FSLR's restructuring plan

FSLR's restructuring should not come as a big surprise for industry observers. This year, FSLR's stock price briefly touched $50 in early Feb.. After that, it went down almost 60% to a low of $20.02 on 04/10.

FSLR's misfortune reflects the changing landscape in the solar power industry. Despite the robust demand worldwide, module price has declined more than 50% at Q1-2012 compared to a year ago. Overcapacity and subsidy cuts at Germany are the two primary causes.

Just two years ago, FSLR commanded a solid lead in manufacturing solar panels at the lowest cost. Its gross margin on its CdTe thin film panels is over 120% while the best competitor has a GM just above 30%. However, rapid growth in the manufacturing capacity and fierce competition, especially in the c-Si modules segment, resulted a rapid fall in the module cost. The price decline of input materials/components/consumables makes up the bulk cost savings for c-Si modules. Efficiency improvement in the production lines and new polysilicon, wafer and cell technology constitute the rest of cost reduction. Still, the cost decrease cannot match the price decline and now almost all the solar manufacturers are operating in a tight GM or even negative GM environment, ending up with an operational loss. Right now, FSLR probably has a very small lead in module cost as it expects to reach 70-72 cents per watt by year end. The lowest-cost c-Si module maker at the moment is likely CSIQ, which should reach the same cost per watt at year-end. It should be noted that FSLR's cost include freight, warranty and recycling while the c-Si module makers exclude above items. Freight usually comes at 2 cents per watt, and warranty is about 1-2 cents for c-Si modules.

Another trouble for FSLR lies in its installation business as large projects are harder and harder to come by, resulting a sliding project pipeline. Last night Goldman's Brian Lee cut FSLR's rating to neutral, citing "lack of visibility into pipeline addtions" as a major concern.

FSLR's restructuring plan mostly deals with its module manufacturing group. The plants with high cost are set to be closed, which includes all the German fabs, and 4 production lines at Malaysia. The lost capacity should be around 700 MW, brought down its total capacity to 1.6 GW. After the closure, the company expect fast cost reduction down the road. By the end of 2013, it estimated the cost would range from $0.6 to $0.64 per watt, on par with the pace at c-Si side. For the module ASP, while CdTe modules usually fetch a low price (by ~10%) to reflect their lower efficiency comparing to c-Si modules, FSLR's brand name makes up the difference in actual selling price. So FSLR is still in the game battling the Chinese c-Si rivals. As a comparison, SunPower expects to have a cost above 80 cents by next year. Despite the premium that SunPower's high efficiency panels typically carry, it appears SunPower is likely to lose market share further.

Another place FSLR took an axe on is its administrative staffs at its headquarter and its Europe operation. The total number should be about 600-700. CEO Ahearn is quite clear that its head count needs to be cut back to match its business. FSLR's head count grew at a fast pace in the past few years, thanks to hefty module margin and a brisk installation business. Now it has to face the tough reality in both segments, and a realignment is indeed unavoidable.

Late last year, after the management shakeup, FSLR disbanded its CIGS thin film module development team and shifted focus to its bread-butter CdTe. The action received favorable comments from analysts. Overall, Ahearn is a much better CEO than his predecessor who does not have a vision.

After the reorganization, FSLR said it can achieve a savings of $30-60 mln this year and $100-120 mln going forward, which should add over $1 per share a year to its bottom line.

For investors, the biggest question right now is whether the low share price is low enough. My view is a cautious "yes" - the bad news has largely baked in. Fundamentally FSLR is still a healthy company and competitive in both segments. Despite a slowdown in large utility scale projects, FSLR has the best brand name in the EPC space and added a few projects this year. Its financials are still the best among solar companies. Recently there are several high-profile bankruptcies in solar space such as Q-Cells, Solar Millennium, Solar Hybrid etc. The self-cleansing should help provide more breathing room for survivors. Another silver bullet for the shareholders is its book value. FSLR enjoyed handsome earnings during its high-fly years.  Even after all the write-off, its book value should still be over $30. So theoretically, as long as FSLR remains competitive and has positive earnings, FSLR should at least maintain its book value.