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dydo posted an article in ArticlesPoor demand in China, triggering 25% decrease in average selling price (ASP), was cited by First Solar as the cause of a surprisingly bad Q4 forecast and equally poor 2017 expectations. The main victim of ASP drop was a First Solar’s technological roadmap. The company announced up to $585M in asset impairments, writing down “series 4” production lines, and terminating development of “series 5” module. The entire strategy shifted to advance the development of “series 6”. Earlier this year, First Solar used low cost as a business case to announce re-entry into third party module sales, an area long lost to Chinese. The company produced an exciting narrative about its efforts, and in April, Bloomberg published an article titled “Cheaper Than China Again, First Solar Vindicates U.S. Investment” containing many supportive views: “First Solar’s investments over the past five years have increased efficiency by almost 50 percent and wrung costs from the manufacturing process. Meanwhile, the change indicates the limits of what Chinese companies can do without further investment.” “The Chinese have hit a wall regarding polysilicon costs and technology,” Jeffrey Osborne, a Cowen & Co. analyst in New York, said in an interview. There aren’t a lot of levers left for them to pull and their labor costs are rising.” “First Solar is the only manufacturer we see with a significant cost advantage in a commodity market,” said Patrick Jobin, an analyst with Credit Suisse Group AG. “Right now, in most markets they have at least a five percent advantage. They will be at a 10 to 20 percent advantage in a few years.” “First Solar finally has technology leadership again,” Osborne said. “Now, they’re shifting back to superior technology instead of construction projects.” Fast forward to November; the market reality had crushed First Solar’s cost metric to pieces. An organization that reasserted itself to lead was forced to reject its cadmium telluride road map as deficient. In July, another exclusive technology, polysilicon n-type monocrystalline, acquired with the purchase of TetraSun, was too dull, compared to efficiency abilities of cadmium. Ironically, the Malaysian factory making mono cells was retrofitted with “series 5” production lines, now also being discontinued. There is no easy way to put this; First Solar has a problem with its technology because the timeline to develop a competitive product is too long to meet cyclical ASP drops. The condition is hidden when selling legacy solar plants, but immediately turning into a weakness when selling modules to third parties. The tech has demonstrated to be expensive to compete, considering $370M spent on R&D since 2013. Finally, it appears very expensive to expand, needing $900M to build 3GW to produce “series 6”. The end game for the new strategy is to have “series 6” offer 40% reduction in cost, compared to $0.41 per watt delivered by “series 4” today. However, recent Chinese forecasts indicate a challenge to this reduction already by late 2018. Figures offered by Jinko (JKS) and Canadian (CSIQ) describe 22 to 28% reduction from costs declared during Q3 2016. The lowest number quoted is $0.29 per watt available by Q4 2017. If another, 20% drop happens in 2018, it will bring the cost below $0.25, which is an estimate of cost for “series 6”. The above challenge is the biggest risk to First Solar, besides an internal apprehension about the ability to deliver “series 6” to its objective. Chinese are capable of contesting First Solar easier than ever due to the statistical superiority of running in the one technology’ majority and having a history of winning with it. None of the top Chinese companies use exclusive, and therefore expensive technologies. Instead, they make modules using polycrystalline and monocrystalline cells of p-type. This technology covers 95% of global demand, and this superior number forces global equipment manufacturers to pursue objectives and demands of the largest contributors. A sheer number of scientists and budgets dedicated to making poly and mono modules, cheaper and more efficient, is overwhelmingly larger than First Solar’s human capacity and R&D expense. Statistical majority and odds to succeed are on the polysilicon side. For years Chinese were taking business away from First Solar, playing them. Companies themselves run low-cost R&D departments with the goal to investigate recent innovations. Their focus is on selecting the most efficient and moderately priced technology, to allow easy adoption into a mass production. In-house scientists, modify off-the-shelf systems, to further lower the cost. This approach enabled Canadian Solar and Jinko Solar to spent just a fraction, $38M and $58M, what First Solar did on R&D since 2013. It is clear that First Solar, contrary to the Bloomberg’s title, does not have an advantage, and the proof is in the Q4 warning versus what Chinese expect from Q4. Current skepticism about the company is not only limited to what its technology may, or may not deliver. Reduced capacity, no new products, spell more market share loss. No making money but more spending to pursue investment on a long leap into the unknown will weaken today’s financial strength, which is so often quoted as part of First Solar’s appeal. The financial status of the company, its cash reserves, will neutralize concerns for many, for the time being. A lot of articles in SA find the stock as attractive, in financial and also in the technical analysis. This quick summary spells out fundamental, an operational concern about the ability to succeed for the strategy, which on cost, unfortunately until now only tried to catch up and failed. Fundamental values remain timeless during periods like one today when glut threatens gross margins via ASP, and when unsupportive US energy policy may push solar into shadows. I think that fundamentally, First Solar is no longer that company. What happened in last 7 to 8 years, indicates slow deterioration of the company’s leadership, which in my view, has to do with the difficulty to maintain its technology against the greater force of another technological thrust. Chinese has methodically gained in every area because of their concentrated approach to focus on cost reductions. In the grass root stage, exclusive technology like cadmium enticed with anticipation to win the competition race. In maturing industry, its exclusive footprint runs the risk of extinction.
dydo posted an article in ArticlesInvesting in solar manufacturing stocks have been a big disappointment this year. In particular, the perception shapes up more and more like a disaster, because of China putting a sharp stop on demand. Since the majority of manufacturing is in China, a glut of material is pushing fear into investors to avoid a repeat of 2011/2012 great glut, which bankrupted many companies and weakened the survivors greatly. Fortunately, every risk resulting in fear offers an opportunity for profit and what followed great glut was a year of massive appreciation of values. 2013 was one of the best years for record gains, in fact, Canadian Solar Inc. (NASDAQ:CSIQ) was the greatest gain for NASDAQ exchange for that very year. While the general view on solar as the industry is struggling with demand versus supply condition is poor, the final view of the impact for tier one companies trading on the US markets is still out, at least for me. Investors are awaiting reports for the second quarter to learn conclusively if the impact is in fact as severe as it appears to be for all other tiers. I hold a personal belief that tier one companies can maneuver the situation a lot better than its lower ranking competitors. Bankability is one of the reasons, and that is experience learned in the great glut of 2011/2012. Top companies today were top companies then. They were losing money on margin, but they were not in a condition to become bankrupt by it. I think that severity of margin losses is going to be milder than in the great glut but will impact earnings nevertheless. Power generation will help those financial statements with revenue from electricity sales. Also in the case of Canadian Solar, plant sales, can and are expected to boost margin and cash flow. All the same, the market is reacting as the problem is on the horizon and the down adjustment on value is already in place. Canadian Solar trades at 50% down year to date. JinkoSolar Holding Co., Ltd. (NYSE:JKS) at 33%, Trina Solar Limited (NYSE:TSL) at 29% and First Solar, Inc. (NASDAQ:FSLR) at 25% loss. SunPower Corporation (NASDAQ:SPWR) is actually 51% lower YTD. I believe we are looking at the market assumption on the impact of disappearing earnings. Both, SPWR and CSIQ, embody lower than other names gross margins hence they are suffering the most. I think that in the case of Canadian, the gross margin impact, at one point, would have been somewhat misread, since it was building greater efficiency in cell and would produce better margin, but natural tragedy in Funing, China destroyed 1GW of solar cell production. I think it is reasonable to fear impacts on gross margin, while Canadian may not lose the ability to produce the guided volume. By the end of the 2015 and in early 2016 I have tried to refocus my objectives on yieldcos as they have offered, renewable focus investment, the opportunity for gains in the value of equity and dividend. It was an alternative to peaks and valleys of solar manufacturing stocks. I have chosen what had appeared the most undervalued one. TerraForm Power Inc. (NASDAQ:TERP) seemed to me to have more value than TerraForm Global Inc. (NASDAQ:GLBL) both on equity value versus its producing assets and level of dividend. I have expected SunEdison (SUNEQ) to be bankrupt perhaps longer than anyone at least on Seeking Alpha. Despite the condition, I was not concerned about the yieldcos. Unfortunately, ongoing concern with listing status and SEC had made me sell TERP, as I could not justify holding to it under my principles. Months later, while the situation in this aspect has not changed and the dividend has not been paid for some nine months, there is a very good possibility for TERP to be owned by another entity and cure all the listing ills. I suspect that level of dividend will no longer be as potent when the dust settles, but certainly, the comeback will be a sign of full health returning to yieldcos. As a resolution to TERP dilemma, I have invested subsequently after in Pattern Energy Group Inc. (NASDAQ:PEGI) and Nextera Energy Partners LP(NYSE:NEP). I looked at the dividend levels and equity, both offering stability and seeing growth this year. PEGI has have done remarkably well in this aspect. I have got only a small benefit from those gains as I traded them prematurely into shares of the manufacturers what I thought were experiencing a new bottom. Both yieldco stocks continued to sail away adding value in the meantime, while manufacturers continue to falter. Trading in and out to repair the impacts of this mistake, I have recently made a decision to invest in Canadian equity of a renewable yieldco called TransAlta Renewables Inc (TSE:RNW). In my spectrum of yieldco interest, it was one among already mentioned PEGI, NEP and also NRG Yield, Inc. Class C (NYSE:NYLD). I think that yieldcos have crept up in value in the last couple of months, in particular as a reflection of the positive resolution to SUNEQ yieldcos. As a confirmation of it, yields on dividends, have normalized to the region of 4 to 6% and moreover against visionaries drawing from oil price impacts, they did not lower dividend levels. TransAlta, in my opinion, has still relative space to gain value in equity. The parent company is against the wall with a decision on some 4GW coal generation to be retired by 2030 in my home province of Alberta. I think for both, this leads to investment into renewables with higher expediency and in particular, in solar. TransAlta Renewables does not have a single MW in solar, while the parent has bought and most likely will transfer 21MW acquired in the US to it. As I mentioned, the interest in the projects and portfolio of SUNEQ yieldcos put a positive light on other yieldocs, which have been already saved from the volatility of solar manufacturers. I think this trend is to continue. Still, the risk to own for a new buyer, SUNEQ yieldcos are very attractive to commercial, institutional ownership giving other names an opportunity to serve as an alternative eliminating the risks. The profile of yieldcos appears to be an oasis of peace in the sea of volatility what future may hold for solar manufacturing. I think, in the current situation, what is happening in China and in addition to the US elections’ outcome which may put Donald Trump into the presidency, Chinese solar manufacturers have a particularly tough test to pass and certainly face heavy, down pressure. On the other hand, If Hilary Clinton is elected, with no exposure to China, FSLR and SPWR could be gaining a lot more attention, and along with it, appreciation. In this scenario, in my opinion, Chinese stocks would remain only modestly priced. To remain invested in yieldcos is part of my strategy for solar to sort itself during those events and to watch for the signs of the opportunity to appear. A lot less potential than 2013, the effective return of 100% is my objective this time, not a concern while drawing a regular dividend during the waiting period. The catalysts to watch start with the Q2 results with a focus on the Q3 2016 guidance and commentary for the year. First Solar reports this coming week to offer the first glimpse in Q3. Then we have SunPower on the 9th. For yieldcos, quarterly results do not have the same impacts, but two of them report on the 9th, NYLD, and RNW.TE. Chinese are yet to announce their calls, but any indication for Canadian Solar on plant sales this year and plans for 2017 would be interesting. The election results, as mentioned in above paragraph, are also very important, and this is a critical catalyst in my view. Lastly, global demand for solar is expected to growth every year, but currently, 2018 seem to model as the year of financial progress for solar manufacturers. The presence of indicators like improved gross margins, greater EPS, potential IPO for Canadian Solar’s yieldco using sympathetic market conditions, could become unique factors to trigger re-investment sooner. In the final thought, yieldcos seem to be independent of above concerns, and I consider them a perfect vehicle to sit out another shake-up in the solar industry.
http://www.bloomberg.com/news/2013-01-31/first-solar-s-new-mexico-project-may-get-less-than-coal.html Horrible news for the Solar 11: FS signed a PPA for 5.79 uscents/kWh, which is less than the LCOE of new coal plants. Nice try to fool people with your "long-term" unsubsidized PPA price goal of 10-14 cents, FS !!! 5.79 uscents has the ITC in it, but take it out and you still get 8.3 uscents.