Suntech Power (STP) is the undisputed king of production volume when it comes to manufacturing Photovoltaic cells. Suntech should have 2.4 GW of production capacity by the end of 2011, with room for more if demand increases as planned. While volumes are surging, the company has been slammed by the drop in average selling prices afflicting the entire PV segment of the solar industry.
Suntech’s shares trade for approximately $7.5 a share down from over $70 a share during the heady days of ’07, when the metrics behind the industry were vastly different. It is especially interesting to note that the share price collapse has transpired during a period when absolute revenue has surged from $259M in 2005 to $2.9B for fiscal year 2010, which represents compound annual growth (CAGR) at a stunning 52%. Normally such fantastic growth is met with share price expansion, but Wall Street is concerned about the long term viability of an industry that it perceives to be in a race to the bottom in the production of a commodity.
It is safe to say that no player in the industry has been left unscathed by the drop in prices of solar panels. This drop in prices is truly a double edged sword, because as selling prices drop this spurs new demand for solar installations, which in turn allows for more scale and manufacturing efficiency. It also lessens the need for governments to subsidize the industry as much as it would. Ultimately these factors may be a boon to the industry, as solar makes gains in market share and acceptance versus other forms of alternative energy.
It is Suntech’s manufacturing scale which gives the company the opportunity to shine once again. As the low cost leader, it can squeeze gains out of manufacturing capacity in the Chinese market, where it both produces and sells. An interesting dimension that Wall Street seems to be ignoring is the fact that Suntech is likely a strategic player to the government of China in its quest to encourage non-polluting forms of energy. With millions being lifted into a consumer oriented middle class, China has no choice but to encourage alternative forms of energy to offset the negative impact of millions of tons of carbon emissions from more traditional coal and gas fired plants. China will be keen to nurture its own market leaders in this still adolescent industry.
Suntech, along with other leading Chinese PV manufacturers will get a seat at the table for large contracts. However, it is Suntech Power’s scale which becomes a huge advantage relative to the other providers, and Suntech has considerable momentum as a leader in manufacturing in newer markets it sells to: both China and now the U.S. The company also stands to gain as it becomes better vertically integrated and less impacted by being at the mercy of silicon wafer manufactures. It is specifically this wafer manufacturing business that Suntech has rapidly expanded, to address the issue of reliance on others for this huge input cost. As it stands, Suntech is among the cheapest of a batch of extremely out of favor Chinese solar manufacturers. Trading at well under book value, expectations for Suntech are extremely low.
|Company||Market Cap||PE||Price/Book Value|
|Suntech Power (STP)||$1.38B||5||.72|
|LDK Solar (LDK)||$1.04B||3||.76|
|JA Solar (JASO)||$ .895B||3||.85|
|Yingli Green Energy (YGE)||$1.34B||6||.99|
|Trina Solar (TSL)||$.148B||5||1.18|
|*Sunpower A (SPWRA)||$1.74B||1||1.0|
|*First Solar (FSLR)||$10.74B||17||2.82|
* US based solar companies. Data as provided from S&P. First Solar and Trina Solar are the lone “thin film” manufacturers in the list.
The “Chinese” discount is pervasive, especially compared with U.S. based solar companies which enjoy higher multiples on all fronts. Thin film manufacturers such as First Solar are perceived as being higher up the value chain because of potentially more desirable commercial applications that can be deployed at lower price points.
While solar is clearly out of favor, it will be interesting to see what happens as solar starts to produce energy at a scale that approaches grid parity. Think this is decades away? One can extrapolate from efficiencies gained in recent years to see that this may arrive in a timeframe that could be surprising to naysayers and carbon enthusiasts. If this happens, the prospects for solar becomes even more intriguing and valuable to those that made a play on solar when it was exceedingly unfashionable.
Disclosure: I am long STP.