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The Sun Will Shine On FSLR Soon

|Includes: First Solar, Inc. (FSLR)

It is very likely that people who short FSLR will be in a rude awakening when the company's performance going forward is not as bad as many have made it up to be. The expected turnaround in the second quarter will inevitably trigger a short squeeze given the relatively high short interest.

FSLR has one of the strongest balance sheets on the block with strong project pipeline for the next 2 to 3 years. The business model is not broken although it has been severely tested during the last two quarters as a result of European slow down, subsidies concern and the over flooding of Chinese solar modules . However FSLR was quick to confront these problems and took immediate steps to reduce cost including closing factory in Germany. Production performance in the first quarter of this year proves that the problem of product defect is not an issue anymore and FSLR has extended the term of its warranty on its product as a seal of confidence. FSLR will eventually emerge as lean and mean player unlike its Chinese counterparts who rely on subsidies and low poly silicon price to stay afloat. It is most unfortunate that the current stock price level does very little justification to FSLR.

FSLR has a low debt to equity ratio of less than 0.8x after making a huge one time restructuring cost of more than USD 400 million of which not all are cash item. It is unlikely that FSLR will be bankrupt in the near term as cited by many because FSLR has a strong balance sheet and its strong profit visibility for the next 2 to 3 years.

FSLR is moving away from subsidy market to sustainable or non-subsidy market to complement traditional source of power generation. This means that FSLR has to improve its efficiency and economies of scale to be competitive. FSLR currently has a low levelized cost of energy of about US 14cent per kWh and cost per watt is only about US 73 cents. At this cost level, FSLR is able to compete against traditional power generation in certain parts of US. Thus going forward, it is not difficult to envisage that FSLR will have an important place in large scale production of energy. The beauty of FSLR is that it does not rely on low poly silicon cost to stay competitive unlike most of its competitors.

Over the five year plan, FSLR will increase its production to 2.6 to 3 GW for large scale utility project development not only in US but increasingly to emerging economies including Asia. Over time, FSLR should be able to compete not only against other solar producers but against other traditional power producer.

The current downdraft in Germany and other European countries is deemed to be temporary. It is in their long term interest to develop more solar power as part of their long-term energy sufficiency plan. This is especially so in Germany when they phase out nuclear power.

FSLR's Thin Film technology is still very relevant and competitive in the long term:

  • Thin Film technology is still very competitive in long-term.
    1. FSLR has put together a sustainable cost reduction and efficiency improvement road map. The implementation of these measures is long lasting and will keep FSLR ahead of its competitors in terms of both top and bottom lines.
    2. Thin Film CdTe has less temperature-related loss than crystalline silicon due to a lower temperature coefficient. FSLR modules have a proven performance advantage over conventional solar modules. Due to a superior temperature coefficient, FSLR modules produce more energy in real-world environments.
    3. Thin Film CdTe provides superior energy output in low, indirect, and diffuse light conditions, producing more electricity on cloudy days and during the morning and afternoon everyday. ( CdTe has an optimum absorption profile (band gap) for the light spectrum of sunshine which allows it to obtain better performance in dim lighting.)

With more stable electrical generation, Thin Film Solar Cell has advantage over Poly Silicon in large scale solar utility farm.

  1. FSLR is extremely competitive in large scale solar utility projects that requires very little subsidy to compete with traditional power source. FSLR is also actively developing projects in emerging countries such as well including India, Thailand, etc.

Positioning of FSLR

  • First Solar plans to focus on the large scale solar utilities and emerging market which it has durable competitive edge over others. Large scale project is expected to grow rapidly much more in the next ten years according to the reasons below:
    1. FSLR is continuously working to reduce installation cost through economies of scale and efficiency on large scale project. It is difficult to take advantage of economies of scale on small project for residential and commercial building PV system
    2. Slow acceptance rate of Roof Top application cannot allow government in many countries and states to meet their renewable energy utilization target. In addition, they are not able to take advantage of economies of scale due to custom design nature.
    3. In the sustainable market Large Scale Solar Utilities project can be supported by private investors especially if they are integrated with traditional power generation plant.
    4. It is easier for government to subsidize the large Scale Utilities project because it will create less controversial issue in public.
    5. Solar energy will see increasing demand from many countries due to environmental reasons. The demand will most likely be for large scale solar utility as roof top may not be affordable for households in most emerging economies,

FSLR targets lower cost of energy

Source from First Solar

  • FSLR is moving away from Roof Top Solar. I think this is a good move :
  1. Structural integrity - Many roofs are not designed to hold the weight and would need to be reinforced. This will limit the deployment potential.
  2. Usable space for Roof Top is about 60% - 65% and not 100% because of the need for other equipments such as ventilation, etc.
  3. Insulation - Many residential and commercial buildings are not in prime solar resource areas.
  4. Shading - Many houses and buildings are shaded by trees or adjacent buildings
  5. Direction - How many of the houses have roofs facing south
  6. Willingness of owner to participate - Will likely be tied to the financial aid that they will receive for using their roof space.

Positioning of Competitors

  • FSLR's competitors especially the Chinese manufactures solar module from poly silicon. It is most unfortunate that most of them are still in the red despite low input cost from historical low poly silicon price.
    1. Low poly silicon price will not persist for long as many of these refineries have either close or idle their production lines as they cannot survive at this current price level.
    2. Going forward, it is very likely that price of poly silicon is most likely to go up rather than down. This will compound matter worse for the many already loss making Chinese solar companies.


FLSR is still Attractive

  • FSLR's business model is not broken and is still a very much a profitable company given its strong pipeline project for the next 2-3 years.
    1. At this compelling valuation, FSLR is an attractive target for M&A.
    2. FSLR is moving towards the right direction, i.e. large scale utility project
    3. The solar industry is very much a growth industry.

Source: First Solar

The recent announcement by Saudi Arabia to invest $109 billion to develop solar power over the next two decades bodes will for the solar industry. Similar occurrence of a much smaller scale is happening in many countries as well. FSLR will stand to benefit due to their competitive edge in terms of technology and cost.

FSLR in my opinion is a strong company with excellent prospect. I believe the company is moving in the right direction towards the business of building large scale solar utility project by aligning to compete in the non-subsidy market. The very fact that they understand the need to increase efficiency and reduce cost will keep them ahead of the pack for many years to come. It is a shame that the stock price does not reflect the true potential of FSLR.

For those who short the shares of FSLR will face huge loss if the market starts to realize the true value of the company. And when poly silicon price faces strong upward pressure, the sun will shine on FSLR once again.

Disclosure: I am long FSLR.