2012 SPVI speculative expectations

A year to forget

2011 is almost over and in many ways investors are not going to miss it. It was a confusing year in regards of solar demand and undeniably challenging one in area of profit creation. Despite losses in Q3, Chinese had been leading cost efficiencies and are seen as most capable of weathering storms in 2012. The ASP drop, being part of BOS, brought solar closer to objective of meeting parity. In certain places the parity has been achieved, which in our opinion will excite demand in those regions soon.  Cost reduction had also stimulated research and development efforts across the supply chain. We are looking for 20% conversion in cells, introduction and limited availability of modules having 17% conversion by the middle of 2012.

2011 Revenues and Demand for 2012

The tier one Chinese companies will deliver somewhere between 25 to 50% increase in revenue for 2011. This increase will be achieved despite 27% drop in a year to year module prices. We believe that solar market had grown by 30% with 23.5GW of installations in 2011. We expect that another 28% will be installed in 2012 moving to 30GW. Chinese like Yingli, Trina, Canadian and Suntech will grow by the additional 30% in volume sales (MW) in 2012. However, based on ASPs, they will not grow revenues in the same fashion.

ASP and Cost

Q3 leading solar Chinese companies have delivered $0.65 per watt of processing costs. SPVI is expecting to process cost average to $0.55 by half of 2012. In addition, polysilicon should settle pricing around $25 per kg. By using thinner wires and diamond wire saws, reduction of kerf as well as larger feeds will lead not only to processing cost reductions but lower use of polysilicon per watt, being around 5.6 grams. Based on this, cost of polysilicon per watt will be around $0.14. In total cost of the polycrystalline module will be in area of $0.69. The ASP should find the floor in the area of the $0.85 by mid-2012. Leading Chinese solar companies will have around 18% gross margins and net incomes in area of 5%.

Capacity Reductions based on Conversion.

Capacity which had led to the overproduction and glut of solar modules will be revised for 2012. Due to increased market expectations in area of conversions, companies which had internally cash flow abilities will upgrade lines with new cell technologies, moving averages above 19% to 20%. Wafer conversions will be expected to be above area of 18.5% with large increases in quasi mono, n-type wafers’ availability. Module conversions in general will get closer to average of 16% from 15.3%. Companies will be able to move module performance of certain upscale lines to 17%. Those modules will receive premiums in 10% or more than ASP mentioned above. There will be few consolidations within the solar industry.   Collectives like reportedly one led by Renesola, may be fashioned in China, but for most part bankruptcies and shutdowns will dominate the landscape.   Tier ones may buy brand names, particularly in Germany, to consolidate operations in Europe. We are also seeing the possibility of China's tier 1 to buy presence in US, in order to avoid importation duties.  Some form of joint ventures may take place in Indian market between local firms and Chinese companies. Consolidation may take place in Taiwan, but it will be between domestic companies. Chinese companies will look forward to entering further into Japan's market. South Korean companies may look for business ties with Chinese top tiers, but they will remain as distant fourth, after Taiwan and Europe, while Japanese companies will lose even more of market's share to Chinese.   Japanese companies may buy or toll services in Mainland China to lower own costs.

Market Demand

Asian markets like South Asia, including Thailand, Malaysia, and Philippines will start more installations.  China and India will dramatically increase, while European markets will continue to rescind. USA may curtail its growth if this decision to enforce importation duties is made.  SPVI is speculating if Chinese product is allowed freely to US, cost of residential installations will slip below $5 per watt. In recent article, we determined that at $4.25 solar is in parity with other sources of energy, based on newest technology. We also suspect if duties are enforced China domestically will accommodate tier 1s for loss of the market in US. South America may become an offset, as well as countries in Africa. US market supplied sales of 21% for Trina and 15% for YGE in Q3.  We see that those values will be easily absorbed elsewhere; however, the negative decision will create a period of the market turbulence in and around February 2012.    

Business Directions

Companies will work on returning to profitability by continuing effort on cost reduction, financial discipline in debt management and cash allocation. There will be marginal expansions in first six months, mostly for new conversion capacity. Mainly upgrading of production lines will take place.   Expenses will be reduced whenever possible and idling of existing capacity will be widespread for low tier companies. Some Chinese companies will get involved in solar plant construction/financing leading to sales to energy and utility companies in global landscape.  

Stock Market

Solar stocks will be in the way of turbulence when the negative decision is announced based on importation duties. Constant pressures will be present until half of the year, when some of the poorer performers are identified and there could be a shift to fewer names, giving a positive lift. Almost all Chinese companies listed in US will exit first half with negative or minimal earnings.   We expect in the second part of the year, there will be greater clarity in regards who will become leading survivors.   Number of the dominant companies will be able to get higher PE, based on the net income worth 5% of the revenue. Companies like Yingli and Trina are expected to receive double digit PE exiting 2012.    

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