Dark Skies Ahead for Solar Sector

The troubles for the solar sector are far from over, Barclays Capital analyst Vishal Shah warned Thursday morning.

Formerly bullish on the group as a whole, Shah Thursday reduced his sector rating on solar to Neutral. Shah says the Q2 weakness in solar company results represents a “secular, not seasonal decline.”

Pricing pressure, he contends, is intensifying. Shah says checks find Q4 module ASPs from Chinese companies could drop to $1.80/watt, worse than the $2/watt he had previously been expecting. “Given the overly optimistic demand outlook of most Chinese solar players and expectations of continued production ramps, we see additional downside risk to module pricing exiting 2009,” he adds. “More importantly, we expect 2010 module ASPs to decline by 25%-30%.”

At the same time, Shah warns that the supply/demand outlook is deteriorating, rather than improving. “We expect U.S. demand to pick-up at a slower pace relative to prior expectations and see potential downside risk to inflated demand expectations in China,” he writes. “Moreover, our updated supply outlook suggests that industry over-supply could persist in [the 2010 second half] until production capacity reductions occur at a rapid pace across the industry.”

For the Chinese solar stocks, he warns, earnings risk is to the downside. “Market share gains and not profitability is the motive for most Chinese solar companies - given the inflated opex/interest cost structures, operating break-even levels of of companies continue to increase and as such we expect companies to continue to produce even as overall profitability levels deteriorate.” As for the U.S. solar players, he says the outlook is “mixed at best,” given a pick-up which he thinks will be slower than expected.

Finally, raising a potentially huge problem for the solar industry, he wonders whether the current German feed-in tariff level is sustainable, given significant volume growth in 2009 and the potential for further acceleration in 2010, and the impact of the trend on rate-payers in the difficult economic environment. He adds that significant module price declines and attractive project economics “may prompt policy makers to reconsider generous FIT levels.”

Shah’s comments follow earnings disappointments Wednesdasy from JA Solar (JASO), ReneSola (SOL) and LDK Solar (LDK), The reports spurred a number of rating changes this morning:

• Shah cut JASO to Equal Weight from Overweight, trimming his price target to $4, from $5.
• On SOL, there was a split decision. Piper Jaffray analyst Jesse Pichel cut his rating to Underweight from Neutral, with a new price target of $4, down from $6.50. But Creidit Suisse analyst Satya Kumar upgraded the stock to Outperform from Neutral, with a target price of $7.50, up from $3.80.

In Thursday’s trading:

• JA Solar is down 20 cents, or 4.5%, to $4.27.
• LDK Solar is down $1.66, or 14.8%, to $9.55.
• ReneSola is up 22 cents, or 4.1%, to $5.58.
• SunPower (SPWRA) is off 38 cents, or 1.3%, to $28.38.
• Suntech (STP) is down 67 cents, or 3.7%, to $17.68.
• First Solar (FSLR) is up $2.15, or 1.5%, to $147.14.
• MEMC Electronic Materials (WFR) is up 9 cents, or 0.5%, to $16.89.
• Canadian Solar (CSIQ) is off 22 cents, or 1.2%, to $18.12.
• Yingli Green Energy (YGE) is down $1.08, or 8%, to $12.38.

Original post

Comments

[Wisdom vs. ...:]

if you want to learn a lot about the solar sector quickly, read LDK's transcript; management answered quite a few questions clearly and thoroughly.

Aug 13 03:30 PM

[rooferguy:]

The solar sector is much more than the upstream suppliers. Continued solar panel price declines are the absolute best thing for customers. When we go from $4.00/watt to $1.75/watt for panels -- and find ways to reduce installation costs even further -- commercial and residential customers can generate their own electricity for much less than their utility. It's called grid parity and demand will increase rapidly. Commodity panel suppliers will suffer with low margins (that's why it's called a commodity) but other parts of the value chain will benefit.

Aug 13 08:37 PM

[dano123:]

asdasda

Aug 13 09:33 PM

[A Barrel Full:]

Anyone familiar with the memory chip market is distinctly unsurprised.

Aug 14 05:17 AM

[TripleG:]

We need R&D, that is a direct tax writeoff as well as full writeoffs for those people who choose to build their home with solar technology. We have to push this through to the masses until the costs come down.

Aug 14 08:36 AM

[TinyTim:]

Here in sunny Phoenix, there's been a lot of price cutting among residential installers. And a lot of buzz about the glut in the market for panels. I can only conclude that all the rebates are not enough at a capex of $5-10K. Payback at 5-6 years. This may change as electric utilities have announced price increases. Sure is a lot different than the solar hot water frenzy in 1980.

It must be a coincidence that the most foreclosure damaged regions of the country are prime solar locations.

Aug 14 10:59 PM

[Fred W:]

Mr. Shah's comments are about 8 months late...this was clearly coming and his "comments" are merely part of the typical pump/dump trading scheme practiced by ALL analysts at major banks--it is their job to make the bank $. The model is quite simple: Buy it, recommend/upgrade it, sell it, short it, downgrade it--WASH and REPEAT.

Aug 15 11:35 AM