Chinese manufacturers has been gaining market share from their US counterparts. Most notably First Solar (FSLR) has been losing customers to the top 5 Chinese manufacturers—Yingli Green Energy (YGE), Suntech Power (STP), Trina Solar (TSL), Canadian Solar (CSIQ) and Jinko Solar (JKS). This is evident from the fact that total shipments for FSLR were down 3% for the year 2011, whereas the aggregate shipments for these 5 Chinese companies were up 53%. However, the story of solar stocks, both US and Chinese, will be driven by how much new capacity comes online, at what point does the average selling prices (ASPs) stabilize and how does the end demand from Europe and U.S shapes up.
In this article we will discuss the US and Chinese solar manufacturers.
US Solar Stocks
First Solar uses thin film technology to manufacture solar modules. It has a global client base and is one of few solar companies that cater to utilities as well. The stock is trading near its 52 week lows. The stock is down 20% year to date vs. its US competitor SunPower (SPWR) being up 20%. The main reason for the divergence in the performance is SPWR’s market share gains. Its shipments are up 36% year-over-year. On the other hand the shipments for FSLR declined in 2011. In their recent earnings announcement FSLR had an unexpected warranty charge which can become a dent for future earnings growth and has raised reliability concerns about its solar modules. This warranty expense is in north of quarter of a billion dollars. They missed Q4 earnings as well as revenue expectations; the reported numbers were below the implied guidance too. They have also announced goodwill impairment which will hit the bottom line further.
The company has a market cap of $2.3 billion and is trading at a 35% discount to its book value. The stock looks cheap on various other valuation metrics too. For instance the price/sales ratio is 0.85, the PEG ratio is below 1 and on EV/EBITDA it’s trading at a multiple of 4x. However, the real problem lies in the competitive threats the company faces. Competitors are gaining market share and with weak financial performance of FSLR, profit margin of -1.5%, investors might not be very comfortable holding the stock. The stock doesn’t offer dividends either. On a price to earnings basis the stock is trading at a forward P/E of 6. SunPower, on the other hand is trading at a forward P/E of 12x. The sell side has a price target of $40 on the stock vs. current price of $27. Jim Chanos and David Einhorn made a bundle by shorting First Solar in 2011. Einhorn covered his short position recently which is a positive for the stock.
One might argue that FSLR looks like a value trap; however First Solar may become hot again if oil prices keep rising.
Chinese Solar Stocks
Though the ASPs for Chinese producers are falling and the solar supply is on the rise, however Suntech Power is one stock that is outperforming its solar peers. Year to date the stock is up around 40% vs. YGE being down and other players being up 5-25%.
One should take this outperformance with a grain of salt as the fundamentals are not supporting this outperformance and STP is at a major risk of sell off. One should not forget that it is one of the most levered solar stocks. Net Debt/ Equity is in north of 250%. More importantly, it has a very high cost structure. Its wafer costs are higher as it outsources more than 50% of its wafer sourcing. It has a pre-tax wafer cost of near $1.2 whereas the competitors cost is in the range of 70c-$1. As other industry players benefit from the decline in wafer costs, STP might not be able to capitalize on this opportunity. The recent guidance on cost also doesn’t appear to be very favorable, hence putting the stock at a risk when their relative margins decline. On top of that the threats of rising supply in the Chinese wafer manufacturers will cause the stock to fall too.
In the most recent earnings release (FQ4 2011) they posted a revenue decline of 22% and a loss of 75 cents per share vs. street expectations of a loss of 32 cents per share. Shipments were down 10%. STP is still the most recognized brand name in Chinese Solar market and has worked on improving its cash management cycle. However, the recent guidance of shipments to be down 30% for this quarter and gross margins to fall further in the range of 3-6% will cause the stock to underperform in coming months.
Profit margin of -33%, an EV/EBITDA of 26x, a high cost structure, highly levered balance sheet and weak guidance by the management will be seen as a major problem for investors to keep buying the stock. We recommend that investors should have a look at CSIQ, which is trading at a 70% discount to book value, has a lower EV/EBITDA of 16x and has a lower cost structure (pre-tax cost/watt is 74c vs $1.2 for STP) to benefit from increasing solar demand. Billionaire David E. Shaw’s hedge fund has a small position in the stock.
