First Solar Stands to Benefit From Rising Yuan

Oct. 5.10 | About: First Solar, (FSLR)

First solar's (NASDAQ:FSLR) stock was punished in 2009 and range bound in 2010 due to systems investors running into financing difficulties and increased module competition from Chinese manufacturers. The financing issues have long since eased. It appears that the closing of the gap in manufacturing costs between FSLR and the likes of Trina Solar (NYSE:TSL) and Yingli Green Energy (NYSE:YGE) may also be a thing of the past.

The vast majority of the inroads made by TSL and YGE over the past few years has been due to the huge polysilicon feedstock pricing declines. Polysilicon pricing seems to have now stabilized. Now, the situation appears to be turning. The Yuan has risen over 2% in the last three months since China loosened its reins over the currency. Though only a small change on the surface, one has to remember that the Chinese central government believes in small incremental moves over a long period of time. This could amount to 5% yuan appreciation each year over the next 5 years. This would be a boon for all solar stocks, but in particular FSLR.Obviously, a rising yuan will increse labor costs for TSL and YGE. Labor costs have already been on the rise in China for years

A rising yuan would also make the solar module commodity more valuable in dollar terms, along with other energy commodities. Chinese manufacturers have claimed that their modules have a 1-2 year energy return on investment. This could be translated to about 10% of total costs. FSLR, on the other hand, has an energy return on investment of only a few months. Therefore it would stand to benefit the most from rising energy costs, all other costs being equal.

In general, first solar stands to gain the most from rising oil prices. The solar stocks are all equally positively correlated to oil price. Yet First Solar's production costs are the least positively correlated. When oil prices rise everyone's margins will increase but First Solar's will increase the most, much like when oil was last at $140. I've long been bullish on First Solar, since it's been the best of breed with the highest profit margins for year. It has weathered the storm and outperformed all other solar stocks since the financial meltdown, with the exception of TSL.

Disclosure: Long FSLR