We remain cautiously upbeat after traveling throughout China for the last seven days. Through our interviews with both public and private solar companies, we return to the U.S. with a very positive near-term outlook for both shipments and pricing, but also have some trepidation due to rising input prices. While our general conviction is that most companies are poised for beat-and-raise scenarios in the upcoming earnings season, we fear that some will also reveal near-term margin pressure as cost declines will be hard-pressed to keep pace with ASP declines. From a very simplistic view, 2011 looks to be another year where the bears make the quantitative argument of over-estimating supply while simultaneously under-estimating demand, and thus call for an implosion to the solar income statement. Our only solace is the qualitative argument that demand always surprises, which perpetually puts the bear argument into hibernation for another six months. We find ourselves at this current stage where even the most bearish meetings conceded that 1H11 is "better-thanexpected" and now 2H11 is the problem, or maybe even 2012. We offer up the following insights from our meetings:
Demand. In our view, 2010 ended with a flurry of business, although supposedly Q4 production had been sold out months prior. We suspect that the majority of our companies will report upside to shipment estimates as additional capacity was added and/or additional wafer/cells were purchased to deliver upside to module forecast. For Q1, we expect several companies are likely to report increasing sequential shipments for Q1 guidance. Those companies that added capacity late in 2010, and are now seeing strong orders for additional modules, should be able to ship sequentially higher volumes in Q1. Likely candidates are Trina Solar (TSL), Yingli Solar (YGE), Jinko Solar (JKS) and Canadian Solar (CSIQ).
ASPs. In our view, we do not think the idea of rising ASPs (average selling prices) in Q4 will come as new news to investors; we found this as the common theme across our meetings at poly, wafer, cell, and module companies. We found poly prices stayed constant throughout Q4 around the $75/kg level, and after a brief reduction into the low $70s in early Q1, we now find poly prices rising above $80/kg in the last ~7 days. This should be very positive for Daqo New Energy (DQ) in terms of Q4 results and Q1 guidance.
Wafer pricing followed the same pattern with pricing for multi wafers declining towards $0.80/W in early Q1, and now trading as high at $0.85/W in recent days. If this trend continues for the remainder of Q1, we suspect Renesola (SOL) will likely guide revenues above the current consensus estimates. We note that mono wafer prices were being quoted roughly $0.05/W higher than multi wafers. Cell pricing has also recovered in the last week or so, and we are now finding average prices closer to $1.25/W; JA Solar (JASO) is the likely candidate in our coverage universe to benefit from this trend.
Module pricing varies across the supply base as there are meaningful variances between those module companies with leading edge cost structure versus those suppliers that can charge premium prices. Generally speaking, module pricing varied between $1.75/W to $1.80/W in Q4, while prices are moderating down less than 10% to a range of $1.65/W to $1.70/W in Q1. Surprisingly, we talked with three suppliers that suggested that if demand continues at the same pace into Q2, rising module prices are a distinct possibility. That said, our contacts were bullishly optimistic for continued strength into Q2, but no contact had a definitive view on pricing; pricing discussions should take place in early March, so first indications for Q2 pricing look to be a few weeks away.
COGS. We are guarded with our outlook for margin performance headed into Q1. With rising ASPs in the last few weeks, we must recognize that those companies that are levered to polysilicon, wafer, or cell purchases will likely see higher than expect input prices into Q1. We have highlighted this risk in a recent JKS note, but should also raise a caution flag for Hanwha SolarOne (HSOL). Those companies focused more on a single portion of the supply chain, such as SOL or JASO, or those top-tier companies with long-term supply agreements or captive poly and wafer operations, such as SOL, Suntech (STP), TSL, and YGE.
GCL capacity increase should be huge. While no formal capacity guidance has been issued, and the idea of Hong-Kong traded GCL-Poly Energy Holding rapidly expanding production in 2011 is not new news, we stumbled upon two new projects that could be part of future capacity. We drove by a site under-construction for a new 2GW wafer facility outside of Shanghai that is located next to a private cell company with more than 1GW of cell capacity; hence two surprises in one visit. We got a first look at a cell company with more than 1GW of installed leading edge capacity, while simultaneous finding a new GCL wafer facility ramping to 600MW by mid-2011 with maximum capacity to 2GW. In addition, we believe GCL is ready to construct a similar 2GW facility in Yangzhou near a facility for JA Solar Holdings (JASO).