This past week, I attended the Intersolar North America Conference in San Francisco. While smaller than the Solar Power International conference, which is held in October, InterSolar provides a good look at the industry. At the highest level, the solar module manufacturing industry continues to struggle despite record rates of installation. Furthermore, the recently announced anti-dumping tariffs and countervailing duties seem to have provided little help to U.S. based manufacturing.
For example, Abound Solar Inc. filed for bankruptcy, bringing the Obama record to 2 out of 4 (Abound and Solyndra have filed for bankruptcy while SoloPower and 1366 Technologies continue operations). Last October, I wrote about Abound in a review of the module manufacturers that received federal support in the form of loan guarantees. Abound produced Cadmium-Telluride (Cd-Te) modules, which is the same technology as industry pioneer First Solar, Inc. (NASDAQ:FSLR). However, the effective space includes all modules regardless of technology. Performance should be evaluated on a cost per kWh of electricity produced. Furthermore, since that time, FSLR's price has dropped about 75%, suggesting a questionable outlook. FSLR now has a market capitalization around $1.2 billion with declining revenue. Its most recent quarterly (Q1 2012) revenue of $497 million is more than 50% below its Q3 2011 quarterly revenue of $1 billion.
The biggest surprise to me at Intersolar was Taiwan Semiconductor Manufacturing Corporation's (NYSE:TSM) entry into the space. TSM is a $67 billion market capitalization company with $14.1 billion in 2011 revenue, over $4 billion in 2011 net income, and a 3.9% dividend yield (based on the most recent annual dividend of $0.502 and a recent closing price of $12.89). TSM is involved in the design, manufacturing, packaging and selling of semiconductors and other integrated circuit components. TSM has established a CIGS thin film manufacturing facility capable of producing 100 MW per year. However, using a very high price of $0.90 cents per Wp, this would represent just .6% of its annual revenue.
In contrast, General Electric (NYSE:GE) has announced that it will indefinitely delay construction of its proposed Colorado 400 MW Cd-Te module manufacturing facility. This is most likely a comment on the overall industry but might also be a more focused comment on the long-term viability of Cd-Te technology, especially in light of Abound's recent bankruptcy. The rapid decline in crystalline prices is creating significant challenges for all thin film technologies ranging from Cd-Te to CIGS to amorphous silicon.
The other major surprise for me at Intersolar was the continued presence of an enormous number of module manufacturers. I encountered several companies that were new to me, including Talesun with over 1 GW of capacity and smaller manufacturers Sunowe and Winaico. These companies join the ranks that include established companies like Suntech Power Holdings Co. (NYSE:STP), LDK, Yingli Green Energy Holding Co. Ltd. (NYSE:YGE), Trina Solar Ltd. (NYSE:TSL) and JA Solar Holdings (NASDAQ:JASO). All of these companies have market capitalizations below $500 million, less than half of FSLR's. Furthermore, there are still well over 100 module manufacturers in the world. Their combined capacity is still substantially more than market demand.
So what are the investing conclusions from this?
It is quite clear that TSM is simply placing an exploratory bet on solar. With declining prices, solar is rapidly approaching grid parity and has already achieved it in numerous locations. However, it remains to be seen if module manufacturers can actually profit from this trend. TSM's activities in solar should have limited effect on its overall financials, but may position it for the future. TSM and GE's behavior has not had an impact on their performance.
In addition, Cd-Te seems to be losing ground against crystalline technologies, which are rapidly dropping in price. This suggests that FSLR, despite its large market share and relatively high market capitalization, is a possible short candidate. Given its very high short ratio, this is a widely held view. The obvious risk is that there might be a short squeeze.
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