The Aftermath Of Countervailing Duties Takes Priority Over Earnings Reports: American Equipment Makers May Lose The Most

by: Robert Dydo

This week's installment of quarterly results was delivered by JA Solar (NASDAQ:JASO), Daqo (NYSE:DQ) and SolarWorld. In the same industry pattern of publishing negative earnings, JASO has lost $89M in net income or $0.54 per share, which was considerably better than a number of other operators; particularly in that JA Solar's main sales were still dominated by solar cells. JA Solar sold 1.6GW of products, which is a 15.8% increase over last year. The company did not present much detail with regard to operational dynamic; nonetheless, costs are expected to fall to within the vicinity of other top-ranking manufacturers. In line with what others already indicated, JASO sees itself entering the development of solar plants, or EPC (engineering, procurement and construction) projects with scales of 100MW or more per year, mostly in the domestic market.

In order to broaden its sales, the company is planning to expand its product sales through OEM arrangements with local players in USA, Japan and India. Another objective is to switch the sales focus from cells to modules, with expectations of module sales to be more than 50% of 2012, or in the amount of 1GW out of total guidance ranging from 1.8 to 2GW of products for the year. Further breakdown sees high conversion modules to be 50% of all modules sales. The company has come from being a cell manufacturer into the ranks of the module makers, mostly in the move executed in 2011. The top performers in the high conversion families of cells, called SECIUM and MAPLE, are the backbones of modules made by JA Solar, with conversions of 19.5% and 18.6% at the cell level, while the company expects to reach 20% conversion through improvements in current cell technologies in the near future. In the prelude to the 2012 focus, modules constituted 45% of sales in Q4, or 179.1MW and 56% of revenue, which stood as $309M. The current 1.2GW module capacity will grow to 1.7GW by the middle of the year, and by end of the 2012 it will become 2GW, while other capacities will remain the same.

ASP for the quarter was at $0.97 per watt, somewhat lower, despite the added 5 to10% premium for high conversion modules. This amount placed JASO's ASP in the same area with Jinko (NYSE:JKS), Renesola (NYSE:SOL), Sunergy (NASDAQ:CSUN) and Hanwha (HSOL). In similarity to those companies' ASP expectations for Q1, JA Solar sees the module price per watt averaging around $0.80, and $0.78 per watt at the lower end, which is a 20% drop from Q4 of 2011. This estimate is rather startling, since the company anticipates development of Japanese and American markets, which certainly hold a premium over Mainland China's pricing. Further, this level of ASPs would have been expected later this year, which indicate that ASP deterioration is not slowing down. Even now, the already famous bid by Yingli (NYSE:YGE) worth 5.18 Yuan or $0.82 per watt appears to be a higher end quote to what the above-mentioned companies are willing to accept in the last days of the quarter. After last weeks' dramatic announcement of Renesola's CEO Li predicting $0.70 to $0.75 in Q4, similar quotes were presented in duration of Solar Asia's by China Sunergy CEO Stephen Zhifang Cai. With Mr. Cai's prediction of $0.72 per watt for Q4 2012, we see numbers that are dangerously low versus even the most ambitious low cost forecasts, eradicating possibility of reversal from shrinking gross margins.

Daqo was a second company that delivered its results this week. Daqo has been affected by a dramatic price drop in the ASP of the polysilicon only in the last quarter, however the small scale and operational dynamic does not indicate a change of fortune in 2012. Predominantly a polysilicon producer, Daqo has a 4,300MT per year capacity, which will be increased to 7,300 by Q1 2013. Current costs are around $30 per kg; adjusted for the contribution of a new facility, they will drop to an average of $25 per kg. In the current environment Daqo will have an impossible time trying to turn a profit with the spot pricing being in area of $25 per kg, while pricing once more is weakening this week in response to German FiT negotiations and lower demand from manufacturers. In addition to the above, in order to preserve capital while accounting for better market indicators for 2013, Daqo canceled upgrades to its poly plants and a wafer joint venture. Despite positive earnings for the year, Daqo does not provide a particularly exciting business formula for 2012.

German solar company SolarWorld reported its finalized numbers for 2011. As we have written before, the company fared no better than any other solar business in 2011. A difficult year succeeded to provide Solar World with enough cancellations of wafer and poly contracts to get 281M in the other income line on top of the 1B euro operational sales. The company's capacity has been reduced to 1GW in wafers, and remains at 800MW in cells and 850MW in modules. Using 90% utilization SolarWorld plans to repeat sales in 2012 in the area of 700MW. Measured by capacity size, SolarWorld is falling from what was once a leadership role, to be overcome by almost every Chinese U.S.-listed company, staying ahead of Renesola's module capacity only if the latter will not reach demand requiring a 1GW capacity. In sales of modules, China Sunergy and Renesola are the only two companies that would have fewer module sales for 2012. Daqo, due to its business profile, is not included in the comparison.

The last to report, LDK Solar (NYSE:LDK) released its guidance this week and provided a final date for their full-year announcement on April 12th, 2012. The company reduced its projected Q4 sales to the lower end of the range guided shortly after Q3. In addition, LDK expects to take a number of write down adjustments and provisions this quarter. In the tradition of the company's high figure estimates, LDK expects to have 400 to 600MW of EPC projects with deliveries of 270 to 360MW recognized in 2012, which is around 3 times that of any other Chinese company. This places the number of expected EPC projects in the area of 1GW among all US-listed Chinese companies.

In 2012 LDK Solar estimates its revenue in the range of $2.0 billion to $2.7 billion, and polysilicon production between 12,000 MT and 15,000 MT, while shipping 6,000 MT and 8,000 MT to customers. Wafer production is predicted to be between 2.7 GW and 3.3 GW, selling 1.5 GW and 2.0 GW to customers, while cell and module production is to be between 1.2 to 1.6GW with cell and module shipments to customers between 1.0 GW and 1.3 GW. In addition to above, LDK will have inverter shipments between 200 MW and 250 MW, this one perhaps drawing from the recent acquisition of German company Sunways.

As we have mentioned in another article, Chinese solar companies will aggressively enter the solar plant development or EPC project space previously occupied by specialized installers/developers. Those organizations, especially when based in Europe, will continue to experience credit crunch with reduced financing opportunities. Assisted by lines of credit, the Chinese will have no problem filling available space and adding competitive drive to this segment of the business. As an example of traumatic pressure caused by drying up financing pools and changes in dynamic of large plant schemes in Germany, solar developer Solarhybrid, once a leader, filed for bankruptcy early this month. Just a month ago Solarhybrid was in talks to take over the American portfolio of projects from Solar Millennium, a company that went bankrupt last December. The portfolio had around 2.6GW of projects with the majority associated with First Solar (NASDAQ:FSLR). Although this case is not a result of the direct presence of Chinese companies, this particular trend of collapse is expected to persist or be accompanied by consolidations and alignments with the Chinese.

Lastly countervailing measures have been applied to the Chinese companies this week, ranging from 2.9% for Suntech to 4.75% for Trina, and everyone in between with 3.61%. To a degree, this low amount suggests the symbolic nature of the penalty, and perhaps is vindication for the Chinese companies, which until now have been accused of every legal and illegal way to obtain benefits that help them lead the industry. Regardless of "wimping out", as one of the Forbes' contributors described action by the American government, affected companies vowed to continue to address the measure through legal avenues in U.S. and WTO bureaucratic systems. Preliminary status of the finding has also brought back the excitement to the supporters of the tough stand in handling the Chinese, after the initial confusion and dissatisfaction followed the announcement and caused some controversial headlines in the media. For many, since this round went to the Chinese, the gravity point seemed to shift to the second subject of the petition started by SolarWorld, which some observers consider even more damaging.

The anti-dumping accusation, for some, holds more promise for a large percentage of duties, with preliminary findings to be released in May. Based on the criteria of anti-dumping, the investigation would have to prove that companies sold at below cost and plainly dumped their product in the U.S., below ASPs in their homeland. With the exception of Hanwha SolarOne, other Chinese U.S.-listed companies have delivered positive gross margins, this including numerous inventory provisions applied in the year. ASP for modules in China remains 8 to 10% below that in the US; therefore the principal arguments are not supported by facts. It has to be also noted that none of the Chinese solar companies listed in the U.S. sold at the spot pricing. Not a single Korean or Taiwanese company had been questioned in relationship to, or is the objective of the investigation, despite open public statements of dumping below cash level in Q4 due to overbearing levels of inventories, including product destined for American markets. A quick look into the quarterly results shows that Taiwanese companies have been selling at an operational loss for the better part of 2011, so the matter is not about a flood of solar modules, but about the Chinese solar modules, which is a politically fed agenda.

Being cognizant of those evident observations, none of the Chinese companies listed in the US will leave this matter to chance, essentially action plans already, to neutralize or disable any punitive measures in the future.

We have identified four companies that already have OEM arrangements in Canada and the US to deal with any type of duties, whether countervailing or anti-dumping in origin. Trina (NYSE:TSL) announced just this week plans to construct a solar factory on American soil, joining Canadian (NASDAQ:CSIQ), Suntech (NYSE:STP), Hanwha, and Jinko.

The U.S. offers major market growth for the solar industry, as one of the most promising large, utility-scale solar plant locations, as well as an opportunity for retail sales, with grid parity reaching more than 30 states by 2015. Leading Chinese solar companies have shown the ability to penetrate and adapt to various geo-political scenarios in the past, and their global format and financial capability, as well as operational efficiency, will support their presence and dedication to the American market. Based on cost advantages, Chinese companies are expected to absorb fees on their balance sheets, until other efficiency can be executed, in order to shield their clients from any potential impacts and to keep the scale and momentum.

Unfortunately, with any political confrontation in the background, there is a possibility that China will try to even out the playing field by addressing importation of solar materials like polysilicon or equipment in the form of duties, this time applied to American counterparts. The benefit of what has been an extremely advantageous cooperation between U.S. and Chinese companies today may be lost in a political agenda, stemming from the interest of a few, mainly uncompetitive entities. German and Swiss corporations like Centrotherm, Mayer Burger or Manz, which seemed to lag behind Applied Materials (NASDAQ:AMAT) or GT Advanced Technologies (GTAT) in recent quarters, may find their second opportunity in Chinese domestic markets, in those circumstances. Regardless of the added cost, the long term effects on Chinese companies executing business objectives in the U.S. are expected to have minimal impact. Yet unnecessary tensions and controversy will continue to spin negativity, which will keep the truth about the real benefits of solar energy from North America, and surprisingly for this country, keep it one step behind the progress.

Disclosure: I am long YGE, TSL.