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Summary

  • ReneSola is best prepared to handle the tariffs imposed by the US DOC.
  • ReneSola has provided strong guidance for the rest of 2014, with the evolution of its strategy to focus on the rooftop and DG markets.
  • Gross margin has improved and is trending upwards, polysilicon plant has become profitable, cost of module production is decreasing.

Since my previous article quite a few developments have taken place:

  • The Department of Commerce has announced preliminary tariffs on Chinese solar modules shipped to the USA. Other countries are threatening similar actions across the world.
  • The share price of ReneSola (NYSE:SOL) has dropped significantly since my prior article.
  • ReneSola has provided strong guidance for the rest of 2014.

So let's re-evaluate whether ReneSola is still a good investment at this time.

Tariffs

Partnering with major producers in selected geographical areas gives ReneSola the ability to improve margins while adjusting the manufacturing specifications based on ever-changing "tariff" situations. This is what I referred to as regional moats, which ReneSola is building with its OEM strategy.

ReneSola is able to add brand premium to the cost of the products supplied by the OEMs, and ship these modules tariff-free to these countries, starting with the USA. None of the other Chinese solar companies are ready with a similar strategy at this time, and it may take 12-18 months before they can implement any change to their current strategy. ReneSola is the largest producer of USA-trade-compliant solar modules at this time.

Gross Margin Has Improved and is Trending Upwards.

Gross margins are projected to be 12-14 % in Q2, and above 15% for the second half of the year. Module sales are also projected to rise in the second half of the year. Furthermore, we believe the percentage of modules sold to high-margin markets in the USA will increase due to Renesola's ability to avoid tariffs from its OEM facilities. Increasing polysilicon costs will also put ReneSola at an advantage, due to its ability to produce in-house polysilicon.

US Tariffs Will Increase the ASPs in the USA

Average selling prices are increasing as we move into the second half of the 2014. Furthermore, ASPs for modules are going to vary substantially with regional drivers, such as import tariffs, incentive levels and technology preferences. Prices in the US may be 20%-30% higher than in other markets such as China. These regional pricing spreads will likely persist for the foreseeable future. ReneSola's increasing share of US business from its OEM factories in view of tariffs will provide the company with improved pricing.

Cost Reduction

ReneSola has announced that it will be able to reduce the cost of production of in-house modules to less than 50 cents per watt, and less than 60 cents per watt for the OEM modules in the second half of 2014. This is comparable to its peers. JinkoSolar has the best cost in the industry of around 47 cents per watt, but ReneSola is easily able to make up for the 3 cents with its ASP, which was 69 cents last quarter vs. 64 cents for JinkoSolar. ReneSola also announced that it will concentrate on the distributed general market or the retail market for its sales. This market has better ASPs and higher margins.

Sales of Additional Green Energy Products

ReneSola has the biggest product portfolio among all the solar companies in the world. Its products include polysilicon, wafers, cells, panels, inverters and mounting systems, LED lights and energy storage solutions. This business will likely contribute $100 million in revenue in 2014. Margins on these products are likely upwards of 25%.

Outlook for Solar Industry

The number of target installations for the year is in the range of 45-50 GW.

India has announced it will install panels on every house by 2019, which may further increase this target.

The second half of the year will show a significant increase in demand from China as it clears permits for the solar farms and distributed general market.

SolarCity recently purchased Silevo, a solar module manufacturer start-up. With the purchase of Silevo, SolarCity has also stepped into the solar module production business, suggesting that it is bullish on module production and the solar industry's future. An interesting fact is that Silevo's current manufacturing facility is based in China. Here is what Elon Musk had to say:

"Even if the solar industry were only to generate 40 percent of the world's electricity with photovoltaics by 2040, that would mean installing more than 400 GW of solar capacity per year for the next 25 years."

Valuation

The total expected revenue for 2014 will be $2 billion. We will split the gross margin into two halves, the first half and the second half of 2014. For the second half, gross margins should be, on average, around 16%. For the first half, the gross margin will be 12%. The gross margin should be around $270 million for the whole year, if we presume $1 billion revenue for each half of the year. The net margin should be about $70 million. Average earnings per ADR should be 70 cents. If you value the shares at PE of 10-15, the target price is $7-10.50 per share.

The company has been paying off debt in recent quarters. The total debt was US$723.9 million as of March 31, 2014, compared to US$742.6 million as of December 31, 2013. This will likely further decrease in the second half of the year.

ReneSola trades at a significant discounted valuation when compared to the other Chinese solar companies, despite having a better and sustainable long-term business model.

ReneSola should see better valuation once Wall Street gets the proof of execution with its current strategy in the next few quarters. When compared to the other Chinese solar companies such as Jinko Solar (NYSE:JKS), Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL) and Yingli Solar (NYSE:YGE), the share price of ReneSola will outperform by the end of the year.

2014 will be the year when ReneSola will outshine other US-listed Chinese solar companies, benefiting from its OEM strategy, polysilicon plant and expanding global sales network to capture the ever-growing rooftop solar market.

Risks

  1. ReneSola still has negative operating margins. This will change in the second half of this year.
  2. Trade wars will keep changing the environment of the solar business.
  3. ReneSola has decided to concentrate on the retail and DG market. It may be hard to sell significant volume into this market and still make substantial profits due to increased operating expenditure.
  4. ReneSola is a small-cap Chinese company in the highly volatile solar sector.

After re-evaluating ReneSola's investment options, I feel I can better evaluate the outlook for 2014, and the price target still holds good. As the share prices have dropped since my previous article, I think this multi-bagger has become even more attractive.

Source: Revisiting ReneSola's Investment Thesis