Catch Me If You Can

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Klothilde

Unregistered

Tuesday, May 7th 2013, 3:02am

Catch Me If You Can

I sense a lot of dark energy against FSLR on this board so I think it's time for some good old lovin'

One way to increase your lovin towards FSLR is to think about the value of its net cash position.

For that I asked myself the question: "How long would it take Chi to catch up with FSLR's net cash position under today's operational structure?"

This is what I got:

Ch Sunergy 14 years
JA Solar 11 years
JinkoSolar 19 years
Trina Solar 9 years
Canadian 10 years
Hanwha 15 years
Renesola 14 years
Yingli Solar 27 years
LDK Solar 19 years

In simple words: It would take Chi forever to reach FSLR's net cash position.

Here are my crunchies. I first lined up figures for net cash / net debt in Q4 from Odyd's quarterly overview:

index.php?page=Attachment&attachmentID=154

Then I made a back-of-the envelop calculation to estimate yearly cash generation assuming a) constant module capacity (for SOL and LDK I was so kind to take wafer capacity as module capacity), b) ASP of $0.7/W, c) net profit of 5%, and d) net profit = cash generation, i.e. Capex = Depreciation. Finally I divided the Gap in Net Cash to FSLR by the yearly net profit.

index.php?page=Attachment&attachmentID=155

I know that this is a very primitive back-of-the envelop thing because it doesn't take into consideration higher margin project business a.o. However I believe the crunchies validly show that it will be hard and it will take long for Chi to generate a position of substantial net cash. The days of Apple-like gross margins are over and players w/out competitive advantages will have to face razor-thin margins of commodity industries with low entry barriers.

Somebody's heart warming up to First ?

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 3:34am

Yes, FSLR has better balance sheet than for example SOL. It also has 25 times higher market cap than SOL to reflect that. So how long until FSLR has paid 4.1b dividend compared to SOL paying 150m dividend is probably what you want to compare here.

Another thing to consider. "Capex = Depreciation": you cannot have them spend their current high depreciation on capex for 10-20 years instead of keeping that as cash (to pay down debt to lower interest and increase NM, before dividend payments) and assume that the capacity remains flat coming 10-20 years.

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Klothilde

Unregistered

Tuesday, May 7th 2013, 3:54am

Yes, I hate the high valuation of FSLR as well. Seems like the PE ratios increase with balance sheet strength.

As to Capex=Depreciation: I stated that this was a very rough calculation and not a scientific exercise. It is just to open people's eyes and increase their lovin.

How long would it take SOL in an optimistic scenario to achieve $339M of net cash? Of course without screwing shareholders in the form of equity infusion or debt-to-equity swap. Can you provide a concrete number (X years) or will you dodge the question maybe?

This post has been edited 1 times, last edit by "Klothilde" (May 7th 2013, 4:01am)

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 4:18am

What's the point of commenting on flawed maths?

YGE and LDK has depreciations north of 200m and many of the rest have close to 100m. If you assume they don't expand you have to add a good portion this to the near future cashflow, since pure upkeep capex is less than depreciation.

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eysteinh

Intermediate

Posts: 446

Date of registration: Dec 9th 2012

Stock Positions: None

Thanks: 37

Tuesday, May 7th 2013, 4:24am

A lot of negativity here. Even if klothilde is off on the calculations he is not off on the fact that fslr have much more cash. Solar industry is cash heavy so this is important. The only thing i dont like about fslr is cost of modules.

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Klothilde

Unregistered

Tuesday, May 7th 2013, 4:24am

Dodge it is. No Chrysler, No Jeep but Dodge.

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cfeng

Professional

Posts: 564

Date of registration: Apr 25th 2013

Stock Positions: SPWR SOL/1.8 HSOL/1.6 JKS/7.25 CSIQ/8.4(sold 1/2 @10.4, sold rest @11.3)

Thanks: 26

Tuesday, May 7th 2013, 5:54am

Let's face it. Chinese solars have been stuck in the mud while FSLR and SPWR have rocketed and are multiples higher from their 2012 lows (4.3x to be exact for SPWR and FSLR).

For a same 4.3 multiple,
SOL would have to be at $4.64 right now (it's at $1.75 instead)
YGE would have to be at $5.38 right now (it's at $2.28 instead)
TSL would have to be at $8.77 right now (it's at $4.99 instead)
JASO would have to be at $12.51 right now (it's at $5.12 instead)
DQ would have to be at $14.62 right now (it's at $5.42 instead)
HSOL would have to be at $3.31 right now (it's at $1.01 instead)
JKS would have to be at $8.6 right now (it's at $6.9 instead)
CSIQ would have to be at $8.39 right now (it's at $5.8 instead)

So as you can see, investing in SPWR and FSLR continues to be far more rewarding than Chinese solars. In other words, Chinese solars continue to underperform and I don't see any reason for that to change.

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 6:43am

Valuation matters in stock picking to me after other requirements like future survivability and profitability have been met. For a 10-bagger chance I need to bet FSLR can reach 40b in market cap or SOL can reach 1.5b. I don't no how we can compare strengths here, since FSLR must be 25 times stronger than SOL (or peers) to be a better pick.

The important thing for solar11 is to have future survivability and profitablity, then they can quickly repair balance sheets during next boom (if they learned their lesson to repair instead of expand this time).

This post has been edited 1 times, last edit by "explo" (May 7th 2013, 6:50am)

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cfeng

Professional

Posts: 564

Date of registration: Apr 25th 2013

Stock Positions: SPWR SOL/1.8 HSOL/1.6 JKS/7.25 CSIQ/8.4(sold 1/2 @10.4, sold rest @11.3)

Thanks: 26

Tuesday, May 7th 2013, 6:53am

Explo,
Even if some have learned their lesson, they will be ones who will act like they know better and they will expand. One of those is YGE. And once they start IMO the others will have to follow.

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 6:54am

Quoted from "cfeng"

So as you can see, investing in SPWR and FSLR continues to be far more rewarding than Chinese solars. In other words, Chinese solars continue to underperform and I don't see any reason for that to change.

It depends on time-frame. At some points in time, e.g. when solar 11 valuation are beaten down, they can be better investments coming 18 months. See them here beat FSLR:

http://finance.yahoo.com/echarts?s=SOL+I…ource=undefined;

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Klothilde

Unregistered

Tuesday, May 7th 2013, 7:10am

Quoted from "explo"

The important thing for solar11 is to have future survivability and profitablity, then they can quickly repair balance sheets during next boom (if they learned their lesson to repair instead of expand this time).

That's precisely my point. There is no such thing as a quick repair of balance sheets for Chi. It will take a loooong time.

Valuation also factors future cash flow risk. If you ask me, I see a very good chance of Chi cash flows improving significantly over the next quarters. However for any risk view you need to factor in also the horrible case scenarios. What if India and Japan slap Tariffs on Chi? What if LG, Samsung, and Foxconn each enter the solar space with 10 GW capacity each? How will that affect ASP of Chi vs. ASP of FSLR and SPWR? You know wham sayin? Chi has a way higher cash flow risk than FSLR and SPWR.

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 8:46am

Quoted from "Klothilde"

That's precisely my point. There is no such thing as a quick repair of balance sheets for Chi. It will take a loooong time.

How do you know that? You assume 3.5 cents net profit per watt. If demand suddenly outstrip poly supply then prices can rise quickly and the net margin can multiply (especially if you have your own poly plant or don't depend on poly, why do you think old poly makers and FSLR could build cash piles before?).

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littleguyintucson

Intermediate

Posts: 331

Date of registration: Feb 4th 2013

Stock Positions: None

Thanks: 39

Tuesday, May 7th 2013, 9:00am

Quoted from "explo"

How do you know that? You assume 3.5 cents net profit per watt. If demand suddenly outstrip poly supply then prices can rise quickly and the net margin can multiply (especially if you have your own poly plant or don't depend on poly, why do you think old poly makers and FSLR could build cash piles before?).

I have heard this argument before justifying LDK and their debt loads. For historical purpose, how many quarters did module ASP rise in the last downturn? How much did ASP rise, I believe if you look at past history ASP rose for 1 or 2 quarters and 5% . Poly moved from $40 to $60 or around 50%. A 50% move would put Poly back at around $28 and would impact production costs by $0.05. That would push cost targets of $0.53 to $0.58.

A net profit of 3.5% is very generous as this implies $0.18 gross per watt shipped. That puts an ASP at $0.73. Only ReneSola would benefit as they are the only Poly to cell. But they need 17,000MT tons of Poly for 3GW of production. So they will be impacted as well. They also outsource some 25% of their demand needs for wafers in 2013. If that model continues then 25% of their business is impacted as well from higher input costs. Not quite as significant as say CSIQ or YGE.

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 9:31am

In 2010 I believe ASP rose from 1.60's in Q1 to 1.80's in Q4 as the industry experienced a minor poly and wafer shortage.

In that latest 1-year long boom period from 10Q2 to 11Q1 SOL earned over 200m net profit. Others had similar profit boom. Unfortunately most spent it all. A similar boom and no capex spending you get for e.g. SOL 200m profit and + 100m depreciation cash flow. This is in the order of half the net debt. So one boom year and net debt can be cut in half for those solar11 with similar debt burden to SOL (we know LDK and STP is another league there).

In that last boom period ASP was a bit more than twice of what it is now, but SOL had less than 1300 MW shipments then compared to 2900 MW guided for 2013. So business volume is about the same and SOL will in 2H need ASP levels in the mid 70s to reach the margin level of last boom period.

This post has been edited 1 times, last edit by "explo" (May 7th 2013, 9:42am)

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cfeng

Professional

Posts: 564

Date of registration: Apr 25th 2013

Stock Positions: SPWR SOL/1.8 HSOL/1.6 JKS/7.25 CSIQ/8.4(sold 1/2 @10.4, sold rest @11.3)

Thanks: 26

Tuesday, May 7th 2013, 9:50am

The industry is still in an oversupply situation and I've seen no poly spot price movement that that is changing. So let's wait for poly to first get to $20/kg before we count our chickens.

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 10:13am

Yes, I'm not speculating when/if the boom comes and how big it becomes, but recovery is starting in 2013. After that it could boom or double dip or stay flat.

Personally I think panels going from 1.80 to 0.70 creates opportunities for policy makers around the world. History tells us that there's a relationship between price level and demand level, in PV industry it takes time for them to balance, because laws have to be negotiated, passed, supporting infrastructure (physical and bureuacratic) built, industry participants established (importers, distributors, retailers, installers, inspectors) etc. The price signal is given the response is building a latent mass that will come all at once. That's when you get boom, shortages and high margins. Just turn the chart from the past to years upside down to complete the cycle. Then morph it a bit depending on timing and magnitude specualtion.

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Klothilde

Unregistered

Tuesday, May 7th 2013, 10:44am

Quoted from "explo"

...That's when you get boom, shortages and high margins. Just turn the chart from the past to years upside down to complete the cycle. Then morph it a bit depending on timing and magnitude specualtion...

Yes, however you fail to mention one boundary condition for prices that will result in lower pricing bands going forward: There has been a massive reduction in subsidies, which effectively limits the amount that module prices can go up before demand collapses. See, during the Boom phase of 2010 that you refer to you had massive demand coming out of Germany and Italy at FIT regimes of >$0.40/kWh. This provided enough leeway to support module prices up to $2.00/W before affecting demand. Those high subsidy days are over and going forward the price ceiling for the industry upcycles will be determined more and more by unsubsidied economics. This means a price ceiling of under $1.0/W imo.

However I think the real resulting price ceiling of industry cycles may be even lower than the $1.0 suggested, since it will be affected by the speed that capacity can be added along the value chain compared to how fast demand can spike. As we transition to an unsubsidized world demand growth rates will be more moderate and we won't experience the crazy demand spikes of the subsidized times. Slower demand growth and more demand visibility will allow for a more timely and also more anti cyclical capacity addition and thus smoothen out the cycles alltogether.

This post has been edited 2 times, last edit by "Klothilde" (May 7th 2013, 11:01am)

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explo

Master

Posts: 1,759

Date of registration: Sep 29th 2012

Stock Positions: SOL, JASO

Thanks: 154

Tuesday, May 7th 2013, 12:12pm

You fail to mention that in 2010 prices needed to rise to 1.80 for profit booming. Now they only have to rise to 0.75 for profit booming. A bit less effort. So no the conditions to support a price hike to 1.80 is no longer the same as in 2010, but we don't need them since we only need a price hike to 0.75. Remember that panels you paid 1.80 for in 2010 were worth 10% less in conversion efficiency than the panels you buy today. The the cost of PV electricity generation capacity today is nowhere close to where it was 2010.

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littleguyintucson

Intermediate

Posts: 331

Date of registration: Feb 4th 2013

Stock Positions: None

Thanks: 39

Tuesday, May 7th 2013, 3:02pm

Technically an ASP needs to be around $1/watt to achieve profit booms like 2010 not $0.75

here is the last 2 quarters of TSL from 2010.

"Earnings per fully diluted American Depositary Share ("ADS") were $1.87, compared to $1.08 in the third quarter of 2010 and $0.74 in the fourth quarter of 2009"

To achieve those levels of profit booms you need

$1.89*80=$151.2 after tax
151.2/.9= $168M before tax
80*$0.11= $8.8M Forex loss
$75M = Opex and interest at 400MW
$251.8M = gross profits required
600MW capacity
$0.50*600=$300M costs
Total Revenue required $551.8M
$558.600= $0.92
If costs were $0.50

This post has been edited 3 times, last edit by "littleguyintucson" (May 7th 2013, 3:29pm)

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Klothilde

Unregistered

Friday, May 10th 2013, 12:49am

Oh, I just noticed I forgot to mention that First will increase her net cash position to 1 zillion by year end 2013. Don't know how many BOOMS Chi will need to catch up, but my gut tells me it has to be quite a few:

index.php?page=Attachment&attachmentID=165