ReneSola (NYSE:SOL) continued to enjoy favorable industry dynamics as evident in its Q3 2010 earnings report. Revenues reached record levels for the company as it expanded to 358.7m, up 41.3% sequentially from the 253.9m reported in the second quarter. Total shipments grew to 324.9mw, up 25.8% from the prior quarter.
Revenues grew at a faster rate due to higher volumes of module shipments, which fetch higher average selling prices. As a result, net income also reached record levels and amounted to 60.1m or 0.70 in earnings per share, easily beating average Wall Street consensus of 0.52 in EPS. ReneSola also topped my earnings per share estimate of 0.59 as shipments and average selling prices topped the company’s own high-end guidance. With the entire industry operating at sold-out conditions throughout the fourth quarter of 2010, ReneSola should continue to enjoy high levels of profitability for its main verticals.
For the company’s fourth quarter, SOL provided extremely specific guidance relative to what many peers normally offer. The guidance metrics below were compiled from information given in the company’s third quarter earnings report, earnings presentation, and earnings conference call.
Renesola Q4 2010 Guidance:
Shipment Blend: 100-110mw modules, 20% wafer tolling
ASPs: .85/watt wafer, stable module pricing
Cost Metrics: .24/watt wafer processing cost, 55-60/kg polysilicon cost
Polysilicon Production: 500-600mt
Gross Margin: 30-32%
From the midpoint range of the company’s guidance, SOL should report around 0.66 in fourth quarter earnings per share. However, it’s important to note the company has been extremely conservative in past quarters on guidance. Often it has surpassed its own revenue and shipment guidance by 5-10% while beating its gross margin guidance anywhere from 200-500 basis points. Just from scratch and using the company’s stated metrics individually, it’s not hard to derive higher levels of earnings for the company.
On the shipment side, it’s hard to expect ReneSola to surpass its high-end guidance of 330mw, given the company’s annual capacity is 1200mw. To even reach the company’s 324.9mw shipment level in the third quarter would have required SOL to outsource some production, most likely purchasing cells for its module shipments. However, its high-gross margins suggest only small portions were outsourced, and thus the company was able to supply the vast majority of wafers consumed internally in its consolidated shipments.
Given that SOL is currently expanding wafer capacity with a midyear 2011 capacity target of 1800mw, it’s very likely the company can supply all of the 330mw fourth quarter shipment guidance with entirely in-house-produced wafers. As witnessed by direct peers, it is possible for shipments to exceed SOL's internal production capacity through outsourcing. If this were to occur, the earnings impact would be minimal, given the low margins that can be generated through outsourced procurement.
On the cost side, SOL made good progress on its polysilicon production. In the third quarter, production ramped up to 269mt, up 66% from the prior quarter. If ReneSola can reach the top end of its 600mt production target for the fourth quarter, it would represent 80% utilization -- a very good benchmark after only a year from initial start-up. With production costs already in the low 50s/kg and stated to potentially reach 45/kg by the end of 2010, any polysilicon the company can produce will be accretive to its earnings, as its blended silicon costs would decrease.
That production level, combined with capacity used by its wafer tolling business, would only leave the company around 50% exposed to contract or spot pricing for the rest of the silicon requirements. Despite recent upward trends in polysilicon pricing, where spot prices reached average rates of approximately 75/kg, SOL’s external exposure is limited enough that its 55-60/kg blended cost guidance for the fourth quarter seems reasonable.
On a last note, the company uses FIFO inventory accounting, which is different from most of its direct peers. As a result, ReneSola should experience some lag in realizing higher polysilicon pricing trends as it has to first consume inventory already procured at lower costs.
On the pricing side, there could be significant upward mobility. In its Q3 2010 conference call, the company guided wafer average selling price to be 0.85/watt, and module pricing to stay stable around 1.85/watt. However, spot market trends for wafers averaged anywhere from 0.90-1.00/watt during the fourth quarter as noted by Digitimes and PVinsights, two historically accurate sources for solar industry pricing trends. Although ReneSola does not sell to the spot market, some of its customer contracts are periodically adjusted in relation to current market pricing. It’s very likely that the company posts average wafer selling prices of 0.86/watt or even higher.
In addition, although stable module pricing is a reasonable assumption, there is another factor which could cause stated module asps to be higher. During the fourth quarter, the euro rose against the U.S. dollar and caused the average weighted euro rate to be over 4% higher than the USD. Modules sold to EU countries should thus record similar increases in average selling prices. This has already been seen by some of ReneSola’s peers who have already reported fourth quarter earnings. Since the company’s absolute module average selling price was already at a high level, the magnitude for upside surprises should be lower than peers who sold at lower quoted prices.
With these factors in consideration, ReneSola’s Q4 2010 may be closer to the following than the company’s own guidance:
Total Shipments: 330mw
Wafer Shipments: 175mw @ 0.86/watt = 150.5m
Module Shipments: 110 @ 1.85/watt = 203.5m
Wafer Tolling: 45mw @ 0.45/watt = 20m
Wafer: 175mw @ 0.60/watt = 105m
Module: 60mw @ 1.15/watt = 69m, 50mw @ 1.40/watt = 70m
Tolling: 45mw @ 0.25/watt = 11m
Gross Profit: 374m - 255m = 119m
Gross Margin: 31.8%
Operating Expenses: 30m
Net Interest Expense: 6m
Net Income: 64m
Diluted Share Count: 87m
If ReneSola’s conservative guidance trend continues, then there should be upside to both revenues and shipments listed above. As also indicated, there could also be pricing upside which would cause gross margin to rise. Based on the actual market dynamics in the last quarter, it’s conceivable pricing was strong enough for SOL to potentially post gross margin in the 33-35% range.
Lastly, foreign exchange impact has been left out. With key currencies in question, only 1-2% off its relative levels a quarter prior -- and in combination with ReneSola partially hedged against currency risks -- foreign exchange translations for the third quarter should be muted.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.