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Solar Industry—a story of increasing capacity, declining ASPs and falling stock prices

|Includes: FSLR, Suntech Power Holdings Co., Ltd. (STP)


Sources: Goldman Sachs, Barclays, UBS
Solar Industry—a story of increasing capacity, declining ASPs and falling stock prices: 

Amid tough market conditions in the solar industry companies will focus on survival strategies. In the long term market leaders will emerge from firms having low costs, healthy balance sheets, product and geographical differentiation with local downstream access. 


Solar Industry Capacity: 

The solar industry is a fragmented one where companies exist across the value chain producing polysilicon (raw material), wafers, cells (layers of silicon wafers), modules (combination of cells) and PV systems.

The total solar demand of 20GW represents just 50% of the installed capacity. Cumulative global installed capacity of solar energy as of 2010 is 42.0GW. This includes 19.0GW added in 2010. 19.6GW of solar capacity was installed in 2011; Goldman Sachs expects further installations of 20.8-27.6 GW each year for the next four years. However, total installed capacity is expected to reach only 60.0GW by 2015, since a major chunk of existing facilities are economically unfeasible and should shut down. GS is of the view that the global solar energy demand, presently at 19.6GW, would surpass 27.6GW by 2015. For next year, solar energy demand is estimated at 20.8GW, representing around 50% of installed capacity by 2012. 


Decline in ASPs: 

Present supply glut is pressurizing solar companies’ margins with Average Selling Prices (ASPs), currently prevailing at $0.94/W, anticipated to decline to $0.85/W in 2012. However, this implies shrinkage of module gross margins by only $0.01 to $0.06, as much of ASP decline is absorbed through cost reduction in polysilicon (poly prices are down 60% for the year); wafer processing, cell processing and module processing.

ASP decline has negatively impacted stock prices of solar companies, with YTD share prices falling by 43%-83% across the group. The dismal stock performances are due to market pricing in a challenging next year for the sector characterized by falling ASPs, unfavorable policy decisions and lack of demand acceleration from Europe. 

On the other hand the positives for the sector include significant upside in volume in the medium term (2-3 years), consistently enhancing solar economies, and pressure to meet clean energy targets from emerging Chinese and Indian regions. 


Key Industry Catalysts: 

  • Reaction to Fukushima nuclear incident is reshaping the debate on energy sources, which may provide a long term demand driver to renewable sources, including solar
  • China has reduced its 2020 nuclear energy target, partly replacing it with solar energy. Local module manufacturers may get a boost from this new policy.
  • Goldman Sachs reports that more favorable central governments’ policy development towards renewable energy, such as Federal Renewable Energy Standards (NYSE:RES) in the US, may provide a medium to long term catalyst to the industry 

Below, we will present analysis on two solar stocks. 

GCL-POLY ENERGY (GCL): The Chinese polysilicon and wafer supplier enjoys all three characteristics mentioned in the beginning of the article to successfully steer through these challenging times into long term prosperity. The company is the market leader in China and enjoys low cost structures, with silicon units cost expected to be $16-$19 per kg in CY12 and non-silicon units costs anticipated to range $0.12-$0.15 per watt. The market has already incorporated most of the expected ASP decline. The company enjoys integration of value chain, from having flexibility in poly and wafer production. GCL is developing more business lines, including a solar business farm that is expected to start contributing towards the bottom line by next year. Goldman Sachs’ price target represents an upside of 28%. The stock is trading at 2012 expected PER of 12X compared to 19X for peers. 

SUNTECH POWER HOLDINGS (NYSE:STP): Suntech is a Chinese PV  module manufacturer. The company is engaged in capacity expansion, raising it by 31% by year end. Suntech continues to be a vertically integrated solar company. UBS has a 12 month price target of USD3.7 on the stock, representing 54% upside from current levels. This target price represents a 65% discount to book value. Investors are, however, advised to sell the stock in near term due to ASP decline pushing earnings into negative for CY11. The other short term catalysts that can drive the stock lower include:  1) lower gross margins than peers :11%-13% compared to 15%-19% for other vertically integrated peers 2) cost reduction efforts (implementation of Pluto technology) seemingly not being successful at present 4) higher than average fx exposure 4) high carrying cost of inventory of poly means margins from internally manufactured wafers are currently not competitive to externally purchased wafers (despite low wafer conversion costs). 

Key Risks

Risks in solar industry include:

  • further decline in ASPs
  • supply glut
  • regulatory concerns-- cut in renewable energy subsidies amid struggling global economy.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.