From CS this morning on First Solar:
First Solar (FSLR)
EARNINGS
Systems & 1H demand helping CY11
estimates; 2012 risks increasing
Bottom line. FSLR raised CY11 EPS guidance from $8.75-9.50 to $9.25- 9.75 – about in line with our view that company could raise CY11 EPS to $9.4-$9.5. Recall our belief is that company has an earnings potential of $10-$10.5 in CY11, but FSLR would likely raise guidance gradually through the year. Our TP of $137 remains unchanged though, as we think it is
incorrect to capitalize the earnings and value FSLR on a P/E basis. Like a utility hedging out fuel price risk through long term hedges, FSLR has hedged out risk through its high-priced PPAs in the system business which act as a long hedge against panel oversupply (FSLR management deserves credit for appreciating the valuation of the underpriced PPA assets in the market when Nextlight and Optisolar were for sale). However new hedges cannot be purchased at these attractive price points as there is much more competition for these hedge (PPA) contracts, so the system business is a cash flow business, and not a sustainable high growth/high margin business. FSLR has itself acknowledged new PPA contracts are trending toward 10- 12c/kwh, significantly lower than the 14 16c/kWh in its pipeline.
Valuation. Our target price reflects our belief that FSLR’s stock screens expensive at current levels. We think valuing FSLR on sum of the parts (SOTP) is more accurate.
(i) FSLR’s earnings from systems group – should be valued at ~$35/share or less on a cash flow basis;
(ii) The panel business has a stand alone earnings power of $6-$6.50 in CY11 – which could decline – potentially to $4 levels in CY12 given our view on oversupply;
(iii) Our target price of $137 reflects 15x estimated EPS from panel business and DCF on systems business; but if you were more pessimistic and applied at 10x peak multiple on the panel earnings, one could assess downside risk is to $100.
Italy & Germany policies remain a risk. The solar industry is growing production by 50% in 2011, which we think will place enormous pressure on Germany & Italy’s uncapped subsidies. While right now the industry believes the Italian government will not cap or sharply cut 2011 subsidies, and that may well be the first policy news we hear in the next few weeks, note that data is changing real time on the pace of installations in Italy and Germany. This data will become continually available, and highlight incorrect assumptions made by Italian and German policy makers on market size while setting their policies for 2011. Italy could take 8GW of panels in 2011 versus GSE chairman’s view of 2.4GW – the discrepancy is so great that talk of MW caps could arise again. Thus, until MW caps are in place, policy in Germany/Italy will continue to be an overhang for the group.
Supply is growing sharply. Perhaps the data point that really caught our attention yesterday was the eye popping record $668mm (up 22% q/q) in bookings by the largest solar equipment company AMAT in its solar equipment business in its F1Q11 (Jan). Between 3Q10-1Q11, AMAT and its equipment peers will book over 20GW of new equipment capacity for wafer and cell manufacturing – these bookings had little to do with the panel shipment bubble we saw in 4Q10. Predictably, panel shipments have been guided up 50% for 2011, with accelerating q/q shipment growth rates in 2Q11 and 3Q11. While we are bullish on prospects for new markets like China/India, and growth here in US, the scale is not sufficient to offset this new supply ramping in 2Q/3Q11 – unless you assume the installations will continue in uncapped markets like Italy/Germany without increased overhang of policy changes. Even if you assumed policy will not change in 2011, it becomes difficult to ignore the potential oversupply in 2012 – new poly capacity from the likes of GCL (expansion to 65k tons by mid-2012), OCI (expansion to 62k tons in 2012), Hemlock and Wacker will contribute to supply growth from 2012. Supply potential could thus grow to 25-30GW in 2011, and to 35+GW in 2012. This supply does not count any contributions from disruptive/new thin film producers like Solar Frontier (CIGS), or Miasole, or Abound, which are all trying to increase production as well.
Positive: Manufacturing execution back on track. After an increase of 1c/watt in manufacturing cost/watt in 3Q10, FSLR returned to its typical cost reduction path - lowering cost/watt to 75c/watt from 77c/watt in 3Q10. Conversion efficiency was up meaningfully to 11.6% (up 30bps q/q due to improvements implemented in 3Q10 which was the reason for the higher costs in 3Q10), line throughput was up 5% q/q to 62.6MW/year. Part of the improvements were offset by FX and ramp penalty. Company also mentioned that its BOS costs are ~30% lower than in 2008. 4Q10 production of 395MW above CS est of 361MW - benefited from higher efficiency, higher line throughput and 6 additional working days.
Positive: Geographical diversification improving. FSLR expects 100MW of shipments into India for 2011, which implies it would be ~5% of volumes (pricing not specified though). FSLR believes its exposure to RoW (such as Australia, India) markets outside Europe/NA/APAC will be much higher at ~10-15% of volumes versus WW demand estimates that are low single digits in these countries.
Negative: Oversupply risks. FSLR echoed concerns expressed by other companies (like AMAT) that oversupply may further cut ASPs in 2H11.
Negative: Not diversified enough. Italy, Germany, and France are 65% of 2011 shipments. We think company will increase production from roughly 2GW in 2011 to 3GW in 2012. If Germany moves to cap the market to between 3.5- 4.0GW in 2011 as FSLR described, and if Italy moved towards a more reasonable 2-3GW level in 2012, the resulting downside in demand could be as much as 8+GW in 2012, if the bubble inflates further in 2011. In parallel, industry supply will grow due to additional poly capacity coming online by another 6-8GW in 2012. This would require additional demand of 15+GW to come from new countries – could prove to be difficult. China is the one key caveat – China is taking 14GW of wind each year in 2010/11 – but at 0.5 RMB/kWh subsidy levels. If solar PV prices drop to ~10c/kWh in China for 20- year PPA (we are at that level in US but US has 30% ITC so the industry is not yet at 10c/kWh apples to apples), then China could open up as a much bigger market. China employs over 400,000 people (our estimate) in solar – it is unlikely the government will let the industry collapse with no support. But we first need to see price points drop drastically, supply growth decelerate, and stocks reflect these factors before we buy into a sustainable demand thesis.
Companies Mentioned (Price as of 23 Feb 11)
Applied Materials Inc. (AMAT, $15.83, NEUTRAL, TP $15.00)
Dow Chemical Company (DOW, $36.02, OUTPERFORM [V], TP $44.00)
First Solar (FSLR, $164.68, NEUTRAL [V], TP $137.00)
GCL Poly Energy (3800.DE, Eu.15)
OCI Company Ltd (010060.KS, W390,000, OUTPERFORM [V], TP W450,000)
Wacker Chemie (WCHG.DE, Eu131.40, NEUTRAL [V], TP Eu142.00, MARKET WEIGHT) |
