Expect Continued Drops in Solar

The Third China International New Energy Summit was held in Beijing on Nov. 27 2008. This two day summit attracted many industry leaders in renewable energy sectors, including solar, geothermal, and wind. According to China’s QQ news report, Suntech Power (STP) CEO Shi Zhengrong attended the summit, and told reporters that the company is expecting 0% gross margin in Q4, compared to 21.6% gross margin in Q3. The gross margin drop is mainly due to the dramatic drop of PV module ASP and the weakening Euro. It is reported that nearly half of the company’s factory has been shut down due to weakening demand.

According to Shi, he will not be surprised to see 0% gross margin in Q4, and the worst is yet to come. In recent developments, most solar companies slashed Q4 and 2009 outlook. Sunpower (SPWRA) lowered profit in Q4, citing the weakening Euro and weak demand. Solar PV makers Trina Solar (TSL), China Sunenergy (CSUN), Yingli Green (YGE), Canadian Solar (CSIQ), and JA Solar (JASO) all reported a dramatic sales drop in Q3 and presented gloomy pictures going forward. In the US, companies like First Solar (FSLR) and Energy Conversion Devices (ENER) are also hit hard by the financial crisis. This confirmed Shi’s concern that “The worst is yet to come in the solar sector”.

Investors who were covering short in solar stocks for the last couple of days will likely come back to short the sector again as the fundamentals are deteriorating.

Disclosure: Author is long FSLR.

Comments

[TPD:]

Yge Q4 and 2009 outlook? I thought the compamy affirned its 2008 numbers on the 26th ??

2008 Nov 28 06:41 AM

[Bob the Bear:]

What does the financial crisis have to do with ENER? They are well financed into 2011 and their backlog is mostly take or pay(approx.$1.5 billion). By the time their bacllog runs out, I would expect that the "financial crisis" will be long over and President Obama's alternate energy plans will be in full swing.
I'm long ENER at these prices.

2008 Nov 28 08:46 AM

[investor88:]

I like Kelvin's article calling a spade a spade ie solar company fundamentals are deteriorating. However I wonder why hold on to FSLR in the light of the dim macro economic world financial crisis and weak solar stock fundamentals - it may not pay off [?].

2008 Nov 28 10:28 AM

[smlcap:]

I don't know about STP, their CEO, and the China Energy Summit. The CEO says that STP has shut down half of his company's factory. I'm sorry to hear that. Solar is going thru some changes, maybe for the better. Maybe the economy and the lending crisis will shake out the weaker solar players, leaving behind the bigger players, in an even stronger position.
I'm banking on an intelligent (for a change) President. A President with a vision. I think Barack is hell bent on alternative energy, period. Regardless of the price of oil, Barack is full steam ahead, no looking back. He's not an "oil man."
One thing I do know for sure. That is......SPWRA is doing a great job for me. I'm a happy solar guy. I'm optimistic that I will be an even happier solar guy in the near term future, as well as the long term.
Full steam ahead!
Or should I say........Full solar ahead!

2008 Nov 28 10:51 AM

[je:]

TPD
I have seen all sorts of excuses for the solars to be down with the most of them using the credit crises as the reason.

YGE has banking in place for its customers and the onlyreson they were slightly off the numbers is because of the currency exchange.

I think they have a great future as the world comes to terms with with the soon to be high price of oil.YGE seems to me to be one of the best companies out there. They are not the most popular (?) but they ar eamong the best.

2008 Nov 28 11:15 AM

[Solar Sam:]

It is important to distinguish the sectors of the market and who will be the winners. Something very few of the bloggers/analysts/repo... are doing.

Badly managed, overproducing Chinese solar companies can expect continued drops. Many will fail, and that will be good for the world.

Solar companies with a value proposition (low cost manufacturer) or market niche (flexible thin film) will not see the same declines. While they will suffer from the poor management of the Chinese, they will decline less and recover faster.

Now is the time to buy quality and hold, and there is no quality Chinese company in solar.

2008 Nov 28 11:17 AM

[canb888:]

Intentional or unintentional, you did not mention that LDK beat the street concensus for Q3 (EPS of 71 cents concensus vs. 77 cents actual on US GAAP basis) and they also guided higher for Q4 as well as 2009! Even annualizing 77 cents, LDK is less than a PE of 5 for a company that is growing at several hundred percentages p.a. and almost everyone agree/know that its going to grow even more in dollar sales once the two polysi plants are in production, i.e., 2009. Is it politically wrong for Wall Street to say anything good about solar these days? If not, why is no one saying anything good about LDK's achievement and their guidance? Now I see clearly the market is not efficient regardless of the Nobel Prize that went for the theory.

2008 Nov 28 11:38 AM

[je:]

YGE has aForward P/E of .52

2008 Nov 28 12:19 PM

[wind4me:]

I choose the China Wind Player APWR because of building distributed power plants for China and rest of Asia.........backlog of APWR is 800Million with a 2009 P/E of 2

2008 Nov 28 12:36 PM

[galewhitaker:]

I think that the price of oil is going to skyrocket when the economy begins to recover. The solar stocks will start to regain their strength at that time.

2008 Nov 28 08:58 PM

[milind P.:]

Most solar firms have slashed their guidance, but FSLR raised their guidance for FY08 by 2% from their previous guidance. FSLR has also announced to add a fourth production line to their Ohio facility, which will increase their overall nameplate capacity to 1.183 GW based on Q3 run rates. FSLR also extended long-term contracts worth approx. 500 MW with key customers taking their backlog to more than 3 GW as on Q3-2008. Key customers of FSLR accounted for approx. 90% of net sales in FY07

2008 Nov 29 03:34 AM

[aquaculture:]

FSLR lives and grows because of solar silicon shortage/high costs, which is extremely unlikely to continue into the coming silicon ages.
FSLR growth is -at some point- limited by tellurium supply/price.
Also FSLR faces enormous recycling and reclamation costs, which FSLR shadily books as ´sales costs´ into the future.
From an environmental standpoint the last thing the world needs now is a cadmium-(re)cycle as a basis for energy supply.

The silicon solar PV industry has a great future.

2008 Nov 29 11:56 AM

[ariesl:]

Isn't it logcal that as ASP's come down, demand will go up? Since the cost of poly is dropping fast, won't that assuage the hurt to margin deterioration? Cheap solar is what the world has been waiting for!
Hey Solar Sam (Great name), why would you not want to see a temporary glut of cheap PV from China? Cost is what has been keeping most most would be buyers out of the market. Let's face it, 20 year pay back is not most peoples idea of good investment! If ASP's plummet, polysilicon prices fall, and gov't help continues, pay back could be cut in half or better. I believe demand will soar. Moreover, utility companies in the US are included in the Gov't subsidies as of 1/1/09. They don't have as much trouble borrowing money as most businesses or individuals.

Even though I own a nice chunk of First Solar stock, I believe the higher efficiency of Poly collectors will still make them the solar of choice for those with limited roof space. Also, compare P/E ratios, their Chinese competitors are selling at a fraction of the cost of our precious First Solar shares. Also, I believe the Chinese Government will simply pump in the money to support their solar companies through the rough spots. I wouldn't want to live under one, but dictatorships can act fast when they need to. With one party, there's little of the tedious public grandstanding and political wrangling we see in our congress. Of course the corruption there makes Ted Stevens look like a saint!

2008 Nov 29 12:06 PM

[Road Runner:]

I own ENER, STP, and SPWRA. I'm trying to be positive like the posts on this site, but frankly, this sucks, and is going to suck until oil goes back to around $100/barrel. I'm hanging onto my stocks because oil has to go back up within 2 years with all the money being pumped into the economy - think weak dollar and inflation. The dollar is peaking now because it is the safe haven currency. Add to that the emerging markets demand and the end of cheap oil.

Please don't give me the argument that oil is not directly linked to solar. In the minds of the public, it is. And, that sentiment is what is driving utility solar projects. For example, Europeans are growing weary of high electricity prices and they perceive alternative energy projects as a partial reason.

2008 Nov 29 04:15 PM

[Buffett Jr:]

I also own APWR as the above poster mentioned. For me solar is too complicated, too many spot prices and players in the game. Technology still evolving fast. APWR is more easy to understand and fundamentally strong. Do your own DD.

2008 Nov 30 12:08 PM

[klemenv:]

In Q4 STP is processing expensive Q3 polysilicon.

If they would be processing poly bought on the spot market, their margin would be intact.

2008 Dec 01 02:37 AM