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Shawn W. Kravetz is President of Esplanade Capital LLC, a Boston-based investment management company. Esplanade Capital was founded to manage capital for a small number of like-minded families, private investors, and institutions. The firm manages two private investment partnerships: Esplanade... More
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  • The Sweet Smell of Solar Values
    For decades, enterprising marketers have unabashedly pitched knockoffs of designer colognes and perfumes at cut rate prices. They were originally marketed with catchy slogans like: “If you like GIORGIO™, you’ll love PRIMO.” Today, it might read “If you like OBSESSION™, you’ll love RECESSION.”
    I thought of this vis a vis solar stocks because we are seeing something reminiscent of this today…with a twist. Today, we are seeing the real stuff on sale. It’s Brioni suits at Filene’s Basement or TJ Maxx. Truly the same, but much cheaper and in your size. We humbly offer you four examples of designer quality solar companies without the designer prices.
    If you like Yingli (YGE), you’ll love Trina (TSL). This duo is a fairly traditional relative value play with an edge. The investor community has crowned Yingli as the global low cost leader, a title rightfully deserved in the recent past. However, on the way to Yingli’s coronation, Trina usurped the throne as the low cost king. After crunching the Q2 2009 data, we estimate that Trina sustains a ~10% fully loaded cost advantage over Yingli. Trina can manufacture a module for $2.05 per watt whereas Yingli is producing at $2.30 per watt including COGS, operating expenses and interest expense. In fairness to Yingli, we hold them in high regard as one of the leading global solar companies (and a cost leader) and have owned their stock and related securities in the past. However, with Trina, we own a slightly lower cost producer with 75% of the capacity at ~50% of the enterprise value. Trina has a comparable if not more favorably diversified geographic footprint, higher gross and operating margins, a bankable brand, a better balance sheet (70% less net debt than YGE), and a simpler corporate structure. And most importantly, Trina trades at a discounted valuation to Yingli; based on consensus (and not our significantly higher proprietary earnings estimates for Trina), Yingli trades at ~16.5X 2010E EPS whereas Trina ~13.5X.
    If you like Evergreen Solar (ESLR), you’ll love ATS Automation (ATA in Canada). We have always liked Evergreen’s string ribbon technology, especially in an era of $400/kg polysilicon. Unfortunately, commercializing that technology ballooned ESLR’s balance sheet. Today, ESLR has a $600MM enterprise value and is likely to remain unprofitable for the near future. ATS Automation manufactures the “Quad” furnaces that are the heart of Evergreen’s wafer technology. While Evergreen has not managed to make money, they are intent on driving their business. Each new factory or JV is a win for ATS without the capex needed by Evergreen or its partners. A source at Evergreen confirmed that they were paying $185,000 per furnace in the boom times of 2008. It truly is getting the milk without buying the cow. Moreover, in ATS, we own their other solid automation businesses serving energy, healthcare and other end markets. Finally, ATS owns Photowatt, a solid PV manufacturer and installer with some challenges but well positioned in two of the most rapidly emerging and highly subsidized solar markets: France and Ontario. This makes me think of another example: If you like(d) Spain’s solar market in 2008, you’ll love Ontario. But that’s another story for another time. With a superb management team and a cash rich balance sheet, ATS is an Esplanade favorite.
    If you like First Solar (FSLR), you’ll love integrated Chinese module makers and upgraded metallurgical silicon (CSIQ/TSL/TIM in Canada). Everyone is focused on the “second” First Solar. We admire First Solar (though we don’t own the stock). Frankly, they have no real competition for what they do. The most likely competition on the cost side, however, is not a venture-backed “highly promising” company (possible but unlikely anytime soon), but rather a few companies with one weapon. Start with the global leading processing and administrative cost structure of Canadian Solar or Trina. Then add upgraded metallurgical silicon [UMg] (instead of traditional polysilicon), such as that made by Timminco. Most people have assumed that polysilicon will continue its price decline into perpetuity. We disagree. If polysilicon pricing holds or even rises, then UMg becomes a very compelling low cost substitute. In 2010, we can easily envision UMg module costs of: $0.85 processing for the ingot through module. $0.21 for UMg ($30/kg at 7 g/watt), and $0.20 for operating expenses. All in cost of $1.26 versus FSLR fully-loaded at ~$1.23 in Q2 2009 (admittedly, this will decline in 2010). Should FSLR be scared? No, but they should keep an eye on their rear view mirror for this compelling combination.
    If you like Phoenix Solar (PS4 in Germany), Real Goods (RSOL), Akeena (AKNS) or, any other downstream solar company, you’ll love Systaic (SJK in Germany). It’s difficult to fault even the most seasoned solar investors for overlooking this tiny EUR EUR 76MM market capitalization solar project developer, yet it trades at ~25% of Phoenix Solar’s enterprise value to ebitda. Systaic boasts a robust 205MW solar power plant pipeline (largely in Italy) that should be realized through the end of 2010. With EUR 700MM in potential revenue from their large solar power plant segment alone, systaic will not remain unnoticed for long. We estimate that the power plant segment can generate over EUR 40MM in EBIT in 2009 alone, which suggests that the entire enterprise is trading at ~2X the power plant segment 2009E EBIT. In addition to its core and very profitable power plant business, systaic is nurturing two potentially explosive growth businesses, solar energy roof systems and automotive solar roofs. Management believes that the solar energy roof systems business can generate EUR 100MM in revenue in 2010 (versus ~EUR 30MM in 2009) and that the automotive roof segment can deliver EUR 100M in revenue within 3 years. In the meantime, these two businesses barely consume cash, and management is confident that the solar roof systems business will turn a profit in Q4 2009. We have confidence in Systaic’s veteran management team to deliver on these two promising businesses, and we believe that trading at 4.7X our estimate for 2009 EPS and 8X 2009 consensus (two analysts), we get the potential of the energy roof and automotive segments for free.
    Ah, the sweet smell of solar values.
    Disclaimer: Funds the author manages are long ATS Automation, Canadian Solar, Systaic AG, Timminco, and Trina Solar
    Tags: ATSAF.PK, CSIQ, TIMNF.PK, TSL, Solar
    Oct 09 09:12 am | Link | Comment!
  • China Solar Safari: Hunting for Value
    Big Five Game are viewed as the five trophy animals of an African safari. We have just returned from another trip to China visiting solar companies and would like to offer our Big Five as well as our top five reasons why analysts are still off the mark on Chinese solar stocks.
    Suntech Power (STP): the African Elephant. The biggest of them all, they are deceptively fast despite their size. However, in this case, their enormous capacity and high cost of goods sold will make for a challenging balance of 2009. As the only company that is a true leader in every big global market, they are well positioned in 2010 and beyond, but the near term will be tough.
    Trina Solar (TSL): the Leopard. The fastest of them all. Trina is, in our view, the low cost crystalline silicon manufacturer today, having overtaken the previous leader, Yingli. Moreover, they are strong marketers. This is a devastating combination. With a capital raise now behind them and analyst estimates still too low, this is our favorite solar position.
    LDK Solar (LDK): the African Buffalo. This animal has caused the most hunter deaths in Africa, and perhaps the same holds true for the stock.   The scale of their wafering operations is stunning. Their polysilicon plant, still doubted by many, is a sight to see. A year from now, we expect to see a cost leader of epic proportions serving a booming market. 
    Yingli (YGE): the Lion. This king of the jungle deserves our respect even if it now shares cost leadership with other nimble creatures. It remains a cost leader with great scale. Moreover, it has been the most successful in attacking that other great lion of the thin film world, First Solar. Though Yingli has, at times, chosen to wage a price war, as a cost leader they can win that battle, and we remain quite bullish on this ferocious feline.
    Canadian Solar (CSIQ): the Rhinoceros. Not as well known as the other animals in the kingdom, this large and fierce competitor is different than the rest. Its herbivore diet is CSIQ’s proven ability to use UMGSI (upgraded metallurgical silicon) instead of traditional polysilicon. This is a powerful weapon in the wild. A superb cost structure and savvy marketing make this a dark horse among Chinese solar leaders. Estimates remain too low and CSIQ is one of our favorite holdings.
    With the Big Five now clearly in view, what are the five reasons analysts are still off the mark on Chinese solar stocks?
    1.       Volumes will be bigger than expected. Most analysts forecast 2009 installation volumes to remain flat with 2008 levels if not decline moderately. A few of the more bearish analysts expect volumes to be halved from 2008 levels while few expect volume growth. We recognize that tracking volumes represents an almost impossible task. Until a few weeks ago, many analysts were unaware that the Czech Republic and Benelux were viable solar markets never mind absorbing significant volumes. Our industry contacts, company visits, and published second quarter results are telling us a different story. On our recent trip to China, it was difficult to find a company that wasn’t shipping multiple megawatts per day and operating their facilities at full utilization. As second quarter results begin to hit the wire, we are learning that companies from SunPower to Canadian Solar to LDK shipped meaningfully more product than the most bullish expectations. As companies provide Q3 guidance, phrases such as “a doubling of Q2” have become the norm. We admit that 2009 likely will not achieve volume growth rates of years past, but we fully expect 2009 volume growth rates in the 10-20% range despite a crippling macroeconomic environment. As importantly, we believe that solar volumes in 2010, a mere 5 months away, could more than double from 2009 levels. In 2008, one country, Spain (the world’s 9th largest economy), drove solar. In 2010, the world’s four largest economies are getting in gear: the U.S., Japan, China, and Germany (as are #5 France and # 7 Italy).
    2.       Prices will be firmer than expected. The Street’s herd of solar analysts confidently proclaim that average selling prices (“ASP”) for silicon modules will tumble below $2.00 per watt by the end of 2009 and below $1.50 per watt by the end of 2010. While linear extrapolation of current pricing trends facilitates easy modeling and story crafting, it does not accurately capture the complexity and geographic diversity of module prices. A few phone calls to the same, stale industry contacts does not make a global market. Like volumes, tracking global pricing from Germany to the US to Mongolia (Trina ships modules there) challenges the limits of what is possible. Thousands of transactions, each unique in structure, size, and currency, represent the average selling price. While we agree that prices continue to decline, albeit far less violently than earlier in 2009, we believe that current and second half demand is much stronger than most analysts appreciate (see above) which will drive firmer pricing. At today’s pricing levels, end-customer economics represent safer and more compelling returns than almost any other potential investment. We also believe that analysts are ignoring the potential for aggressive shipments to Germany in Q4 to beat the next subsidy degression and for substantial higher-priced volumes to reach emerging solar markets (e.g., Italy).
    3.       Costs will be lower than expected. Analysts are guilty of underestimating second quarter volumes, but they should stand trial for overlooking these companies’ cost structures. For example, Canadian Solar exceeded second quarter revenue estimates by about 20%, but they trampled consensus EPS by $0.58 (consensus = ($0.09) vs. actual = $0.49). We don’t think that Canadian Solar will be the last Chinese solar company to flabbergast analysts in the second quarter. 
    4.       Chinese leaders are winning more share than expected. Would you buy a Ford Taurus for $26,000 or a Toyota Camry for $20,000? When credit flowed and economies were strong, solar customers could justify the $26,000 Taurus (i.e., American/European branded modules) because the economics supported it. However, in today’s environment, more customers are opting for the value-priced Camry and in large and growing numbers. Almost daily, we learn of another Chinese supplier supplanting an established western peer at a distributor or an integrator. 
     
    5.       These businesses are more durable than expected. Common sense dictates that falling selling prices cannot drive margin expansion. Well, common sense is wrong in the case of solar. In 2008, the low non-silicon processing costs of the Chinese were buried beneath the weight of $400/kg silicon. Silicon comprised ~80% of module costs. Today, falling module prices have thrust silicon prices to multi-year lows. Chinese solar companies have very successfully driven their costs down faster than ASPs by leveraging lower silicon prices and driving down processing costs. Silicon represents about 40% of module costs today, which allows the Chinese cost structures to shine. Some Chinese producers are shining while some American/European competitors are witnessing a partial eclipse.
    And what becomes of the original Kings of the jungle (Sharp, SunPower, First Solar, and Q-Cells)? Well, that’s another safari for another time.
    Disclosure: Funds the author manages are long Canadian Solar, LDK Solar, Suntech Power, Trina Solar, Yingli, and are short SunPower
    Tags: TSL, STP, LDK, YGE, CSIQ, SPWRA, SPWRB, FSLR, QCLSF.PK, SHCAY.PK
    Aug 10 10:35 am | Link | Comment!
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