First Solar (FSLR) is the most valued solar panel company with a market capitalization in excess of 2 billion dollars. However, this thin film player may not hold this position for long in our view. The company's solar technology is under threat from the mainstream crystalline solar technology which accounts for more than 90% of the global solar panel shipments. The cost cuts implemented by the Chinese solar players have far outpaced the cost improvements made by First Solar in the last 5 years. The costs of the lowest cost Chinese companies such as Canadian Solar (CSIQ) has reached 55c/watt compared to >65c/watt cost for First Solar panels. These costs also do not factor in the negative effect of the lower efficiency FSLR thin solar panels. The lower efficiency implies that the Balance of Systems (BOS) costs for FSLR panels are much higher, compared to the crystalline solar panels. We had earlier outlined the major reasons why First Solar is a short. I would advise readers to read this earlier article, as it builds the foundation for the current one. The stock has gone down by ~20% since that time. The 4Q12 earnings were not up to the mark, which led to the decline in the stock price. I am still of the opinion that the FSLR stock should be sold, given that its cost position is still deteriorating in comparison to the other major solar panel producers.
Silicon Pain - The cost cuts implemented by crystalline solar companies in the past couple of years have been nothing short of amazing. From $4.00/watt ASP in 2008, the current solar panel ASP has declined to only 60c/watt. First Solar which used to be far ahead of the competition in terms of its cost structure has seen its competitive position erode. First Solar cost of 66c/watt is now ~20% higher than the lowest cost silicon panel cost. The processing costs of silicon solar panels will continue to decrease in the future and there are little chances of polysilicon prices increasing given the massive overcapacity. First Solar is not able to sell solar panels outside its own projects because of its higher costs and lower efficiency. I think that there is a very strong probability that First Solar will have to jettison research and production related to thin film solar.
Why we would continue to short First Solar
- Disappointing 4Q12 Results - First Solar stock fell after it reported weaker than expected 4Q12 results. The company did not win any major orders in 4Q12 and the management accepted the fact during the conference call. The company failed to give the guidance for the full year and even the next quarter guidance was below analyst estimates.
- First Solar has almost no presence in China and Japan - China is going to be the largest solar market in 2013 with capacity expectations of 10 GW. First Solar has negligible presence in the country and we have seen no recent contract wins by FSLR in China. This means that First Solar is effectively competing for only 70% of the global capacity. Also First Solar has not made any big wins in the Japanese market, which is undergoing a major solar boom. JA Solar (JASO) managed to beat 4Q12 shipment guidance by shipping a large number of panels to the Japanese market.
- Relative Valuation still high - First Solar has a market cap of $2.4 billion, which is the highest for any solar panel company. The other big Chinese solar companies have a much lower market capitalization compared to First Solar. The P/S ratio for FSLR is 0.7x compared to 0.2x for Yingli Solar Energy (YGE). I think that it makes sense to buy the top 3-4 Chinese solar panel makers and short First Solar.
- Book to bill goes below 1 - First Solar has managed to remain profitable mainly due to DOE funded large ground mounted solar plants, which it had won earlier. But as those plants get built and sold, FSLR has zero chance of replacing the profits. The book to bill ratio is now 0.8, which means that First Solar is not winning enough orders. First Solar shipped 1. 4GW solar panels compared to 1.1GW of new bookings in 2012. Also most of these new orders will only have fraction of the profitability of the DOE solar farms.
- Thin Film competition is still strong - A large number of thin film solar companies have gone bankrupt during the recent industry downturn. While some have been bought by large industrial conglomerates in Asia such as Hanergy, others have simply shut shops. However, the bigger companies such as Solar Frontier have managed to increase shipments faster than First Solar. Also others such as GE and TSMC are continuing to invest in R&D waiting for better conditions to make a big entry.
- Improving thin film panel efficiency - FSLR managed to improve its module efficiency to 12.9% in 2012, from 12.2% in the 2011. First Solar has managed to keep improving the cell efficiency of its solar panels reaching 18.7% in test conditions. While we are impressed with FSLR continuous efficiency and cost improvements, the fact remains that the global R&D dollars being spent on mainstream crystalline silicon solar technology far outnumbers, that being spent on Cadmium-Tellurium technology.
- China and Europe solar war - Europe and China seem poised to go to a solar trade war and Canadian Solar management indicated that Europe will impose retrospective duties on imports of Chinese solar panels. This will benefit non-Chinese solar manufacturers who will escape the duties. While US duties on solar panel imports from China have not changed the competitive dynamics too much, European solar duties would have a much bigger impact. The reason being that Europe accounts for more than 50% of the global demand and China ships more than $20 billion of solar panels to Europe. First Solar and Sunpower (SPWR) being the 2 biggest non-Chinese solar panel manufacturers would benefit from a China- Europe solar war.
The solar industry is still not out of the woods despite the bankruptcy of numerous solar companies in the past two years. The solar industry presents good opportunities both on the long and short side. Our earlier favored solar long Renesola (SOL) has performed much better than other industry peers, and our short idea did quite well for Suntech (STP). The short idea did not do too well for Solarcity (SCTY) but I continue to think that this position will also make profits in the future, given its bad 4Q12 results. First Solar has managed to navigate the severe solar industry downturn quite decently. However, the company suffers from a big technology disadvantage at the current moment and the competition in the industry remains quite severe. Given the present circumstances we would recommend short First Solar.