risk to the right multiple to pay for FSLR.
Maintain Outperform on WFR.
We think stocks with specific downstream exposure to end markets that provide barriers to entry and are still investable – such as WFR (US exposure). Our view on WFR is simply that fair value on the semi business and cash on hand is $15 (25% higher than current levels). In addition, we think the Sun Edison business is overly feared – all said and done, US will be a high growth end market, with above average entry barriers for downstream players. Production exceeding demand, inventory risks increasing. We have compiled production estimates for the top 20 panel companies (4 have reported so far). We estimate that Q1 panel production from top-20 companies will be ~2.5GW (with bias to upside), or a run-rate of 10GW. Assuming these companies have an 80% share (inline with 2008 share), Q1 panel production is already running at 20% higher run rate than our full-year 2010 demand estimate of 10GW. Some demand estimates such as from FSLR are much more conservative at 7.5GW for 2010. Thus there is a rapidly growing risk of excess inventories in solar panels.
Supply growth is accelerating.
Several solar companies are now running at full capacity utilizations as demand is being pulled ahead of the proposed decline in feed in tariffs in Germany. As a result, companies are starting to aggressively expand capacity - we estimate at least 3GW of incremental capacity will come online through 2010. Some estimates for solar panel supply growth are even higher - AMAT, which is the largest supplier of equipment for the solar industry, estimates over 6GW of capacity growth in solar and warned of oversupply in the sector last week. We are concerned that this supply growth will hit at just the wrong time as demand starts to flatten out or potentially decline following feed in tariff cuts in Germany.
Additional Details
Utilization rates could decline by 20-40%. Panel manufacturing utilization rates have increased from 50% in 1Q09 to over 90% in 1Q10. This has resulted in better factory absorption and lower rate of panel price declines in 2H09. As a result, operating margins for key solar companies (ex-FSLR) have expanded from 3% in 1Q09 to 13% by 4Q09. Now however, our supply and demand analysis suggests that panel utilizations can decline by 20% even in our bullish demand scenario of 10GW. There is risk of an even sharper decline of 40% if demand estimates came in at the lower end, toward 7.5GW, noted by FSLR and MEMC at their recent analyst events. We think that there will be additional pricing and margin risk as a result of declining utilizations from 1Q10 through the rest of the year.
Valuation.
Solar investors tend to focus on P/E multiples when stocks are in the expansion phase of the cycle (right now) and on P/B multiples when oversupply risks erase earnings power. Solar stocks still have about 30% downside to 1x book levels, and over 50% downside to prior trough book multiples. We do not expect stocks to retrench to prior trough book multiples as that occurred in 1Q09 when we had the perfect storm of collapsing Spain and the credit crisis. Now we have lower profitability in Germany but still hope for volumes, and the credit environment is much better (though there are some risks of interest rate increases, and some macro concerns on Euro currency weakness). However, the industry is just as competitive if not more now than it was in 1Q09, and there are examples of quasi-commodity companies in other industries that trade closer to 1x book (eg., UMC).
Shipment Analysis
We maintain shipment data for the top 20 cell players in the industry, which is a good indicator of capacity and supply in the industry. We see that that total shipments will increase by ~49% y/y from ~7.3GW in 2009 to ~11GW in 2010, while we expect worldwide demand to increase ~42% y/y from ~7GW in 2009 to ~10GW in 2010 implying that the oversupply situation will continue in 2010.
Amongst the top 20 cell players, additional 3.3GW of cell capacity will come online between 4Q09 and 4Q10. News flow post 3Q09 results suggests incremental ~3GW+ capacity addition in 2010 implying at least ~6.3GW+ capacity additions in 2010. Our analysis is inline with AMAT’s recent comments on solar capacity additions in the industry. AMAT noted during its F1Q10 earnings (Jan ending) that up to ~9GW of incremental solar capacity would be added in CY10, with ~5GW-7GW in China. With additional capacity coming online we expect further increase in supply-demand mismatch. Also note that vertical integration was a fad when TSL first popularized the concept a year ago. However, just about every solar panel manufacturer in China has some ambitions on vertical integration, which has diluted the uniqueness of the model. |
