Renesola Expands Module Capacity To Combat Wafer Gross Margins

Low gross margin on wafers moves Renesola to expan module capacity to 1.2GW

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Today, Renesola (SOL) reported its 2012 Q1 earnings with a 47 cents loss per ADS share, which is more than analysts’ expectations of 30 cents. However, Renesola reported higher than expected shipments and revenue in the quarter. The revenue is down sharply from a year ago due to the dramatic fall on the selling prices.

Obviously, this is a very difficult time for all the companies in the solar PV industry. The persistent overcapacity since early last year and the FIT cut in Germany and a few other countries drove the module ASP below the costs of all the module manufacturers. As a result, all the module makers are anticipated to report a loss in Q1, and very likely for the whole year.

The competition in Renesola’s core business, ingot and wafer, is even more heated due to the aggressive expansion of GCL. Although there are reservations about GCL’s claimed low polysilicon and wafer costs, it is less disputed that GCL has one of the lowest costs if not the lowest. For the quarter, Renesola’s wafer cost went down 1 cent to 19 cents per watt from 20 cents in Q4. The company is guiding further cost reductions to 17 cents per watt at the end of Q2 and 15 cents at the end of the year. SOL is well-known in the industry for its low wafer cost, which is the result of large R&D investment. Yet, compared to GCL’s reported 13 cents processing cost, SOL is lagging behind. The low wafer ASP is the main reason why SOL is expanding into a module business, where SOL has a better chance to improve gross margins. The story is similar with LDK, which is downsizing its wafer division while adding to module division.

One thing notable is the percentage of the Virtus module in its Q1 shipments, which is about 11% (10 MW out of 91 MW). GCL also reported similar ratio of its quasi-mono wafer shipment of overall wafer mix. Comparing to last year’s high pitch of quasi-mono by the company, the low percentage of Virtus in the shipment mix implied either the demand or cost of Virtus was not up to the expectation. With no high efficiency cell technology, the low Virtus output does not bode well for its high-efficiency strategy despite a target of increasing Virtus to 33% in the total module shipment. We need to wait and see how the Virtus line evolves.

A few years ago Renesola bought the module plant of JiaCheng, located at WuXi of Jiangsu Province. However, Renesola did not fully utilize the plant in the past as the module margin was thinner than wafer margin, such that it preferred to sell more wafer over module. Starting late last year, CEO Xianshou Li sensed that there would be higher module demand in 2012 due to the so-called “demand elasticity”. So he began to add more module capacity by buying cheap lines from some small module makers who could not sustain the brutal business and wanted an exit. Therefore, its CapEx on acquired lines is lower, thus giving it an edge in competing against established players. Lacking the cell capacity, SOL went to Taiwan for additional cell partners. So far, the strategy appears to be working with projected module sales rising to 150-170 MW at Q2, beating the expectations. It also gives the company a breathing room for the overall margin as its wafer business is still difficult. Nevertheless, there are signs that the wafer vertical is firming up with small players exiting and LDK cutting back. So there is a good chance that GCL won’t cut or even raise its wafer price. This will diminish the gap between pure GCL clients: Canadian Solar (CSIQ) or China Sunergy (CSUN) and more integrated ones like Trina (TSL), Yingli (YGE) and Jinko (JKS).

All things considered, I expect that Renesola will emerge as a strong contender in the module space when it completes expansion of its module capacity to 1.2 GW this year.