While there is always huge media pressure on solar companies at large, the past two years have made it even more difficult to offer viable investment opportunities to investors. Conversely, almost all recent events have made it very easy for critics and masters of the obvious to foresee the demise of solar, using a single indicator - a profitless business - to measure the future.
After the US evoked tariffs on Mainland China-produced cells, the European Union vowed to bring justice to its solar industry, which basically vanished from the map due to what the Chinese called "cost competitiveness," and others, "subsidies and dumping." While a lot of bandwidth has been dedicated to an analysis of whether the Chinese are subsidized or have dumped product, no longer has the question merited an answer. In reality, who cares? The US tariffs, which are supposed to stop the Chinese, have only enabled giant companies from China to fill the gap after the departure of the little guys from China. If anyone thinks the EU is going to accomplish more than the US did, they need only to understand the Sino-Euro relationship to see that this is impossible. Also, the EU's own policies may prevent tariffs or perhaps lower their severity. So, for those who think that Chinese solar companies are going to vanish entirely, they are about to miss big on the momentum switch.
So, what has happened in the US since tariffs?
While businesses had to adjust, a good 250MW went to the US from China in Q4 2012, in the order of ReneSola Ltd.(ADR) (NYSE: SOL), Hanwha SolarOne Cl Ltd (NASDAQ: HSOL), Canadian Solar Inc. (NASDAQ: CSIQ) and Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE: YGE) as volume leaders. If one is interested in detail, Solarzoom and SolarPVInvestor provide data for serious investors who do not want to stay in the shadow of Wall Street interests or media outlets pumping collapse.
In first two months of Q1, the numbers have increased slightly, while players changed leadership positions. The order for the first two months of the year is Yingli, Trina Solar Limited (NYSE:TSL) Canadian and Hanwha. Canadian Solar has quite an impressive EPC (engineering, procurement, construction) project pipeline of 780MW, both in Canada and the US. GCL Poly, which makes polysilicon and wafers, and buys in return modules for its own EPC projects from Canadian, Hanwha and Trina, has described a 1.2GW solar plant pipeline in the country. Hanwha SolarOne has 400MW in standalone projects in the US, and the company is using the parent's Hanwha "Q.Cells" cells free of tariffs. On the day when Wuxi Suntech's bankruptcy was announced, GCL Poly and Yingli Solar announced cooperation, which will lead to teamwork between the largest polysilicon producer in the world with the largest global manufacturer and shipper of solar modules in 2012. Yingli has plans to ship over 3.3GW of modules in 2013, which is 9.5% of global demand. Yingli has 325MW of binding contracts to deliver to the US, and OEM arrangements for 125MW to Canada.
Clearly, the US offers a lot more to the Chinese than the added cost of Taiwanese- or Malaysian-made cells.
How about Japan?
This is a difficult market to get into, highly guarded and with high-quality requirements, right? Not only do the Chinese produce more cheaply, they also produce equal quality and certainly on par with the innovation of today's Japanese modules. In fact, recent data points out that the majority of Japanese modules are built on cells from Taiwan, but also on wafers from China and sold in Japan via the American company. While the American media is touting SunPower Corporation's (NYSE:SPWR) efficiency modules, Chinese manufacturer Comtec Solar's 77% production of n-type wafers in 2012 went into SunPower's module efficiency marvels. So, how are the Chinese commodity makers managing in Japan? A total of 316MW was delivered to Japan in Q4; usual suspects Suntech Power Holdings Co. Ltd. (ADR) (NYSE:STP), Canadian, JA Solar Holdings Co. Ltd (ADR) (NASDAQ:JASO), and Hanwha lead the pack. Kyocera (NYSE:KYO), which produces its fine modules in Tianjin, China, shipped 111MW on top of that volume the last quarter of 2012. Well, in Q1, in only two months the Chinese shipped 350MW, while Kyocera actually did less than 67MW. There is a very good chance that the Chinese will ship at least 3GW into Japan, which is probably as much as 50% of what installations in Japan are expected to reach this year.
Suntech collapse, what have you?
The collapse of Wuxi Suntech a subsidiary of Suntech Power Holdings is an example of the wrong time and the wrong bond. It happens that collateral given to the company was a worthless piece of paper, instead of German bond certificates. Since the company did not have a way to find $576M to cover its convertibles, the government in Wuxi, where its major subsidiary Wuxi Suntech resides, took the assets under control. They are planning to shave the capacity and leave the most efficient, most automated lines worth 600MW to produce for existing contracts. Suntech is neither a Chinese banking system failure nor a failure of the Chinese solar company model; it is a failure of not being careful with money and being the victim of fraud. Like it or not, if the company was able to sell a legitimate bond, there would be no bankruptcy. It is also a proof that Chinese companies are as individual as any other global businesses, both vulnerable and resourceful at different times.
While Suntech's demise due to money mismanagement is good for capacity levels and further reduces the glut, it apparently made banks in China think twice about lending money to solar companies. The media made another officious attempt to round up everyone into the same bag regardless of circumstances and common sense. Trina Solar, with $807M in cash on hand, is being questioned whether it can pay $83M in convertible debt in July. JA Solar, which has a $113M convertible bond in May, also has $486M in cash. Both companies are in possession of very good balance sheets, particularly in this debt-laden industry.
The message of death due to the absence of funding has been lauded as another opportunity to beat the drum and warn the masses - a spurious attempt, when most are not looking for funding at all. Since borrowing has been always viewed as a sin due to an allegedly robust support mechanism in the domestic regime, it is confusing that the current condition of liquidity drought has lent an opportunity to fear, but in reality should be a reason to rejoice. The logic is simple: without funding there is no cash, since there is no profit. When there is no cash flow, no operations can continue, leading down a straight line to consolidation and reduction of capacity. It does not help detractors that members of the peer group are obtaining loans as before. ReneSola and JinkoSolar Holding Co., Ltd. (NYSE: JKS) have received $50M each from China Development Bank, confirming differentiation among companies and available access to funding. They remain supported because they offer value in efficiency and processing costs, which will lead at least a couple of them to profitability by the second half of 2013.
Profit - the most understood indicator?
Who can become profitable this year? Perhaps Canadian Solar, with some 300 to 500MW of EPC projects to be recognized as revenue this year – a prospect that is completely unexplored by financial media, while those projects offer in the vicinity of 20% in gross margins to the company and ignoring CEO Shawn Qu, who is speaking about full fiscal 2013 profitability. While the company is concentrating on the EPC model, it has been very strong in Japan, the US and dominating Indian markets with deliveries thus far this year.
ReneSola, which started as a wafer producer, is becoming a meaningful polysilicon maker and an even more aggressive solar module manufacturer. They are expecting sales of 1.6GW of modules (more than double the 2012 total of 716MW of modules) in 2013, partially by outsourcing production to Indian and South African companies. In my view, the company can hit profitable levels in Q3, but some see it even sooner. Very strong deliveries to the US (41MW), Greece (40MW), and Australia (30MW) during Q4 continue with a large presence in Greece and Australia during this year. The company's processing costs, due in part to access to their own cheap polysilicon, marks ReneSola as one of the better contenders to profit in 2013.
Trina Solar, in the words of Chairman Jifan Gao, is expected to become profitable in Q3 2013. The company is planning to ship around 2.3GW in 2013 versus the 1.6GW shipped in 2012, resulting in growth of 44%. This improvement has been created by opportunities in the Chinese market, but when reviewing global markets in Q1, Trina made advancements thus far in the UK (leader), Australia (leader), and Japan (in the lead pack). Like Canadian, it plans to embark on an EPC journey, but its pipeline lacks market visibility today. When executed, this can become an instant boost on the path to profit.
JinkoSolar boasts the lowest processing cost, which should offer the potential for the company to be profitable this year. While Jinko made a major commitment to China in Q4, now it is staging a comeback in global markets, including high levels of deliveries to India and to the European continent. How big? In the first two months of Q1 the company doubled the Q4 global deliveries. The company also is planning to increase its capacity to around 1.5GW from the current 1.2GW, expecting high sales. It would be interesting to see what hints the company will offer with its Q4 results coming this week. Jinko is also taking part in the South African market with a recently announced 115MW deal. The area has been supplied in Q1 with most deliveries from Suntech and Hanwha SolarOne. Deliveries to South Africa grew from 16MW in Q4 to 110MW in the first two months of 2013. In addition, the Chinese confirmed around 550MW in total to deliver, with Hanwha planning to ship around 150MW, Suntech with 100MW, BYD Co. China with about 75MW and Trina at 32MW. Only 80MW have been shipped in 2012 out of the 550MW commitment, and there are at least an additional 170MW in unconfirmed volumes, as announcements have not been made, but insiders have reported.
While of course a lot depends on module ASP (average selling prices), most of the mentioned companies are able to reach profitability with pricing returning to $0.70 per watt and their processing cost dropping to $0.55 per watt for all-in costs. While the demand is around 35GW this year, the existing capacity levels in China for bankable module production are estimated at no more than 31GW. It appears this is not being noticed; nor is the fact that at the processing costs of $0.60 per watt and potential of ASP of $0.70, gross margins go back to 14%. Under this scenario, the first batch of Chinese can see profits in 2013.
