Since the beginning of 2011, the entire photovoltaic solar industry has been locked in a death struggle where only the fittest survive. The harsh operating environment has made it nearly impossible for most solar companies to remain profitable. For investors of solar companies it has been an equally rough ride given the poor execution and expectation management delivered for many firms. ReneSola (SOL) may be one of the few exceptions. While operating losses were unavoidable, ReneSola did an excellent job managing its corporate losses in 2011. Unlike many peers that have continually negatively pre-announced quarterly results, ReneSola recently presented investors with a positive surprise by raising 2012 shipment guidance ahead of its second-quarter earnings on August 24.
For 2012, ReneSola now expects total wafer and module shipments to fall between 2.2-2.4GW well above its prior 1.8-2.0GW guidance. In addition, total first-half shipments are now expected to approach 1.0GW. This implies second-quarter shipments could hit 535MW compared with the company's prior guidance of 460-480MW. More importantly, SOL's second-quarter module shipments are expected to increase to 150-170MW from 90.9MW in the first quarter. Given the company's module segment is potentially its only profitable segment, ReneSola's recent shipment upside is good news in a sector where downside revisions have been the norm.
There is a caveat to any positive or negative annual shipment revisions for most solar companies. Due to the difficult pricing environment especially for upstream verticals such as silicon wafers, ReneSola's wafer segment may not generate much if any profits in 2012. Since wafer shipments may make up as much as 75% of SOL's total annual shipments, any upside volume would add little if any incremental benefit to the company's U.S. GAAP bottom line. Nevertheless, ReneSola has certainly been increasing its market share as less competitive peers exit the industry.
In addition, due to ReneSola's late concentration on its downstream module business, the company has had to price aggressively relative to U.S. listed Chinese solar peers. In the first quarter, SOL's module average selling price ("ASP") was $0.84/watt. Larger top-tier incumbents Trina Solar (TSL), Yingli Green Energy (YGE), and Suntech Power (STP) reported Q1 ASPs 10-15% higher than ReneSola. SOL's second-quarter module ASP is also expected to drop further to $0.75/watt potentially halving its per watt gross profit on a sequential basis based on the company's $0.70/watt module unit cost. Thus despite 80-100% higher sequential module shipments, gross profit for this segment may stay roughly level.
As a result and aside from any charges, ReneSola's second-quarter results will likely be similar to its first quarter despite higher shipment volume. The company took a $12.2m inventory provision in the first quarter and may likely take additional write-downs given the continued market declines in polysilicon and module ASPs during the second quarter. Outside of any potential inventory provision as well as other unannounced gains or charges, a second-quarter earnings estimate for SOL has been compiled below. As usual, estimates are based solely on information given by the company presented in its Q1 earnings report and conference call.
- SOL Q2 Earnings Estimate:
- Revenue: $241m
- Wafer Shipments: 355MW at 0.32/watt = $113.5m
- Module Shipments: 170MW at 0.75/watt = $127.5m
- Total Shipments: 525MW
- Unit Cost:
- Wafer: 355mw at 0.32/watt = $113.5m
- Module: 170mw at 0.70/watt = $119m
- Total COGS: $232.5m
- Gross Profit: $8.5m
- Gross Margin: 3.5%
- Operating Expenses: $30m
- Net Interest Expense: $9m
- Foreign Exchange Loss: $3m
- Tax Benefit: $4.5m
- Net Loss: -$29m
- Diluted Share Count: 86.5m
- EPS: -0.34
Looking beyond the second quarter, there are both positives and negatives regarding ReneSola's business prospects. The biggest positive is the company's increased module business, which is expected to more than double in 2012 over 2011. SOL has also announced module capacity expansion to 1.2GW by the end of this year, which could allow for half of the company's shipments to consist of modules moving forward.
ReneSola has also done well in reducing production costs for its core silicon wafer business. If its targeted cost metrics are reached, SOL will be among the largest scale and lowest cost manufacturers in this segment. If the solar industry parallels other industries' consolidation cycles, gross margin in this single vertical should improve after market imbalances become resolved. Whether silicon wafer gross margin will improve to levels sufficient to make it a sustainable stand-alone business remains to be seen, but any improvement beyond SOL's recent break-even level would incrementally add to the bottom line.
Given ReneSola's scale and cost structure, the company should survive the industry's recent destructive consolidation cycle. In theory once pricing normalizes after demand excess has been removed, SOL should be able to return to profitability in its present form. ReneSola's excellent management of the recent industry downturn should also provide investors with more confidence that profitability is an inevitability rather than a probability.
While ReneSola is likely to eventually return to profitability in its current form, its business structure may cause earnings re-acceleration to lag peers. Prior to the industry's pricing collapse in early 2011, SOL made an upstream polysilicon commitment while many peers concentrated on fully integrated downstream business models. With the collapse in polysilicon ASPs towards $20/kg vs. the company's current $30/kg internal production cost, SOL's polysilicon segment will be a U.S. GAAP negative on the company's gross profits. While SOL expects its newer lower cost polysilicon plant to eventually reduce blended production costs below $25/kg, its polysilicon business will likely remain a drag until global solar demand absorbs the recent glut of polysilicon capacity.
In additional, SOL's recent aggressive expansion into the module business is less competitively positioned than larger, more integrated peers such as TSL, YGE, and STP. Renesola has chosen not to expand cell capacity and instead will use external cell tolling. Under the industry's current cell capacity excess, this model will enjoy short-term benefits. However if the industry's demand imbalances revert to normal, external cell tolling or purchases will likely cost more than internal production. This trend has already been witnessed in the solar industry a number of times revealing disproportionately higher profit ratios by less integrated firms as nothing more than fool's gold.
Renesola's delayed module business expansion also may present additional future risks. As noted by management in its Q1 earnings conference call, the company has targeted secondary tier companies and markets. Most of its shipments in the first half of 2012 have been to Eastern European countries. In a recent press release, Renesola indicated 40MW of premium modules were shipped to Greece in the first half with up to 100MW to the same customer annually vs. the company's 600MW annual target. Normally this regional exposure would not raise concerns but with recent large receivables write-offs by higher-tier peers such as Trina Solar, which targets mainly higher-tier customers and markets, ReneSola could face receivables risk moving forward.
Lastly, ReneSola has elected to not pursue additional downstream expansion into the systems and solar project development. While the company does own and operate a 20MW Qinghai solar project, management during its Q1-earnings conference call indicated the company has no current plans to expand further downstream. As U.S. rival First Solar (FSLR) has recently shown, solar project development and sales can insulate a company from irrational component pricing during periods of market imbalances.
Many U.S.-listed Chinese solar peers such as JA Solar (JASO) and Jinko Solar (JKS) have already expanded into project development mainly in China's emerging domestic market. With most Chinese-based project development second half weighted, peers with project pipelines may experience enough incremental revenue at higher gross margin to return to profitability if enough project sales are realized in the second half of 2012. With ReneSola's higher commitment to being a component supplier, this is one less avenue for higher near-term profitability.
Additional disclosure: No position in SOL, JASO, STP, and FSLR.