Solar Cell Manufacturers Have Room to Grow 16 comments
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All of the solar cell manufacturers are supply constrained. The entire world produced a total of 3.8 Giga Watts [GW] of solar cells in 2007. The manufacturing capacity for solar cells is small compared to the capacity required by government initiatives to increase renewable power production.
Europe wants to produce 21% of its power from renewable resources. America and other countries like China are also seeking to expand renewable power initiatives. This creates huge demand. Worldwide electric production (2005) was 18,560,000 GW hours total. By my rough calculations, one year of solar cell production produces about 0.05% of total world electric production.
3.8 GW solar capacity x 365 days x 7 hrs per day = 9,709 GW hrs of solar production.
That is 0.05% of the total world production.
Total world-wide solar cell installed capacity was 12.4 GW.
12.4 GW solar capacity x 365 days x 7 hrs per day = 31,682 KW hrs of solar production.
That is 0.17% of total world production.
As long as government policies providing subsidies for solar cells continue, production capacity has tremendous room to grow. All of the solar cell companies can easily expand production capacity 3 or 4 times per year for the next several years. Expanding production should also help lower unit costs. Margins for these companies may even expand.
I especially like Trina Solar (TSL) and Canadian Solar (CSIQ) because of their low PE ratios. The expected Forward P/E for TSL is only 11 with an expected PEG Ratio of 0.58. CSIQ has an expected Forward P/E of 14.26 with an expected PEG Ratio of 0.85.
CSIQ’s stock price shot up this week when they reported results above analyst sales and earnings expectations for the current quarter. I would expect TSL, which has not yet reported, to also show good results.
The growth of the solar cell producers should continue until supply catches up with demand, which could be several years from now. The low P/E stocks in particular have the potential to rise many times in price. It is possible the market could support a 3X increase in production in each for the next 3 years, which would be 27 times current production. That would imply total production capacity of 102.6 GW per year or about 1.35 % of total installed capacity. That would be a point where capacity expansion may start being constrained by demand. If existing fossil fuel electric production capacity is retired, then solar production capacity could expand further.
The key to this analysis is the assumption that government programs will continue to provide subsidies for solar alternative energy. If governments cut back or stop this funding, then the economics will not support even the current demand and prices of these stocks would collapse. Technological innovation by companies like First Solar could also depress margins of traditional solar cell producers. This will only happen as the industry’s production capacity catches up to demand. The supply of poly-silicon for cell manufacturers could also constrain growth. The supply of poly-silicon was limited, but this problem seems to be abating.
Disclosure: I own both CSIQ and TSL and have no position in FSLR.
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This article has 16 comments:
However, I think the calculations are incorrect in that you looked at whole-world energy production, and you have to keep in mind that only a small part of the world is enjoying subsidies, so I think the percentages go up ten-fold from maybe tenths of a percent to 1-2%.
Nevertheless, that still leaves a lot of room to grow.
The other aspect you didn't really take into account is that in some (1) very sunny places that (2) worry about environmental costs of fossil-fuel-generated power, solar is already at parity WITHOUT subsidy. See my article on this topic for further details.
The number of places where this will be true will increase as (1) more people insist that environmental costs be considered, (2) as fossil fuel costs increase, and (3) as PV costs decrease.
This will spur demand far more than subsidies ever could, therefore potentiating your thesis.
Jack
Secondly, 3.8 GW is the consumption (sales). If the capacity was 12.4 GW, how can you say solar cell manufacturers are capacity constrained when in fact there is 3x more capacity than was sold? And don't look for any catch-up. Capacity is far outstripping demand, which is growing 40% per year. It seams that we are hearing of new companies starting up on a daily basis.
In addition, there are 100 Chinese companies making solar cells and aabout half as many companies in India will be in production in 2010. With lower production costs there than in the U.S., Europe, or Japan, competitive forces will drop the price of solar cells and thereby eat the bottom line. That should impact public solar cell manufacturers.
Also, TSL's operating margins are about 30% higher than CSIQ's (14% versus 11%), so CSIQ has to sell 30% more panels to just match TSL's earnings. Having said that, I believe CSIQ's margins will expand and come closer to TSL's, narrowing that 30% disparity.
Finally, CSIQ has run VERY hard in the past month, which is why I advised someone a few days ago in one of my comments, when TSL was about $43 and CSIQ was at $46 to SELL their CSIQ (which would have been a double for its owner) and instead buy TSL. Even if the exchange had been share-for-share, today, as I write this, CSIQ is a bit over $44 and TSL is a bit under $49.
In other words, had the person done what I suggested, he would have made another 10% on top of his double.
If TSL announces well next week, I see TSL at $60--possible more if they really blow out the numbers and increase guidance substantially-- and CSIQ at maybe upper $40's.
This is logical given how much CSIQ has run.
Jack
scott
solarfeeds
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Because a watt is not an amount. It is a rate. It is energy per unit time. To find the amount used, you need to multiply the rate by time.
Check your utility bill sometime. It will not show how many KW's you used, it will show how many KW-hours you used.
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Secondly, 3.8 GW is the consumption (sales).
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No, it is not the consumption. It is the capacity. 3.8 GW is the energy per unit time that all the solar panels sold in 2007 could produce if operating at the same time under reasonably optimal conditions.
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If the capacity was 12.4 GW, how can you say solar cell manufacturers are capacity constrained when in fact there is 3x more capacity than was sold?
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The 12.4 GW is the capacity of all solar cells in use in the world, which is a very small percentage of the world's needs. I think that is the point.