ReneSola's New Business Model Is Designed to Beat Wall Street

The solar sector is starting to pick up momentum on the expectation that President Obama will boost green energy in this country for the coming years; China also jumpstarted solar incentive to solar energy developers. However, keep in mind solar incentive in US will not kick off until 2010 according to the new administration. In a recent report from Chinadaily.com that the Chinese government has started to process the first round of project applications from domestic solar comapnies, these companies include Suntech Power (STP), ReneSola (SOL), Solarfun (SOLF), Yingli Green (YGE), etc. US solar companies, such as First Solar (FSLR), SunPower (SPWRA), are not eligible at this point.

Besides checking the PE of the company (see my previous article), it is always good idea to know its business models, and this may bring some insight to these companies.

STP: Suntech Power is the largest PV maker in terms of production, but sales have been disappointing so far in 2009. However the company has one of the lowest costs per watt to produce PV. The company also claimed to reduce cost to below $1/W by 2012. Analysts were dubious because the company has no control over the wafer cost, as it purchases wafers from ReneSola and LDK Solar (LDK).

SOL: ReneSola was a wafer provider in 2008, and its customers include Suntech Power and Canadian Solar (CSIQ). Recently, the company acquired JC Solar, a Chinese PV maker, whose sales reach across allover the world including Europe, China, Africa, Japan and North America. Suddenly, ReneSola become a vertically integrated PV maker, with a similar model as Yingli Green. Recently ReneSola received a 5MW project from Zhejiang province to kick off this province's first solar project, and more projects are expected to follow as ReneSola is the only solar company in Zhejiang. More importantly, ReneSola's cost base should be well below $1/W under the new model.

SOLF: Solarfun had constantly exceeded Wall Street's expectations in 2008, and it has the same model as Suntech Power and Canadian Solar, but the company has managed to lower cost in this tough enviroment. The company reported lower Q1 earnings, but expect 2009 sales to pick up the pace. The company may benefit from 2010 World EXPO as it is located in Shanghai, and solar is the topic of this event.

YGE: Yingli is another vertical integration name in solar space. It is known as a low cost PV producer because of its model. But valuation wise, YGE may be expensive here compared to ReneSola. Yingli is expected to report revenue of $1.1B in 2009, and ReneSola is expected $699M (JC Solar is not included yet), and based on yesterday's close, Yingli has market cap of $1.9B. ReneSola has a market cap of $320M. It is expected that ReneSola's stock price has some space to catch up.

CSIQ: Canadian Solar is actually headquarted in Canada, but most people believe it is a Chinese company. For that reason, it is unknown if the company is eligible for Chinese incentives. It has the same model as Suntech and Solarfun, and its cost base is not as competitive as SOL and YGE. The company has a low float of shares, so share prices were very volatile historically.

Disclosure: Author is long FSLR, SOL.

Comments

[oyuan:]

How can a guy like you who are so ignorance about Chinese PV publish articles like this?
1) Renesola is not the only PV company in Zhejiang, they are a public traded one. There are private companies which are stronger in government relations such as SunFlower: sunowe.com in Shaoxin City, Zhejiang Province and AstroEnergy Solar: www.astronergy.com. Sunflower is a much older company with 8 cell lines and Astro Energy is a congelomerate which has resources Renosola can not compare.
2) Solarfun is not related in Shanghai, they are in Qidong, Jiangsu with a small office in Shanghai. SOLF's main government connection is in Jiangsu, not in Shanghai.

Jun 05 08:50 AM

[jbde:]

Why hold FSLR - they cannot get lower production costs as the wafer based PV makers. As companies like LDK are able to produce their own poly-si at $30/kg they can thus lower wafer prices to customers and greatly expand the market for modules at lower ASPs.

There will be a run on poly-si soon as China subsidies generate real business and bookings are made for modules for US project well in advance of installation as larger PPA based projects try to lock in low module prices.

The expectations of a turn will cause spot prices for poly-si to jump - as well as glass and aluminum for frames. China has been buying all the commodiites it can during the downturn and stockpiling to enjoy low costs as commodity prices jump [as they are starting to now].

As module assembly becomes more and more automated, wafer based manufacturers will achieve lower and lower costs despite aluminum and glass price rises [which will level off at some point].

Jun 05 09:16 AM

[Fred W:]

Finally, some comments from people that understand what is happening in China's solar industry--the author is excluded from this compliment of course--hasn't a clue other than his internet research.


On Jun 05 09:16 AM jbde wrote:

> Why hold FSLR - they cannot get lower production costs as the wafer
> based PV makers. As companies like LDK are able to produce their
> own poly-si at $30/kg they can thus lower wafer prices to customers
> and greatly expand the market for modules at lower ASPs.
>
> There will be a run on poly-si soon as China subsidies generate real
> business and bookings are made for modules for US project well in
> advance of installation as larger PPA based projects try to lock
> in low module prices.
>
> The expectations of a turn will cause spot prices for poly-si to
> jump - as well as glass and aluminum for frames. China has been
> buying all the commodiites it can during the downturn and stockpiling
> to enjoy low costs as commodity prices jump [as they are starting
> to now].
>
> As module assembly becomes more and more automated, wafer based manufacturers
> will achieve lower and lower costs despite aluminum and glass price
> rises [which will level off at some point].

Jun 05 10:23 AM

[gebby:]

good reason to buy sol despite minor inaccuracies by the author.

Jun 05 10:44 AM

[Daryan:]

FSLR is going to get crushed by the Chinese manufacturers on a cost/watt basis, and any advantage technologically-speaking that thin-film currently has will be alleviated by cost. FSLR is a great short for a pairs trade at these levels against a long position in whichever Chinese manufacturer one chooses on a fundamental or technical basis. That said, the street will never figure this out until it is much too late as the herd is too closed-minded to trust any of the chinese companies or their abilities to execute on a business plan even though corporate America is a gigantic disaster as far as I am concerned. The "china discount" on a PE basis will eventually turn into a premium as we continue to print money faster than the trees are growing to make paper, but until then expect one heck of a high-beta ride.

Jun 05 03:24 PM

[Windsun33:]

Basing anything on hopes of the Obama Greening I think is a bad play. We have close contacts with many in the solar industry and the general consensus is that very little, if any, of that stimulous money will actually reach the street beyond a very few large projects. And most of those projects are solar thermal.

Jun 06 03:55 PM

[frflyer:]

Windsun
You may be right about the stimulous money, but IMO, stimulating solar thermal growth is a good thing. It will even help to integrate the intermittent energy from PV and wind into the grid. It's dispatchable power ( with heat storage) will better facilitate this, than base load power from coal and nuclear. And it is best suited for replacing the base load power from coal plants. There will be oppurtunities to invest in this when the market becomes more favorable for IPOs.
A price on carbon emissions, as well as a national renewable energy standard should stimulate the solar and wind sectors.

Jun 07 03:58 PM

[frflyer:]

I forgot to add that CSP (solar thermal) needs the stimulous to get to commercial scale faster. It is more capital intensive because of the size of the projects, and hasn't had as much time to develop on a commercial scale. The costs are expected to drop dramatically once economies of scale are reached.

I also believe CSP will change how people think about renewable energy, when they realize the huge potential for power and the potential for low electricity prices from CSP, which are already lower than from PV. Too many people still think renewable energy is an unrealistic pipe dream. How many have even heard of CSP? Not many, if my own experience of talking to people is any indication.
When they understand the huge potential of CSP combined with that from PV and wind, they start to see things a little differently.

Jun 07 04:10 PM