Has Solar Found a Floor?
Only recently has solar gotten a respite from the relentless selling that had brought many industry participants well under book valuation. The sell-off had been so violent that the objective observer might question the viability of an industry that is struggling to find its footing after panel prices have dropped precipitously over the past year.
Counter-intuitively, this presents a golden opportunity for investors, and the larger solar companies that have the staying power to ride out the after-effects of a glut of capacity and the tightening of financing in the wake of government austerity measures in the West. The below matrix attempts to list the likely survivors.
Many 2nd and 3rd tier players won’t find a seat when the music stops playing, but the strong must take this opportunity to continue to move up the value chain in terms of panel efficiencies and production and complex supply chain integration. This is a precarious time for all players, and has effectively become a final chance to get past these difficult times. A misstep now is tantamount to irrelevance in the form of bankruptcy or a no- or low-premium acquisition.
For Solar Companies that Survive
The good news for companies that have the staying power to survive the downturn: demand for solar is set to explode as the drop in panel prices and the increase of efficiencies begins to bleed into that line of grid parity for power production. While it is true that subsidies and feed-in tariffs still need to be part of the equation, but they become less of a factor as dropping panel prices become an effective offset.
This puts less pressure on cash-strapped governments in the West, but really spurs adoption in places like India and China that have lots of sunshine (unlike Germany) and government mandates to produce plenty of sustainable energy to mitigate environmental degradation from high growth rates in carbon emissions.
How fast deployments are likely to grow: In the US alone, solar installations are growing at over 70% for fiscal year 2011. This is transformational demand that is not likely to slow down, but the benefits will only confer upon a relatively short list of survivors. The window has also been effectively slammed shut on potential new comers backed by venture funding. This new paradigm will serve to seal off the winners.
What Can Investors Expect?
What goes down can go up. One would be tempting fate to short the primary players at this juncture. Give credit to those who had the foresight to understand the visceral nature of this shake-out and consequent melt-down in share prices. A 20-50% spike in share prices is possible -- if not likely -- given how far share prices have retreated. Longer-term, there are some $20 billion market-cap companies lurking in this bunch, but better industry visibility, execution and deployment need to be part of the process before this comes to fruition. For risk-tolerant investors, this is a very interesting time to put capital to work.
|First Solar (FSLR)||$49.00||(64%)||8.79||Undisputed king of thin film panel production used in commercial applications. Plenty of liquidity and strategic to what is left of US solar industry.|
Sunpower (SPWRA, SPWRB)
|$10.00||(35%)||30||US based integrated PV giant. Majority owned by Total (TOT) which should provide ample liquidity. Set to survive and extend leading position as US begins to adopt solar at scale. Calls for home market protection should help.|
|Trina Solar (TSL)||$8.02||(74%)||1.86||Perhaps China's strongest player in the PV market due to scale and supply chain integration. Low valuation yet with ample liquidity and backing of low cost China gov't loans.|
|Suntech Power (STP)||$2.74||(76%)||2.26||Similar profile to Trina Solar but supply chain integration still a work in progress. Massive scale and will survive and likely thrive in years to come.|
|LKD Solar (LDK)||$4.14||(72%)||1.48||Another China giant. Massive sales offset by a massive amount of debt: $3.3 Billion. Still, strategic for China and "too big to fail".|
|Yingli Green Energy (YGE)||$4.06||(67%)||2.21||Yet another Chinese giant albeit with a better balance sheet and about $1 Billion in cash. A tier one player because of size/scale/balance sheet.|
|JA Solar (JASO)||$2.21||(78%)||1.55||Room for one more Chinese tier one player? Certainly China benefits from all this capacity. Yes, the industry will be big enough for this many players.|
|ReneSola (SOL)||$2.28||(83%)||1.17||Borderline "tier 2" player. Expect some consolidation at this level.|