SunEdison (SUNE)

[Guest quinn the eskimo]

I have felt for some time that the movement into a YieldCo will accelerate the amount of activity engaged in by SUNE and the others. Quite simply, if the economics of projects truly do show that there is more value there to be captured than has been to date (as both SUNE and SPWR have quite coherently argued, I believe), then logically, these firms should move to maximize their capital-raising... in order to reap the harvest of projects from every corner they can manage. 

 

And in the case of SUNE, I believe large-scale capital has told them, "You bring in the projects, and run them into your mechanism, we'll fund them to the hilt." This is no different than financiers backing a SCTY or other DG-building firm, other than - in my view - the economics of utility-scale projects remain, at present, somewhat superior to attempts to collect and value 000's of DG projects in one financial instrument.

 

In that context- one which SUNE's CEO described as requiring them to very soon raise $10-$15 billion PER ANNUM - then the existing and historic debt load of SUNE, accumulated from its days fussing with silicon, could be rather quickly dwarfed.

 

Just look at the activity in SUNE's last month:

• 50 MWs from Bluewave
• >400 MWs from AES/Riverstone (including projects in the US, India and potentially Italy)
• A 1,700 MW JV in China with a wafer firm, Huantai
• A 1,850 MW master service agreement with a firm that supplies racking equipment
• $400 Million Convertible notes, at something like 0.25% interest
• Launching Latin America's largest-ever solar project, in Chile
• A successful spin-off of their Semiconductor wing, now trading at over $17
• And a detailed set of plans for their YieldCo, with its initial 500+ MWs and 1500 MWs by 2016

 

I look at that, within a month, and am rather flabbergasted. But not at all surprised when DB looked at it, and set a $35 PT. 

 

I think we're looking at the birth of a rather new entity on the global energy scene, certainly for the solar sector at least. Give it 6 months, and if SUNE's efforts pan out, I think we're looking not just at a whole series of existing PV players who will want to follow (like SPWR, JKS and TSL, at a minimum), but almost certainly, at the movement of very large financial houses and institutions, and perhaps cash-rich energy firms and utilities, into the sector. 

 

e.g. To take just the most obvious case, why would a Total sit and allow a pipeline of >5,000 MW's, presently held by SPWR, to simply be sold off to funds such a Blackrock or to existing utilities, when it could hold, profitably, these assets for the next 20 years?

 

e.g. And why would a financial house, which today might scramble to find Treasuries or Bonds or safe investments in "Utilities" - that would earn it perhaps 3%-5% p.a. - not want to, instead, own solar projects which, while having their own risk, are safe from environmental/regulatory risk of the kind coal/gas face, and yet which could earn the kinds of returns JKS speaks of in China? 

 

I'm no expert on these things, but the signals being give off at present - albeit still in the early stages - are quite intriguing. And for me, worth me sliding my investments more towards firms I see as gaining from this movement, due to their interest in projects - SUNE, followed by JKS, SPWR, TSL and perhaps CSIQ (if it wakes up or is bought out.)

[Guest quinn the eskimo]

I have felt for some time that the movement into a YieldCo will accelerate the amount of activity engaged in by SUNE and the others. 

 

 

 

And obviously, I'm leaving out a wider set of candidates, such as Shunfeng, GCL-Poly and China players I don't know as well... and the Japanese firms, many of whom have great access to capital, and strong global links within their corporation... as well as FSLR and so on.

[Guest JulyWebb]

Thanks quinn

[explo 612]

There's a lot of discussion on SUNE so I took a quick look. My understanding is that the business model is build (with partial in-house sourcing) and hold PV projects. I'm very bullish on the growth outlook for project development cost leading companies applying this business model as I describe in this article:

 

https://solarpvinvestor.com/spvi-news/732-profit-profiles-of-different-project-business-models-part-ii-jinkosolar-analysis

 

So I took a look at SUNE key statistics on Yahoo to quickly compare financials to the Jinko example. It was a bit of a Yikes!

 

The enterprise value of SUNE is much much larger than Jinko and the cost efficiency seems lower so far. I mean their equity is melting fast and already negative and they have a 5 billion debt burden (at high price all dirt can of course be cleaned up by willing investors with reasonable dilution). So I'm wondering what will make SUNE the king of profitable PV power plant asset holdings in the unsubsidized future? Right now Jinko achieve 30% NET profit margin on their PV power plant holdings. Is SUNE much better than this to deserve a 5-10 times higher price tag? Or is it that they are more ahead with very strong late stage pipeline? In that case is that pipeline subsidy dependent or can they retain both growth rate and margin in a large but low subsidy future market?

 

The reason I like Jinko is that they are so cost efficient that they can sustain high growth in this very capital intense business model from self-funding. Can SUNE do the same or do their model assume dilution dependence to feed growth? This is the critical question when I assess what price tag is reasonable.

 

My case for the past 5 years that best of bread CN11 is cheap compentence (due to being listed in US instead of China) still holds I think, but I am keeping my eye on US names. Primarily watching FSLR.

 

Two years ago SUNE could be bought for $1.60, so something significant must have happened. The rebound in panel demand and ASP is not something that benefits SUNE, since it is a panel buyer, while rebound of CN stocks make sense, since they are panel makers.

[Guest quinn the eskimo]

There's a lot of discussion on SUNE so I took a quick look. My understanding is that the business model is build (with partial in-house sourcing) and hold PV projects. I'm very bullish on the growth outlook for project development cost leading companies applying this business model as I describe in this article:

 

https://solarpvinvestor.com/spvi-news/732-profit-profiles-of-different-project-business-models-part-ii-jinkosolar-analysis

 

So I took a look at SUNE key statistics on Yahoo to quickly compare financials to the Jinko example. It was a bit of a Yikes!

 

The enterprise value of SUNE is much much larger than Jinko and the cost efficiency seems lower so far. I mean their equity is melting fast and already negative and they have a 5 billion debt burden (at high price all dirt can of course be cleaned up by willing investors with reasonable dilution). So I'm wondering what will make SUNE the king of profitable PV power plant asset holdings in the unsubsidized future? Right now Jinko achieve 30% NET profit margin on their PV power plant holdings. Is SUNE much better than this to deserve a 10 times higher price tag? Or is it they are more ahead with very strong late stage pipeline? In that case is that pipeline subsidy dependent or can they retain both growth rate and margin in a large but low subsidy future market?

 

The reason I like Jinko is that they are so cost efficient that they can sustain high growth in this very capital intense business model from self-funding. Can SUNE do the same or do their model assume dilution dependence to feed growth? This is the critical question when I assess what price tag is reasonable.

 

For what it's worth, I have more $ invested in Jinko than in SUNE, for precisely the reasons you outlined, explo. 

 

Jinko is doing some great project business in China, they generate a good flow of funds internally, their panel costs are dirt cheap, and they seem to have great relationships with the CDB and regulators. The question then becomes - when does the value of these projects get realized in their share price? 

 

To me, SUNE's Yieldco is part of the answer, as I've laid out somewhere above. Namely, once the first successful YieldCo is launched, we will then have formats and standards for the financial guys to evaluate projects being held by other firms, such as Jinko. And once they do, I believe JKS's share price will soar. (Albeit, I'm expecting lots of financial babble about the need to discount because China blah blah blah.)

 

As for SUNE, I found their CC discussions, as well as their Capital Markets days presentations very useful. In essence, they say that around $3 billion of their debt is project related, and so, not just sitting as dead weight on their B/S. More importantly, the outside commentary from the financial side on SUNE is consistent, and encouraging. SUNE has been raising enormous amounts of money for projects, it refinanced its debt, it spun off SEMI, and all to a chorus of hurrahs from the financial side.

 

This says to me that the money spigot is not going to be shut off anytime soon. 

 

Also, on JKS, much as I love them, they have been fairly China-centric in their project plans. For understandable reasons, but nonetheless, SUNE gets points for having done the spadework to develop real links into India, Latin America, the US and Canada and so on.

 

And also, a side-card that I'm very much expecting to see is that SUNE has said that their YieldCo will be buying in projects, and pieces of projects, from other players. I'm fully expecting to see them - if they can - begin to link into the China solars, and buy some project %'s from them. CSIQ, and perhaps JKS and TSL as well. 

 

This will mean top-notch profits for SUNE, as an early mover.... but also, for JKS and/or TSL, it would mean the projects they already hold would have had a value placed on them by the YieldCo, and thus, TSL and JKS's value would be expected to rise accordingly.

 

Again, lots of holes in these notes from me, as my understanding is very limited and the field rather in flux, but for what it's worth, some thoughts. 

 

Thanks for your note.

[odyd 1,268]

Explo, your comparison would make sense in the world of compatible values. Only on the surface, those are compatible.

 

What makes SUNE something exciting today its potential to become very lucrative solar plant owner, with a lot more reach that Jinko will ever be. Let's face it, Jinko is a local Chinese player in the market full of local players. Among four companies, Jinko's plans are only ahead with 200MW of solar plants built to date, being caught by operators like TSL and CSIQ within couple of years pursuing this strategy. When it comes to exports, there are last. JKS is a great company, but for the average investor JKS has limited audience appeal, without pointing to things which make markets simply stay away from Jinko. Nobody here is an average investor.

 

SUNE balance sheet is not what anyone is paying for today. This is true for 90% of the stocks on the market. If this was the case DB would not put a target on the company with $35 mark.  Unfortunately, the only thing which makes some of the Chinese companies attractive, is the better than average balance sheet.

 

TESLA's balance sheet looks very bad so it does SolarCity

Those companies are not making investors excited with financial statements, they make them excited about their plans, vision and strategy.

SunEdison strategy is crazy exciting. The company is at the stage to build up momentum, which will turn them into a profitable business at one point. In a sense investing in this company is not that different that investing in the Chinese solar stocks with high risks but rooted in different areas. 

In my view if one belives in solar, SUNE's vision is not only plausible but excitingly profitable in a reasonable timeline.

SUNE is also a global oriented, American company. This means a lot to investors today.

To me having it in the mix with my Chinese component of solar portfolio is a natural extension of solar investment strategy.

[explo 612]

Quinn, odyd, I like the business model, but can it not just be copied by anyone and those most successful will be those best at execution?

 

The model is simple. Build/acquire PV plants and hold them for yield on power sales. Tell investors and banks to fund the buildout/acquisition and they'll get a return from the yield from those plants. So far so good, but those that can build plants with much higher yield will be the ones loved by their banks, yielco and parent investors.

 

It's like on says: "Do you want to buy a 20 years 6% yield bond (kind of) from me?"

 

And the other one says:  "I'm offering a bond (kind of) too, do you want a 10% yield instead of 6%?"

 

"How is that possible?"

"I'm more cost efficient and thus generate higher return on invested capital than the other guy."

 

Who will dominate the future? The model talker or the model executer? If the executer only cost 20% of the talker now, where should I place my bet for the future?

 

Jinko's panel supply is secured and the cost is controlled (in-house source) and lower than the competition. SUNE's panel supply and cost (for their yieldco's future investments) is at the mercy of the supply/demand situation on the panel market. This and the panel sales profit funding stream into development is the main difference besides the current price tag, holdings and pipelines.

 

I envision a future where those who claim the panel making throne (succeeds in making panels much cheaper than competition) will also start saying "nah, I'll keep these for my own project development" and thus making other project developers without competitive in-house panel supply less competitive project developers. The cake is sweet and stakes are high that's why I think supply security at cost competiveness will become a play in the project development field. Of course this trickles down to the next step where successful PV utilities will be those with in-house cost competitive project development and in the end those with the best returning PV plants will offer the most attractive PV plant based yieldco instruments to raise more funds to increase dominance.

 

I do like Quinn's view that what SUNE is doing is great for CN4. They are educating the market about the unrealized value of the cheap CN4. Believing in what SUNE says and does does not mean that SUNE is the best buy.

[odyd 1,268]

SUNE has own supply via Flextronics. The supply costs are not as critical since their business in solar plants not manufacturing.

Can model be copied? Perhaps, but how easy is to truly get to those levels? CSIQ model is not being copied by Jinko, yet it would make JKS a better company. Instead, CSIQ moving into a China looks as a lot stronger player when comes down to holding plants in format JKS does. So model may be simple but the execution is not, and not in the court for everyone.

Investing in SUNE is an investment in the market phenomenon. Look at the SCTY, the same concept.

[sunnysky 905]

I think both sides have some valid points. Explo is of course more focused on fundamentals. SUNE, on the other hand, looks like more a momentum stock in the solar space. Yeah, don't forget about CSIQ. It's somewhere in between - huge global project pipeline with its own module supply chain. I think their recent meetings with investment banks has more to do with yieldco than a possibility of a sale. I'm looking for CSIQ to benefit the most from the current up cycle driven by the yieldco momentum and its relevant immunity from US tariffs.

[Guest BIPV Investor]

It really all just comes down to who has the easiest access to capital. Yes Jinko is loved by Chinese banks and has the lowest production costs, but I do not think US markets intend to give much of a premium for Chinese projects and access to Chinese financing. The premium will be to those companies that take PV plant development global  using international and western financing. In this regard SunEdison has an immense advantage over Chinese names. If they wished to buy a cost competitive panel maker, a 20% dilution would net them 1 Billion dollars. Thats a lot of capital to go shopping with. It is easier to copy a successfully manufacturing strategy than it is to copy a successfully financing strategy as the financing can buy you manufacturing, but I'm hesitant to say that manufacturing can buy you financing.

 

In regards to stock price, it is a coin toss as who knows if Jinko is going to blow it again this quarter with a huge forex loss. If they hadn't had done that, I find it unlikely that their stock would still be sub $30.

[Guest JulyWebb]

I expect to see JA and JKS developing projects in S Africa. Big part of the reason why they both moved module facilities there. 

[explo 612]

I think the capital access argument is valid. SUNE could just buy Jinko (or similar cheap executer) to secure future supply and cost efficiency. What I did not like is that they added 2.2b debt past two reported quarters, but still lost 50k cash and did certainly not add 2.2b fixed assets. I haven't dug enough into it, but it seems they raise cash and then it is used up with little to show for it, except debt going up from 2.8b to 5.0b.

I like the model, but the ability is not clear to me. The price tag is always the one thing that is clear.

[Guest quinn the eskimo]

Quinn, odyd, I like the business model, but can it not just be copied by anyone and those most successful will be those best at execution?....

 

Jinko's panel supply is secured and the cost is controlled (in-house source) and lower than the competition. SUNE's panel supply and cost (for their yieldco's future investments) is at the mercy of the supply/demand situation on the panel market. This and the panel sales profit funding stream into development is the main difference besides the current price tag, holdings and pipelines.

 

I envision a future where those who claim the panel making throne (succeeds in making panels much cheaper than competition) will also start saying "nah, I'll keep these for my own project development" and thus making other project developers without competitive in-house panel supply less competitive project developers. ....

 

I do like Quinn's view that what SUNE is doing is great for CN4. They are educating the market about the unrealized value of the cheap CN4. Believing in what SUNE says and does does not mean that SUNE is the best buy.

 

Here's my problem with the "panel cost advantage" argument. Imagine you sell your panels for 65 cents and make them for 50, for a gain of 15 cents/W - whereas the competition is far worse, with a 60 cent cost.

 

However, what's the full cost to build a project? $1.50 to $3.00 shall we say, depending on where you are in the world? 

 

Now, what's the full cost of that, once financed? Much higher again.

 

Plus, add on some O&M over 20 years, etc. etc.

 

So how does SUNE do across all project costs?

 

Well, SUNE already does the O&M, and is one of the largest companies in the world at that. So its costs are solid there. SUNE's construction costs are going to be very strong, as it is highly experienced in building projects. 

 

And most important, SUNE's financing costs for projects are absolutely miles ahead of any Chinese firm. I'm not saying that I LIKE that this is so, but they just put out $400+ million in convertible notes at 0.25%. What was the last rate Jinko got from the CB? 7.0% or so? I don't know the exact numbers here, but the gap was huge.

 

Now we run the model costs again. SUNE's all-in costs to develop a project --- let us say, outside China for the moment --- will be far less than a JKS or even a CSIQ, I would argue.

 

And even within China, SUNE has just signed a deal with their old JV partner, to jointly develop 1700 MWs (at least, that is their hope.) SUNE will provide the silicon, the China partner will do the wafers to SUNE's specs, the modules will be assembled somewhere in Asia, perhaps even within China by a Tier 2 company. And the finance... well.... if SUNE brings it from outside, they might outbid a Jinko even within China.

 

*

 

As for whether SUNE can be copied, like a lot of things, it looks easy, but I'm not sure. SUNE has detailed, on the ground, project by project knowledge of solar in the US, Canada, India, Chile, and many other nations. This has a value. As does their O&M knowledge and capabilities. Same with their project construction work. Same with their brand name. 

 

Are they weak on the panel side? Relatively, yes. But let's not forget, they came up out of the the silicon and wafer end of things, so they're not technologically ignorant. Plus, they had a semi-conductor side as well, which gave them strong links to companies like Samsung - again, a real advantage when looking to develop projects.

 

Now, if I wanted to find a competitor, the most logical, and potentially powerful one, would be SPWR - expensive though their panels may be, and slow though their expansion may be. Why? Well, they have very strong technical chop plus a large pipeline, and have now ALSO found their way into China, through their partnership on a C7 project. That would, at least, have taught SPWR the ropes about working in China. And for access to capital, they have Total.

 

What does SPWR need? Well, if we assume the C7 won't demolish the opposition, then they're going to need access to a low-cost panel producer, to compete, stride for stride, with a SUNE. If I were them, I'd be looking to use their strong B/S - and Total's - to buy a Chinese panel-maker, simply to help supply the non-US market. CSIQ might be a fit, with their projects plus their Canadian angle. But so too might a JKS. Or maybe better, a JASO - cheap, but technically strong.

 

I have no idea the likelihood of these options, I'm just thinking out loud here.

 

Good conversation. Thanks.

[Scsnospam 117]

My case for the past 5 years that best of bread CN11 is cheap compentence (due to being listed in US instead of China) still holds I think, but I am keeping my eye on US names. Primarily watching FSLR.

 

explo, what are your trigger points for FSLR? Any particular news or price levels etc? I think its worthwhile too for long term.

 

Personally, I think CSIQ looks very strong recently. Its making a big push technically, fundamentally the project stream news is about to hit.

[explo 612]

Thanks quinn, good points.

Nospam, actually I've not looked that closely at fsrl yet. They are interesting because they are historically the most succesful PV company in terms of building strong financial from ample profits. The reason I find them interesting is to see whether they can keep lead or is losing it. Compared to US peers I think that considering track record and BS they are less expensive.

[Guest Xeloris]

fslr has enough cash on hand to do what everyone else is doing without even taking out debt.   They are sitting on 2b in cash with no debt.  Free Cashflow keeps buildling the bank up.

[odyd 1,268]

Excellent posts Quinn and Explo. I was excited to see SUNE hitting 52-week high and no so excited dropping down to mid-range of a day.

I have a feeling that next two months despite of the sleepy mood of the forum, will be quite exciting for all of us.

[explo 612]

Here's my problem with the "panel cost advantage" argument. Imagine you sell your panels for 65 cents and make them for 50, for a gain of 15 cents/W - whereas the competition is far worse, with a 60 cent cost.

 

I'll explain what I mean. Jinko build plants in China at an average cost of around RMB8 or US$1.30. They have a panel cost of $0.47. The market value of plants (the market's valuation of discounted future cash flows of the plant) is around $1.60. If Jinko would sell a plant instead of keeping it they would thus make around $1.60 - $1.30 = $0.30 profit or 19% profit margin. Now if Jinko did not have in-house panel supply at $0.47, they would be forced to buy at prevailing market price which might, depending on market condition, drive panel cost to $0.62 instead, thus reducing profit and profit margin in half(!). This means that they would be more exposed to changes in the plant market price. Should subsidies decrease causing market price to decrease to $1.45 for PV plants, then purchasing panels at $0.62 (sure panel prices might go down too to offset this, but not necessarily as there are those with cheaper supply) would mean 0% profit margin, while Jinko in-house modules would still render plants with 9% profit margin, i.e. it still makes sense to develop your plants yourself for Jinko (for a much higher IRR plant) compared to buying a plant on the market (minimum IRR plant), while the panel purchasing develop and holder might as well buy finished plants instead of developing them.

 

If SUNE as opposed to CSIQ (which is the one I mainly compare Jinko with in-terms of plant IRR result from different module sourcing costs) is more focused on holding than developing plants, then I agree that for such an acquire and hold company the capital supply becomes the dominating factor.

 

But even in that perspective I still don't see SUNE strength in latest quarterly reports. Their quarterly interest cost is approacing $70m and already before this cost their operating income is negative $80m. So although the idea of acquire and hold from superior capital access and cost model sounds attractive, the income and balance sheet of SUNE looks very dirty. Maybe they are more proven than what track record of negative equity and negative operating margin shows..?

[explo 612]

I think I've concluded that:

1. Whether you should yourself develop the plant you want to hold depends on your development cost, where the panel cost is a significant post. Here Jinko has an advantage as project developer with access to cheap panel supply. This is Jinko vs CN peers development cost.

2. Whether you should hold or sell plants you develop depends on your access to cheap capital. Here US names and maybe SUNE in particular might have and advantage (capital cost in China is high). This is CN vs US holding cost.

From what I understand SUNE has clear advantage on point 2, but not on point 1. It pains me a bit to say, but I think point 2 is more important for the long-term model I like. China is working on the PV plant financing support model. One example is 15-20 year loans instead of standard max 5 year in China. CDB has already started offering such solution, but they would need interest rate discount on long-term loan too. 6.5% for long-term loans (short-term loan market in China is now at 5.5%) is making a real dent on the levered IRR.

[Guest quinn the eskimo]

I think I've concluded that:

 

1. Whether you should yourself develop the plant you want to hold depends on your development cost, where the panel cost is a significant post. Here Jinko has an advantage as project developer with access to cheap panel supply. This is Jinko vs CN peers development cost.

 

2. Whether you should hold or sell plants you develop depends on your access to cheap capital. Here US names and maybe SUNE in particular might have and advantage (capital cost in China is high). This is CN vs US holding cost.

 

From what I understand SUNE has clear advantage on point 2, but not on point 1. It pains me a bit to say, but I think point 2 is more important for the long-term model I like. China is working PV plant financing support model. One example is 15-20 year loans instead of standard max 5 year in China. CDB has already started offering such solution, but they would need interest rate discount on long-term loan too. 6.5% for long-term loans (short-term loan market in China is now at 5.5%) is making a real dent on the levered IRR.

 

Taking both points:

 

#1. Absolutely, when it comes to project development, Jinko - with its low cost panels - has a clear advantage. All other things being equal. 

 

#2. The world has, I think, just changed, however. and the way it has changed may have just rendered this advantage somewhat secondary. Namely. SUNE says that the price you say "the market" provides for the developed project is only a fraction of the full value of the project. In their capital markets presentations, and their CC's, their estimates are that the full value of the project is 3 TIMES larger than this price. That is, once one adds in the full cost of financing the project, plus acquisition costs, plus differences in capturing the full value of the tail years plus the real likely output of the project and so on, the full project value is many times larger than the $1.60 price being paid. 

 

And they mean it when they say "3 TIMES larger," it's not just a way of speaking grandly. They are actually arguing that the project's value is $4.80, not $1.60.

 

And if that is true, or even half-way true, then the math of Jinko's advantage is utterly transformed. Because competitors who can take a slice of that extra $3.20 - which is presently being tucked into 3rd party buyers pockets, or lost in the transactions -will become the top players in the field.

 

#3. So we now need to re-run project math on the basis that Jinko's panels offer them a 6 cent advantage, but on a $4.80 deal (plus, yes, JKS will also get some consequent savings in interest etc, since their project cost are lower.) But if a firm, SUNE or other, can get financing even 1% lower than Jinko, then... their financial advantage will be (I'll let others do the exact math) many times larger than 6 cents, I suspect.

 

#4. If we then look out over 3-5 years, a firm such as a SUNE will be growing, not on the basis of 6 cents/watt dropping into their pockets, but potentially many times faster and larger. And that means they can choose a number of strategies. i) They could decide to underbid other firms whenever they chose. Surprising though this may seem, SUNE has already spoken to it at their CC. i.e. They already see this. Or.... ii) they could choose to simply buy out the lowest cost panel-maker of the day. Or or or.

 

#5. It strikes me as similar to the shift which occurred as silicon became a smaller % of the finished product. Sure, there are good and bad firms making silicon, and one can invest and make money in them. But does the math of silicon costs really MATTER to the growth of the global solar industry any more? Errrm, perhaps not so much. A few cents difference on a $1.60 or $3.00 installation. 

 

I think we are in the early stages of that with module-making, as it is incorporated into the full and final value of the project. "Early stages," I think, because this could all still fail. But right now, I'd say it's moving quickly.

 

#6. As for SUNE's books, let me just say this. I have no gut preference for a SUNE. I'm a Canadian, traditionally of the political left and a 30 year green, and someone who has never had the slightest interest in stocks or options or big money and such. But to judge SUNE on the books from their recent months, without recognizing that they are explicitly in the process of spinning off TerraForm, their YieldCo, and have already begun to name the specific projects, and debts, which will go with it, strikes me as a too limited analysis. I understand that people on this site are pro the China solars. So am I. And I think Jinko, for instance, or JASO, will double their share prices in the coming 1-2 years. But a look at SUNE's CC's and Capital days info shows that they see much of this debt as being specifically project-related. And that should be, I believe, taken into account. 

 

#7. The perhaps more interesting questions, for me, are:

 

- What value would be placed on a Jinko should it be able to set up a YieldCo like SUNE proposes. To compare, early scuttlebutt is that the market could put a $1.5 billion value on 500 MWs of projects. This may be wrong, I don't know. But JKS will hold that many projects, and perhaps better projects than SUNE, by the Fall of this year. And add that much annually. This would quite dramatically affect their share price, I believe.

 

- If a Chinese PV-maker sets up a Yieldco, and FINALLY gains access to much lower cost capital, i.,e. not 7%-10%, but even 5%.... then how would their world be transformed? Imagine TSL or JKS or others with plenty of capital, PLUS their in-house panel-making, and a globe worth of projects to bid on. 

 

- Imagine a firm like Jinko or Trina moving into global project development, perhaps with partners, perhaps on their own,but utilizing such a YieldCo. Suddenly, the math of their production side becomes less critical. They could chose to add more capacity, I would think, even if it moved their overall costs up 1 cent or 2 cents. This would give them great freedom. 

 

- Imagine how the Chinese Government might see and respond to this. I'm sure they will have questions, should outsiders come to own a share of the projects being built in China. But. What if THEIR firms are winning projects globally, employing growing numbers at home, turning profits, not asking for support, no longer worried about individual tariffs, and are generating profits by owning solar utilities in other nations?

 

Ok. I should stop there. Good to chat. 

[odyd 1,268]

Quinn,

SUNE's grand approach to the business and their balance sheet, is on trial here, so do not get discouraged that conversation will always hit those points. It is hard to like running totals on debt and huge overall losses, for members who  spent analyzing BS as a core value for investment thesis.

Squeezing beaver on manufacturing costs is the one ingredient you cannot go wrong with, according to us. Selling and holding solar plants is a new game and to play you have to have your home in order like Jinko (COGS), this is why CSIQ is not considered by purists a value machine.

I disagree with that view and owning Canadian is basically saying that more expensive supply chain does not equal suffering as long as you sell well your projects.  In fact, it means even less if you hold to them. I enjoy your argument on leverage put on money. The difference measured in cents on manufacturing gains certainly does not cover the gap of borrowed money at 20 times of rates.

Lastly, let's talks about all what makes Chinese stocks hard to appreciate for investors. Being Chinese come to mind. I think we all agree PEs for them will be lower and they are lower. We really do not know what takes place in China. Accrued payments, VATs, struggle among 100s of names. How far one need to look how claustrophobic 14GW down to 10GW had become for the market? What happened in Q1?

 

One needs to take a leap of faith here and put aside those approaches, which work for CN evaluation methods. The point needs to be made as well, those help to point to a value but is that value captured by the market? JASO was worth $11 in May 2013 and it is worth the same today. How many times I have read how much value JASO offers. Not much when you look into 12 months past. If value of money is associated with time, JASO has failed to be it.

 

Not being faced with Chinese factors, SUNE demands another skillset or belief, that is their balance sheet will not explode to pieces and every element of their strategy will fall into place timely and as designed.  The game is capital intensive and there is a lot of money flowing on their behalf into solar projects. Still investing this way is notoriously good to investors. NFLX, AMZN, SCTY, etc. Growth companies, with a unique value in the unique industry require a bit more faith that what their financial statements offer and people like good story, close to home.

I put money into SUNE for an idea, not a result of the analysis they are better. SUNE is a different business than Jinko, and hardly resembles any company out there.

If I believe in grand scenarios of solar power taking over the world, I believe that SUNE's model is going to be a winning strategy and appreciating a lot more freely than Chinese company can. SUNE's contractual method of managing supply chain leaves a lot of flexibility for shifting gears as needed also with a lot more ease than dumping a bag of the capacity at will.

Anyways great posts Quinn, Explo. Nice to read such great exchanges of views on Saturday morning.

[odyd 1,268]

Quinn, have you done any analysis upon  the balance sheets since divergence of SEMI from SUNE? Is Q1 reporting from SUNE the report for SUNE or includes numbers from SEMI?

[Guest quinn the eskimo]

Quinn, have you done any analysis upon  the balance sheets since divergence of SEMI from SUNE? Is Q1 reporting from SUNE the report for SUNE or includes numbers from SEMI?

No, I haven't. Would love to see someone more skilled than I take on the B/S and finances of SUNE-SEMI-TERP. 

 

I know SEMI's share price has done quite well since the launch ($15 to $17.25), and I know SUNE pulled some cash from the launch, but I have no idea how the B/S's have shifted.

 

More than anything, it sounded as though SUNE simply wanted to clear the decks of all non-solar interests, so they would be treated by analysts and others as a pure solar firm, without always having to handle questions about the semi-conductor side of things. So I doubt they made the most of the spin-off, financially. [in fact, they said that explicitly, at one point.] 

[Guest Lepv123]

But JKS will hold that many projects, and perhaps better projects than SUNE, by the Fall of this year. And add that much annually. This would quite dramatically affect their share price, I believe.

 

Quinn, how dramatically do you think it could affect JKS? Just curious. Thanks for your inputs.

[Guest quinn the eskimo]

Quinn, how dramatically do you think it could affect JKS? Just curious. Thanks for your inputs.

Again, others would be better placed than I to produce a quantitative sense of how this will affect share prices....

 

But SUNE's first 500 MWs of projects were apparently valued at just under a $1.5 billion market cap (assuming ~ $65-$75 million in dividends X a 20X multiple.) I have seen estimates often in the $20-$30 range for the share p[rice value of the YieldCo. This market cap is then estimated to be tripled by 2016, to more than $5 billion, as SUNE brings it up to over 1,600 MWs. 

 

For JKS, Credit Suisse valued their projects at $26, on their own, back in March.

 

http://blogs.barrons.com/emergingmarketsdaily/2014/03/20/jinko-solar-confident-in-project-business-credit-suisse-says-buy/

 

To me, comparing the two, by year end JKS will have 600-700 MWs held as projects. One might think that should be worth between $1.5 and $2.0 billion as a starting point, but we then have to remember that the JKS projects likely earn a greater return (JKS claims 60% GMs and +30% Net, if memory serves?); but has less geographic distribution than SUNE's; and perhaps more political risk (arguable, but there it is.) At present, JKS might expect a much lower multiple (I donno, 5-7-10-12?) so pick your numbers, and see what you think!

 

But to me, even if we discount JKS's projects quite radically down to just 1/2 the value of SUNE's, then that's a market cap of $800 million or so, just for the projects it holds now. Whereas JKS's total market cap right now is.... $800 million. So... a substantial impact. And looking forward, JKS talks as though it wants to add another 400-600 MWs a year, I believe.

 

But you can see why I'm keen that someone please SELL SUNE A 50% SHARE OF A PROJECT IN CHINA. Should that happen, I'm not sure how a WS analyst could then drop a 5X or 7X multiple on the same damned project in China, but a 20X multiple if SUNE held it. 

 

Should that day come - and it seems to me inevitable that it will, since SUNE has now said it is chasing 1700 MWs in China, and also that it is happy to buy into projects initiated by others - then we could at some point see a rapid bump-up in the valuations placed on China solars.

 

I believe this makes sense, as a logic chain. Then again, politics and big money end up in lawyers and guns as often as not.   

 

Or as the master, Warren Zevon, put it:

 

I was gambling in Havana - I took a little risk

Send lawyers, guns, and money

... Dad, get me out of this.