Seeking Alpha
Long-term horizon, research analyst
Profile| Send Message| ()  

The earnings season continued last week with four Chinese companies. On March 15th, Hanwha SolarOne (HSOL) and GCL Poly reported their results. Hanwha executed three sets of financial adjustments, in the same form as other businesses reporting this quarter. Inventory write-down, provisions for long-term contracts and goodwill impairment totaled around $95M. The company shipped 189.1MW for the quarter and 844.4MW for the year, achieving over $1B in revenues for the full year. Due to the depressed margins, the loss for the fiscal year was at $147M, or $1.76 per share. Hanwha presented a carbon copy of operational cost objectives already seen in other presentations. Unfortunately, the company's cost has been related much more to the performance of Suntech (STP) and stood at $0.74 for non-polysilicon cost in Q4, versus a lot leaner results from the class of Trina (TSL), Yingli (YGE) and Jinko (JKS). Despite the favorable cost of $42 per kg, and an average of around $.24/watt, Hanwha's low 60% or so utilization added another $0.08 per watt to the bottom line, with the in-house cost using internal wafers and cells ending at $1.03 per watt. An even less helpful outcome came after the external source product blend hit $1.16, dubbing Hanwha the most expensive Chinese manufacturer of the quarter. Despite this extreme outcome, Hanwha sees the future at $0.55 to $0.60 per watt on non-poly cost by Q4, expecting (or hoping) to stay with the pack of other manufacturers.

The road to cost reductions, as per Hanwha, rests in the optimization of silver paste, increased module output and conversion of cells in a similar fashion to other makers, to over 17% in multi and over 18% in monocrystalline cells. At the conference, the management revealed even more detail on cost, with processing wafers at $0.11 per watt, cells at $0.18, and module, at what sounded pricey below $.30 per watt. While the last figure hints at high costs for module assembly, wafer processing seems incredibly well optimized, particularly for an operator with limited 800MW worth capacity being able to closely challenge the processing cost of the most efficient wafer maker, GCL, and beating outright that of Renesola (SOL). In defense of Renesola, a blend of quasi-mono and mono processing, as essentially Renesola has no traditional multicrystalline product left, will be naturally more expensive.

Development of solar plants has become a silver bullet solution to combat negative gross margins, and as have others before, Hanwha envisioned moving itself into a downstream. To put words into action, on March 16th, S.A.G. Solarstrom and Hanwha SolarOne formed a joint venture to put Hanwha's modules on roofs in Italy in the amount of 20MW, with a further 20MW for future developments. Hanwha took an 85% share of the new entity. The move to solar distribution and plant development may put soon yesterday's suppliers against the likes of IBC, Solarhybrid and Juwi, as the direct competition. While majorities of large businesses, like Yingli or Suntech, are eyeing China for this type of growth, in a place where business is mostly local, Canadian is openly talking about USA, Japan and Europe, with Sunergy chatting on India, USA and Australia. Certainly at some point those companies will be crossing paths with some of the segment's players. Development of solar plants may become a second battlefield for China's objective to dominate the industry, and without an alternative source of quality supply, current developers may be experiencing increased pressure, which will lend itself to closer relations and joint ventures like the one between Hanwha and Solarstrom at one end, or bankruptcies further extending into this sector on the other.

In summary, Hanwha delivered little excitement with another quarter of quoting the need for improvement, but leaving the audience wanting more concrete delivery. There was very little confirmation on synergies with Hanwha Chem, the parent company. Outside of 100MW of consideration for the company's modules, and undetermined financial support, Hanwha parent seems to be in limbo mode, which does not put a lot of confidence in SolarOne for 2012, in addition to a weak forecast with 1GW of sales, or 18% growth. The fairly low debt level is probably one of the few attractive aspects left in the company, which makes very little difference to industry, which measures its progress and leadership in a few pennies per watt and sorts winners from losers by using this spread.

In China, the largest world producer of polysilicon and wafers at 65,000MT and 8GW respectively, earned $0.03 per share on $3.3B in revenues, based upon the account of financial conditions. GCL results confirmed objectives given earlier by Canadian (CSIQ) about the ability to reach certain operational milestones for GCL wafer processing and polysilicon costs. The end of 2012 objective of $0.10 per watt processing with $.09 poly costs will produce 24% GM on a wafer sold at $0.25, a relatively comfortable level for an undisputed global leader. GCL processed wafers at $0.13 per watt and produced poly at $18.6 per kg in Q4. GCL is also in expansion mode into solar plant development and downstream activities in the US and Japan, as we reported on the Solar PV Investor site.

Renesola, the third largest wafer manufacturer in the world, and China Sunergy (CSUN), the smallest of the Chinese manufacturers listed in USA, announced their results on March 16th. Renesola shipped a combined 339MW of products, which included 94.5MW of modules in Q4. The modules sold at $0.97 per watt, while wafers sold at $0.36 per watt. For the yearly total, shipments were 1,294MW including 280.7 MW of modules. Net revenue for the year was at $985M, 18.3% below 2010 results. The dramatic decrease behind the wafer ASP was the main reason for the drop in revenues, despite the new quasi-mono wafer Virtus, which is gaining a lot of traction with clients. Renesola has managed to stay in the black on the year, which makes this a unique condition for a company that had the least amount of opportunity for a gross margin based on wafer pricing.

The big contributing feature was their own polysilicon production, which will be expanding in 2012 as a helpful portion of value chain enabling lower cost of internal modules. However, as a standalone production, costs are borderline with the spot ASP, putting at risk gross margins in the wafer segment. Renesola plans to develop its poly manufacturing in Phase II to reach 10,000MT of poly per year by the end of 2012, up from the current 4,000MT. The cost of poly production for Renesola in Q4 was at $30 per kg, and with the new plant running is expected to reach $24 per kg by year's end. Wafer processing improved by three cents to $0.20 per watt, but appears to be somewhat lagging when benchmarked against GCL, whose production includes processing of quasi mono wafers, even so when granted a degree of error due to variable quasi mono penetration at each company. By Q4 2012 the company expects this cost to be reduced to $0.15 per watt, and after adding poly, to ultimately drop down to a total of $0.28 for the watt. Despite those efforts I expect Renesola's wafer production cost to be 40% above the one at GCL for that period. Renesola appears to identify the above condition and plans to increase sales of modules built on its own value chain by leveraging the full spectrum of internal production. Today's all-cost-in at $0.73 (March 2012), makes the company the most efficient module manufacturer on the market, without seeing potentially better results from LDK (LDK). In line with this thought module capacity is expected to increase to 1GW, contingent upon demand and expected cost dynamic, while CEO Li is firm on his estimate of 600MW of module sales in 2012, a 137% jump. The sales of wafer will grow as well, into the 20 to 40% range, or 1.2 to 1.4GW. Virtus appears to draw a 20% premium on the market to quasi mono strong wafer made by GCL, and priced by GCL, as part of the LT contract Canadian described in February. Renesola is probably the last resort for a cheap wafer, aside from LDK, for those who never got on the GCL wagon. Some Taiwanese companies like Green Energy Technology may stay in line, but the rest of the cheap wafers will be coming from bankruptcies rather than from continuous production. Renesola's wafer capacity will be at 2GW, including 1.6GW of Virtus' wafer lines.

While China Sunergy sold 420MW of products in 2011, including 411.5MW of modules, the company lost $94M for the year and went through ADS consolidation in order to avoid delisting as one of the unique conditions affecting the company's stock. As others, Sunergy sees downstream business as a door leading to a profitable dynamic. The work estimate here is for 100MW financed by the Chinese banks in 2012. Sunergy also has high conversion modules, which are apparently capable of conversions of 17.7%. Those sales are still limited, thus overall ASP for Sunergy was at an average of $0.94 per watt, not seeing much of the premium. Synergy plans Q1 sales at $0.84 per watt, with processing costs of $.20 per watt cell and $0.25 per watt module. To date, Renesola with $0.97, and Jinko with $0.96, are the other two companies that sold below $1 in Q4, and are expected to continue the downward trend, reaching below $0.90 in the same fashion as Sunergy reported. Another bomb dropped, which is becoming a tradition of Renesola CEO Mr. Xianshou Li, was the prediction of Q4 module pricing as low as $0.70 to $0.75, which spells little to no gross margin for the majority of the industry, unless as Canadian speculated, they can process wafers bought at $0.25 into modules at $0.35 processing per watt. In order to reach 10% gross margin in Q1, Sunergy needs to purchase wafers at $0.30 per watt, a steep drop from blended wafer costs of $.38 in Q4. Luckily, Sunergy is included in GCL's customer list, and getting to this level is feasible through this relationship, but may be delayed as the company is cycling inventory.

Insofar as predictions for Q1 and the year, solar companies have no manufacturing ability to reach a profit for the H1 as an industry, with perhaps few breakaways in the second part of the year. Almost certainly all companies mentioned will have an impossible task to be profitable for the full year, unless the distribution and development efforts will be dramatically increased to affect this year's income statements.

Finally, another postponement had been made in the case of importation duties. It is ironic that something that has been observed by SolarWorld with such clarity and conviction cannot be determined, due to its complexity, by a governmental body. Perhaps the complexity is in the attempt to prove something which does not exist in the presented framework, but it is a result of any industrialized country supporting its efforts internally and globally, in the case of China leading the spent in renewables for years, and finally reaching its leadership by cost management today. Further, it appears that in anticipation of the soon-to-be-announced verdict, two currently anonymous companies went public with their part in the anti-dumping petition against the Chinese: MX Solar USA, a manufacturer of solar panels in Somerset, N.J., with 65MW of production and 120 workers at peak; and Helios Solar Works from Milwaukee, with its 50MW production and 34-person workforce. CASM, or Collation for American Solar Manufacturing, claims a membership of 150 companies and 15,000 workers, a smaller headcount against what many consider a 100,000 job industry and growing, with the fastest pace among other American industrial segments. For every installation job, which is a 100% labour-intensive process, manufacturing by today's standards constitute 0% (automation) to 15% labor; this means for one job in manufacturing ten are created in installing. SunPower (SPWR) is the bestselling brand in California, and has no problem competing with the Chinese on grounds of conversion. Kyocera and Sharp are leading sellers, with a lot higher pricing as we have proven on many occasions; again quality and conversion makes the sale here. No large American corporations joined CASM, including MEMC (WFR), SunEdison and First Solar (FSLR), with the latter looking actively for work in … China. In the latest announcement the case conclusion will be delivered in May, but the outcome is already being neutralized by some of the Chinese. Sunergy is prepared to open a manufacturing site in the US, and Jinko recently made arrangements with an OEM module assembler in Canada, something which Hanwha has been doing for more than a year. LDK has been having OEM arrangements made; Canadian sells "Made in Ontario" modules, which under NAFTA should be free of any duties. Suntech simply makes modules in Arizona. Therefore if the duties are in fact enforced, the impact may be minimal for the majority of those who matter. Yingli and Trina did not provide details on how they will deal with duties at the manufacturing level. Trina, who counts on 20% plus business in the US, took an 8% provision added to cogs in Q4, the only company at this point taking financial adjustment in case of the incoming verdict.

Source: Solar Plant Development Is The Next Phase Of The Price War