New full-year reports were published this week from global solar companies. The largest in revenue, German Q-Cells (OTCPK:QCLSF), accomplished sales of 1B euro in 2011; however, this was a loss of 24% in revenue versus 2010, and in the case of this company is a story about a fight for survival. Faced with costly manufacturing, Q-Cells had another financial obstacle this year in the form of a convertible bond expiring in February. The company, which has around $406M in cash, announced yet another restructuring agenda, this time with a main objective to swap current and future bond issues for equity. This last effort, however, since refinancing was not possible, has been rejected by the ruling of the court last week, possibly placing Q-Cells in front of insolvency proceedings. Three other German names, Centrosolar, Conergy (OTC:CEYHF) and Solar-Fabrik (OTC:SLFBF), also experienced revenue reductions, averaging close to a 30% loss versus last year. Solon (OTC:SGFRF) and Sunways (OTC:SWYAF) are the last two European companies tracked by SPVI (Solar PV Investor), left to report in late April. Both are currently majority-owned by other entities. Solon was purchased under insolvency proceedings by Microsol, a UAE (United Arab Emirates)-Indian company, and Sunways has been taken over by LDK Solar (LDK).
The picture based on reports out of Taiwan has been mixed. Almost all industry leaders from this region, considered as second to Mainland China in scale and capabilities, have seen similar losses in revenue to that of their German counterparts. Probably the most dramatic is seen in the case of Gintech, which until now was considered the second largest cell maker in the region, after Motech. The company has seen a 35% loss in revenue versus 2011 and has been passed by Neo Solar Power, a considerably newer contender. To illustrate some extremes, E-Ton, a company with sales over $600M in 2010, had a loss of revenues amounting to 62% versus 2011, and has been on the bankruptcy watch for some time. At the other end Taiwanese company Waferworks, engaged in the solar wafer business, grew by 36% in revenue, while Taiwan-listed, Hong Kong-based Solargiga grew its revenues by 55%; this company produces monocrystalline wafers. In startling contrast to U.S.-listed Chinese companies, only Motech out of large Taiwan-based companies tracked by SPVI achieved positive gross margins.
In addition to weaknesses exposed by operating dynamics last year, companies face pressure made by traditional yearly reviews of FiT (feed in tariff). Those are triggered generally by the popularity of solar installations under various subsidy formats. As BOS (balance of systems cost) costs drop due to manufacturing and installation costs, affordability increases demand, and investment rate of return IRR (investment rate of return) becomes even more attractive due to lower upfront costs. However, this favorable condition for industry places a stress on the subsidy schemes, in some cases encroaching on fixed spending budgets. Adjustments to subsidy are expected to have a cooling effect, or in some rare cases resulting in no subsidy (Spain). Almost always those decisions create pockets of opportunity for more installations, resulting in boom periods prior to a date of enforcement. Changes in the format of coverage based on the scale of the projects have a traumatic effect, particularly to businesses that are already stretched in the current settings, and by reducing benefits in IRR, put some of the projects or even companies at risk when unable to obtain financing. Germany and Italy, the two largest solar markets to date, are currently making those decisions, evoking pressures on those who are fragile, and creating market share growth for those who will emerge intact. The hypothetical layout of events as expected by the market is as follows: Any feed in tariff reductions are expected to eliminate existing demand. Lack of demand will force overcapacity in the market, which in return will force drop of ASP (average selling price) as companies scramble to turn inventory into cash. The concept of oversupplied market is fueled by the statement that the solar industry is commoditized, meaning no matter where an item is made, it has the same quality and value and sells for the same price, without any differentiation to the consumer.
A world without subsidies is the place where solar energy is going to be fully vindicated. It is natural for everyone in the industry to anticipate operating in that environment, expecting a challenging task ahead to prepare efficiencies capable of creating profit under those circumstances. This time is nearing despite opportune delays, where mature markets like Germany are moving aside for emerging locations. Some of those offer greater opportunities due to their size as well to conditions like irradiance, but also attractive FiT. Japan, India, and the US are viewed as the strong market candidates for 2012 for some or all of those reasons. China is also taking a lot of demand and is forecasted to do so for years to come. Executives of solar firms foresee up to 5GW of installation in 2012 in China, and even Germany is expected to grow this year, despite FiT reductions. Ultimately those conditions are really temporary offsets to an ultimately non-subsidised environment.
Another opinion on solar assumes an easy entry into a manufacturing format. We have discussed at length how South Korean companies have halted capacity growth this year, while the market has touted them as the most capable of breaking down cost barriers. The next barrier-breakers are seen in Taiwanese Foxconn (OTCPK:FXCNY) or even in GE (GE), which are scale monsters and can produce a profit at minimal operating margins. Reviewing capital expenses for 400MW of cell manufacturing planned by Foxconn, the company will not be able to produce a positive return on its investment, nor produce positive earnings. The small scale has a prohibitive effect on making operations in solar profitable. Rolling large scale at once also has a punishing outcome. Buying large amounts of the newest equipment can put a business that is a part of an industry pursuing innovation (another anti-commoditization argument) fairly quickly out of touch, so intensive upgrading ,which is a cost risk, while learning execution is something that has to be a part of a plan. Bosch, LG and Hyundai Heavy Industries have stopped expansions, quoting technical dilemmas to pursuit of the best technology, with large conglomerates leaning towards thin-film due to cheaper production and low learning curve. The original momentum in the market of the last two years makes any entrant very uncomfortable, leaving potential growth to survivals of this stage, with emphasis on crystalline silicon manufacturers having more advantage.
SPVI tracks a large number of public, global companies (full list here). We compiled a list of 20 companies in order of the revenue for 2011 with certain selective filters applied. Since it is difficult to extract revenue from conglomerate businesses, all Japanese and Korean conglomerate corporations are not listed. We also excluded from the "list of twenty" MEMC Electronic Materials (WFR); this is despite the subsidiary of the company SunEdison having in 2011 $1.7B in solar projects and solar material sales, bringing 36% growth over 2010. MEMC has $1B in sales semi division and this is the reason why it is not seen in part of pure plays. Another one, LDK Solar, has not reported yet. The company is expected to report revenue of $2.7B, so we placed it on the list, but it is absent in other calculations. We have also not listed Sharp (OTCPK:SHCAY), which provides a bit of separation to its reported data. The company is expected to deliver $2.4B in fiscal 2011, which is around a 24% drop in earnings. We expect to see Sharp go through further reorganizational steps, confirmed with announcement made on March 30th about the closure of a polysilicon joint venture with Nippon Steel, called NS Solar Material. Sharp has also announced changes in outsourcing of cells, which puts Taiwanese corporations on the list to receive some of the orders.
Lastly, because these are global companies, currency exchange will impact results of transition to U.S. dollars from day to day and this should be taken under consideration, when reviewing those figures.
The recipe for a successful solar company in 2012 includes a variable ASP driven by conversion premiums, low cost, and a capable balance sheet, including ample cash and manageable debt. Adding another ingredient of EPC (Engineering, procurement, construction) projects will help the gross margin to stay positive or grow it higher.
Best revenue growth 2011
- Jinko Solar (JKS) 66.37%
- GCL Poly 38.33%
- Canadian Solar (CSIQ) 26.98%
- Yingli Green Energy (YGE) 23.13%
- Trina Solar (TSL) 10.24%
2011 Best Gross Margins:
- REC 39.9%
- First Solar (FSLR) 35.13%
- GCL Poly 33.1%
- Yingli Green Energy 16.6%
- Trina Solar 16.2%
Best non poly silicon (blended) costs from wafer to module Q4 2011
- Yingli, Trina, Jinko $0.64
Cash on hand Q4 2011 (no restricted cash)
- Yingli Green Energy $891,867
- GCL Poly $886,701
- Trina Solar $816,780
- SolarWorld (OTCPK:SRWRF) $730,415
- Sunpower (SPWR) $657,934