Suntech Stock Sensitive to Cost of Solar Cells

Mar.21.11 | About: Suntech Power (STP)

Suntech Power’s (NYSE:STP) average cost for producing a solar cell has consistently declined over the years. The cost has declined from around 2.28/watt in 2007 to $1.25/watt in 2009 due to improved technology leading to an improvement in efficiency and a decline in polysilicon costs. With wider adoption of thin film technology and higher process efficiencies, we expect the production costs to decline further in the coming years. Suntech designs, develops, manufactures, and markets photovoltaic (PV) products and also provides engineering and construction service for building solar power systems. It mainly competes with FirstSolar (NASDAQ:FSLR), SunPower (SPWRA), and Yingli Green Energy (NYSE:YGE).

While we anticipate Suntech’s production cost to decline to $0.94/watt by 2012, Trefis members predict the average cost will be at $1.24/watt, paring down to $0.8/watt by the end of our forecast period. The member estimates imply a significant downside of ~30% to our price estimate for STP stock. According to our analysis, Suntech Power derives around half of its stock value from PV modules and is hence highly sensitive to the production cost of solar cells.

We currently have a Trefis price estimate of $10.68 for Suntech Power’s stock, about 17% above the current market price.

(Chart created by using Trefis' app)

Adoption of Thin Film Technology

Thin film technology is a low cost PV technology that involves depositing several thin layers of silicon or more complex materials on a substrate such as glass to make a PV cell. Currently, only First Solar uses this technology and thus has the lowest manufacturing cost in the industry at under $1 per watt. Thin film technology reduces the production cost of a solar cell, as it significantly reduces the consumption of silicon materials. Suntech is pursuing thin film technology aggressively and investing heavily in R&D for this technology. As adoption of thin film increases, the production cost of solar cells will reduce over time.

Improvement in Process Efficiency

In 2009, Suntech continued commercial production of PV cells utilizing Pluto technology. This technology helped Suntech achieve a conversion efficiency rate of 18%-19% on PV cells manufactured with multicrystalline silicon wafers, and a rate of 16.5%-17.5% on PV cells manufactured with multicrystalline silicon wafers. Strong R&D capabilities have enabled Suntech to develop advanced process technologies and to manufacture cost effectively and on a large scale. Higher efficiency cells reduces the area and plants cost, thus leading to lower costs.

Trefis Community Forecast

Trefis members forecast production cost of solar cell will decrease from $1.30 per unit in 2011 to $0.80 per unit by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from $1.00 per unit to $0.80 per unit during the same period. The member estimates imply a downside of 28% to the Trefis price estimate for Suntech Power’s stock.

Disclosure: No positions

Notes: In August 2010, Suntech Power announced that it would stop manufacturing thin film solar cells and focus exclusively on crystalline silicon cells. Crystalline silicon has generally been a poor absorber of light and requires greater thickness to produce solar cells. As a result Suntech and other solar players in the past decided to experiment with thin film technology. The firm made an investment in wafer manufacturer, Shunda and bought SunFab systems from Applied Materials. The experiments to venture into the thin film space did not prove successful as a reduction in costs related to the manufacture of crystalline panels and improved competitiveness forced them to rethink their strategy.