SAN FRANCISCO, CA / ACCESSWIRE / December 21, 2017 / AlphaDirect EnergyTech Investor, LLC, a research and investor intelligence firm, announced today that Founding Partner Shawn Severson conducted a review of ReneSola Ltd. (NYSE: SOL) and their solar power project developer and independent solar power producer role in the smaller scale market with CEO Xianshou Li.
"With overcapacity being an issue in the overall solar market, we believe that ReneSola has successfully repositioned itself and simplified its business model in order to provide higher returns and growth. The company has also successfully completed a spin-off transaction which should enhance ReneSola's financing ability to cost effectively fund more downstream solar projects and drive more recurring revenue and cash flow," said Mr. Severson, Founding Partner and CEO of AlphaDirect EnergyTech Investor, LLC.
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THE ENERGYTECH INVESTOR INSIGHT
ReneSola was founded in 2005 and with its recent corporate restructuring, the Company is diversifying itself by being more focused in the downstream market with an emphasis on smaller scale projects in different jurisdictions, such as the China DG market as well as community solar in the United States. With overcapacity being an issue in the overall solar market, we believe that ReneSola has successfully repositioned itself and simplified its business model in order to provide higher returns and growth. The company has also successfully completed a spinoff transaction which should enhance ReneSola’s ability to cost-effectively fund more downstream solar projects and drive more recurring revenue and cash flow.
Shawn Severson: First, I would like to thank you Mr. Li for taking the time to speak with us today. Before we dig into the business, could you start by giving us a brief introduction of yourself and what brought you to ReneSola?
Mr. Li: Sure, Shawn. Compared with other competitors in the solar sector, ReneSola has a longer history than other companies in the industry. ReneSola was founded in 2005 and listed on the London AIM at first before we transferred to the New York Stock Exchange in 2008. We strategically evolved over time from a fully integrated solar company from polysilicon to modules and lately our company has simplified, and we are now considered a pure play downstream player.
Shawn Severson: Can you provide us with a general overview of your business and your growth plan, meaning how should investors think about ReneSola from a strategic standpoint?
Mr. Li: We used to cover everything in the solar industry, which made investors think of us as a mixed company. We wanted to be more focused on what we believe are the most attractive areas of our business, which led to our spinoff transaction. After the spinoff, we were primarily focused on the downstream market and on smaller-scale solar projects in diversified jurisdictions, such as the China DG market as well as community solar in the US as opposed to participating in the large-scale utility projects. We believe that this is the future of the industry and we are positioning ourselves to take full advantage of this trend.
Shawn Severson: Is there something about the smaller scale market that is especially attractive relative to larger projects?
Mr. Li: Let’s take a look at Germany as an example when referring to the history of the solar power projects. In markets such as Germany, the UK and Italy, we used to see projects reach a certain scale before governments would cut the subsidies. We have witnessed similar trends in many other countries as well and have concluded that large scale projects would receive less support from government entities. On the other hand, when we see emerging markets such as Poland and Turkey, I believe that the governments in those countries will put a cap on the total size of the markets. For example, in Poland, the annual installation cap would be 100 megawatts, with each site not exceeding one megawatt. I expect this to be the government’s strategy in emerging markets such as Poland. This strategy obviously favors small scale solar power projects. As a result, we see these markets as attractive targets with installation growth at a rational level.
In addition, solar power has its advantages compared with other energy sources. For example, solar panels could be of a smaller size and built on rooftops without taking up land resources etc., which allows solar power to be transmitted to end users directly without transmission losses.
Shawn Severson: The company recently spun off its manufacturing business and completely transformed from a cell and module manufacturer to a pure-play solar project developer and independent solar power producer (IPP). I know you’ve touched on this a bit, but can you remind us of the business rationale behind that? Did you perceive that as a better business, a more profitable business, or better growth opportunities?
Mr. Li: The main reason for the spinoff is to reposition ourselves based on our belief that the industry is facing a serious issue of overcapacity. We used to be a fully integrated solar company and our story was very mixed and we were seen as a highly leveraged company with a low profitability business model. After the spinoff transaction, the new ReneSola is no longer liable for the approximately RMB 3 billion of bank borrowings related to the manufacturing business. I provided a personal guarantee to the lenders to get their consent. Our business model will be simplified and we will provide more visibility to investors in terms of our valuation and profitability. Another reason for the spinoff is that the transaction will enhance our financing ability to fund the solar downstream projects.
Shawn Severson: In your view, is this the sort of industry trend that you’re seeing on a broader scale? In other words, do you anticipate more and more tier-1 or tier-2 solar manufacturers moving in a similar direction as ReneSola?
Mr. Li: I think that’s a very likely scenario. We have seen various cases for example such as Jinko Solar, which has spun off their project business, while keeping their solar manufacturing business in the US market. Another example is First Solar and SunPower who founded a JV for project business. There are different reasons for a spinoff and after many years I have witnessed that companies in the solar industry tend to be more specialized in their own field, especially in a niche market, rather than being a fully integrated story.
Shawn Severson: Thank you. Let’s dig into your business model a bit more. ReneSola’s BT(Build and Transfer) model has been an important strategy for you, but it looks like you are already positioning yourself to be an IPP, or independent power producer. Help us understand what these two models mean for ReneSola and what’s advantageous to each of these models.
Mr. Li: I think that the BT business model was more of a transitioning phase for ReneSola. We used to have the solar manufacturing business and the BT business model as an extension of the manufacturing business - we sell the solar modules, then provide EPC service, and then sell the project. On the other hand, the solar power projects are not an easily replicated resources, so we’d rather retain the valuable project assets. Also, the spinoff transaction enhances our financing ability to hold assets. We currently still have some BT contracts on hand, but the long-term strategy for the company is to hold valuable assets that provide us with recurring revenue and a steady cash flow.
Shawn Severson: Let’s discuss your project development business a bit. What type of projects and which geographic regions do you focus on? Can you also give us a bit of color on the typical size and economics of those projects?
Mr. Li: Geographically, we will remain focused on developed regions such as China, Europe, and North America because we will be able to manage the projects in those countries very well, taking into consideration the operation and maintenance service as well. For example, for a 200 megawatt-sized DG project, there could be 200 projects with each megawatt, whereas for a utility project, 200 megawatts could be just one project.
Regarding the overall return, we look at the projects with equity IRR of over 10%. In large scale projects, the PPA price could be only two or three cents. So, unless you get very competitive with the financing, you won’t be able to reach such high equity IRR. These projects are more attractive to companies such as state-owned power companies, since they are able to get lower financing costs. For the same reasons, we choose not to do large scale projects.
In regards to emerging markets, we still see risks such as policies, financing and exchange rate fluctuations. We need to observe the markets for a while before entering.
Shawn Severson: So, in the markets where you’re operating, what are the key drivers for growth - is it subsidies or straight economics? What are the real drivers that are growing the demand for these types of projects and are there any specific competitive dynamics related to these projects that investors should consider?
Mr. Li: In regards to the dynamics for the DG market, even after grid parity has been achieved, there will be issues such as land as well as transmission costs for large scale projects, which is not a very attractive business to us. On the other hand, there is a trend of subsidies going down in countries such as Canada as well as in the European markets. The government places a lot of effort into supporting large scale projects, so we don’t focus on these projects. Solar energy plays a supplementary role to the overall energy industry and in the long run, solar energy should be provided to end user markets such as community solar. We see 20-30 gigawatts of new installation per year for small scale projects and that accounts for approximately 30% of annual installations of solar energy.
Shawn Severson: What do you think are the biggest risks or challenges for ReneSola today? Could you address that both in terms of the company as well as the overall industry?
Mr. Li: Overall, the biggest challenge the market is currently facing is the issue of overcapacity as I mentioned earlier. Going forward I see demand from the industry being flat or even declining, while on the manufacturing side the capacity could grow up to 30% or even 40%. The overcapacity issue reduces the profitability for everyone in the industry. We now see a gross margin overall for the industry at approximately 10% with the net profit of only 1%. That is a very unfavorable factor for the whole industry and the banks will likely be more cautious towards the industry in the future. As a downstream player we will be negatively affected as well. Secondly, everyone in the market sees oversupply in the manufacturing business, so everyone wants to go downstream, which will pressure the government to provide subsidies resulting in a serious issue for subsidy payment delay as well. Lastly, with more and more companies focusing on the downstream market, the government will accelerate the process of cutting subsidies. These are the three main issues or challenges that I believe the industry and ReneSola are currently facing.
Shawn Severson: Lastly, one area of interest currently to the investment community is the distributed generation opportunity in China. How large is the opportunity for ReneSola over the next several years? Also, how are you going to capture and fund those projects in China?
Mr. Li: Regarding our DG market, we built 180 megawatts in the first half of the year and we sold parts of the project to a state-owned enterprise. In the second half of the year, we expect to build another 100 megawatts, totaling around 300 megawatts annually. We don't consider our strategy for production of 300 to 350 megawatts annually to be aggressive. We would rather be very selective on good projects and see risk management as a key to the success of the business. We now have a development team as well as a technology team of a few hundred people, focusing on only the most developed areas in China which brings us very good, low risk clients and end-users and resolves the pressure on financing as well. We are now working with over ten financial institutions; primarily leading financing companies and they are very flexible when compared to traditional banks. In conclusion, we are doing very well on the financing side of our business.
Shawn Severson: You mentioned 10% IRR target earlier. Do you think that will be the case in China as well or should we expect different returns?
Mr. Li: When we mentioned 10% of equity IRR we meant globally. We have obtained a very attractive PPA. For example, in Poland, our PPA price is over 10 cents in Europe, and in Canada, our FIT3 and FIT4 projects, the PPA price is above 20 cents in Canadian dollars and for the community solar projects in the US, our PPA price is over 10 cents as well, making 10% of equity IRR very achievable.
Shawn Severson: Thank you, Mr. Li, that will conclude our conversation today and I look forward speaking to you again.
Mr. Li: Thank you, Shawn.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.