Given the rapid declines in spot market average selling prices (“ASP”) following Renesola’s (SOL) first quarter earnings report, today’s pre-announcement on second quarter earnings expectations is not entirely surprising. In an article written a month ago, I had already lowered my expectation for SOL’s second quarter and outlined the main reasons for the shortfall. As it turned out, Renesola’s second quarter was even worse than feared.
Renesola now expects second quarter revenues to range between $235-245m on total shipments 290-300MW. Gross margin is now only expected to be around 17-19%. This compares to prior forecasts of $280-300m in revenues on 330-350MW of shipments. Prior gross margin guidance was expected to fall in the 25-27% range. While declines in gross margin due to lower than expected ASPs were widely expected even prior to today’s pre-announcement, the magnitude of the decline is surprising. Even more importantly, SOL’s shipments were reduced from prior expectations in an environment where many fully integrated peers are expecting significant sequential shipment increases.
It is now clearly evident Renesola’s argument on its own silicon wafer ASP strength even in a weakening industry environment is broken. The company had argued due to a number of reasons which industry analysts disputed in its second quarter conference call, it could hold its core silicon wafer ASP at .70/watt even if it meant its customers might only break even or in some cases even lose money. Today’s warning on gross margin implies SOL’s second quarter ASPs are clearly below these levels.
However Renesola is still among the most efficient large scale silicon wafer supplier in the world. With internal polysilicon production increasing at a lower cost, SOL’s core silicon wafer cost should remain stable if not decrease. A new gross margin range of 17-19% suggests a disproportionate portion of the company’s business in the second quarter may have been back end loaded. With much of the ASP erosion in the industry occurring in the back half of the second quarter, Renesola’s blended gross margin may have been more exposed to pressure than peers which have shipments more evenly distributed during the quarter.
Additionally, Renesola’s guidance on revenues suggests the company’s module shipments were not experiencing the same sequential strength as other direct peers. It appears SOL’s implied second quarter module shipment guidance is flat with the first quarter when other US listed Chinese solar peers such as Trina Solar (TSL), Yingli Green Energy (YGE), Jinko Solar (JKS), and Canadian Solar (CSIQ) all guided for sequential module shipment volume increases of roughly 30% or higher. Renesola’s most closely structured rival LDK Solar (LDK) suggested its second quarter module shipments could be up to 90% higher than levels recorded in the first quarter.
Unlike these direct peers that are more focused on business at the downstream module level, Renesola remained more focused at an upstream single vertical silicon wafer level. While the company did expand into solar cell and module production since 2009, most of its more recent capacity expansion was targeted at the more commoditized polysilicon and silicon wafer verticals. Even in today’s pre-announcement, management stated “We will maintain our focus on our core wafer business.” While SOL’s corporate strategy can be quickly altered to focus more at the downstream level much like LDK, Renesola’s current business may be more vulnerable to short term industry cycles than more integrated downstream oriented peers. Renesola’s second quarter shipment weakness may be the result of the company having less control over its own end market product placement while being more dependent on its customer's demand patterns.
With most of Renesola’s costs fixed, today’s pre-announcement should result in a much lower second quarter earnings per share (“EPS”) expecatation. At the midpoint of today’s guidance, SOL may only generate $43-44m in gross profit. With operating expenses and interest payments generally fixed, I now estimate SOL’s operational earnings to be approximately $9m. Given the company’s currency hedge position assuming it remained constant to levels seen in the first quarter, SOL may also experience $5m in net foreign exchange losses. As a result, Renesola may only report a US GAAP net income of roughly $4-5m for Q2 2011, or about .04-.05 in EPS.
Finally as continually noted in my prior articles on the sector, much of recent business fundamentals may already be priced into the company’s listed stock. Fundamentals and valuation may not influence short term stock market activity which is more sentiment driven, but sentiment does not change intrinsic qualities of companies. While Renesola is still more vulnerable than peers as long as it remains more a single vertical silicon wafer supplier, the company can alter its corporate strategy with little effort if it chooses. SOL is still widely regarded as a large scale low cost quality provider of silicon wafers with proven low cost metrics in downstream solar cell and module production. This footprint should allow Renesola to shift corporate strategy more quickly than smaller rivals with less experience in fully integrated solar module production.