Tuesday, September 28, 2010

Hapoalim Securities still Downbeat on First Solar, They're getting Closer to Being Right... (FSLR: SPWRA; STP; TSL; YGE)

...with every tick the stock goes against them.
After trading up to $151 earlier today, the stock is now at  $148.06 up 15 cents.
We first met Hapoalim in June's "Hapoalim Cuts First Solar Target to $65 on Cadmium Telluride Risk; It Won't Matter and Probably Sets an Intermediate Low (FSLR)" with the stock a bit lower than today:
The stock is at $105.35 +0.37 in subdued pre-market trade.
This fear is not immediate and for First Solar may not even be relevant in five years. I'm not sure Hapoalim understands the politics, the science or the company I'll explain after the jump....
We next heard from them in August:

"Hapoalim Securities Cautious On Solar Names" Climateer Asks "Who Really Cares What they Think?" (FSLR, SPWRA)
I am not all that impressed with Hapoalim.
Back on June 8 we posted "Hapoalim Cuts First Solar Target to $65 on Cadmium Telluride Risk; It Won't Matter and Probably Sets an Intermediate Low (FSLR)".

The stock did indeed set an intermediate low that day, at $100.19. It started running and didn't look back until it hit $140.00 on July 23.

On July 29 FSLR reported second quarter numbers.
The next day Hapoalim upped their target with nary a mention of the CdTe risk that was ostensibly the reason they initiated at sell:

Analysts at Hapoalim Securities maintain their "sell" rating on First Solar ( FSLR), while raising their estimates for the company. The target price for FSLR is set to $100....MORE
...I'm starting to think that Hapoalim could cost an investor some real money.
It appears they fired the first analyst. Here's the latest via Barron's last Saturday:
Solar Outlook: Cloudy 
Likely oversupply will batter many of the stocks. An analyst is bearish on First Solar and Suntech, somewhat bullish on Trina and SunPower.

WHEN AARON CHEW TOOK OVER Hapoalim Securities' coverage of the solar power industry this summer, he succeeded the sector's best-known bear, Gordon Johnson (Barron's, Sept. 28, 2009). Chew is only modestly more optimistic than his predecessor.

Barron's: What makes you such an expert?
Chew: I was in equity research at JPMorgan for about four years. Then I worked at a clean-tech incubator in New York.

An incubator?
Sort of like pre-venture capital. You are helping very early-stage startups get off the ground… I linked up with solar integrators, developing cash-flow models for small commercial projects in New Jersey. After that, I got this platform at Hapoalim, where there is no investment banking. Our only function is to provide research for investors.

You launched your coverage when?
In mid-July.

How have you done?
Trina Solar (ticker: TSL), which we rated a Hold, is up about 23%. First Solar (FSLR), which we rated a Sell, is up around 8%. The others have declined. Hold-rated SunPower (SPWRA) is down 3%. Sell-rated Yingli Green Energy Holdings (YGE) is down about 4%. Sell-rated Suntech Power Holdings (STP) is down 16%. That said, our thesis centers on 2011. Most analyst estimates and valuations don't reflect the likelihood that price declines will compress industry earnings.

What drives solar installations?
Financial incentives set by governments, such as the "feed-in-tariffs" that make utilities pay above-market rates to renewable-power producers. Europe is the big driver of solar and has been for years. But from September 2010 to January 2011, incentives will fall by double-digit percentages in the markets that make up three-quarters of the industry. Germany's feed-in-tariff will have been cut by 38% over 13 months. In Italy, a series of cuts next year will total almost 20%. France cut rates 12% in September and the Czech Republic—a surprisingly big market—is reducing rates by at least 20% in January. So either demand will slow or prices will come down.

What's your demand forecast?
I've seen bullish forecasts for 15 gigawatts [GW] next year. [A gigawatt is enough electricity to power 100,000 homes.] I forecast 13.3 GW, and an expected 12.7 in 2010. That assumes Italy grows 23%, to 2.1 GW; the U.S. grows 45%, to 1.5 GW, and China almost doubles, to 1.1 GW.
But key markets will decline or stay flat. It will be hard for the industry to reach 15 GW in 2011 unless Germany grows to 7 or 8 GW. Installations surged in June, and I expect Germany to exceed 6 GW this year. That is a huge number—more than Japan, the U.S., Italy and France cumulatively installed in all their histories. But in 2011, I forecast 5 GW in Germany, and that's at the high end of the range assumed by integrators with whom I've spoken.

What kind of supply do you foresee?
Oversupply has cast a shadow for two years, but it hasn't impacted results or pricing since the fourth quarter of 2009. The reason is "bankability." Banks don't lend money for the product of every new manufacturer out there. We have actually been in a state of tight bankable supply for the last couple of quarters. Production capacity at bankable module manufacturers was 2.2 GW in the first quarter of 2010, 2.4 GW in the second quarter, and 2.9 in this third quarter— and it will be 3.3 in the coming fourth quarter. Our demand number of 12.7 GW for 2010 averages to 3.2 GW quarterly.

So the tight supply is on the verge of loosening up. Looking ahead, bankable manufacturers' capacity will rise from 14.2 GW at year-end 2010, to 18 GW at year-end 2011. Compare that to my forecast for demand of 13.3 GW, or even the bullish forecast of 15 GW.

You must take into account Samsung [005930.Korea], LG [066570.Korea] and Hyundai [005380.Korea] coming into the picture. Samsung came into the DRAM memory-chip industry and was the only company to figure out how to gain market share in a profitable way.

What decline do you therefore foresee in actual sales prices?
It ranges from 18% to 24%, depending upon the manufacturer. Most analysts assume that prices fall in line with the incentive cuts coming in January. But you will probably see a decline of 10% to 15% in the first few months of 2011, and then a further decline through the year.
The other problem is that the potential for reducing production costs has shrunk. Since 2008, the biggest source of savings for silicon solar-module producers was the drop in polysilicon price from $300 a kilogram to $50-to-$60. That saved $1.50 a watt. Poly prices could continue falling to $40, but that won't provide much more than 10 cents a watt in savings.

Play this out, company by company.
Suntech Power Holdings may be most at risk. They do not produce silicon wafers. That adds another layer of cost. Suntech plans to make wafers, but it will take some years and a lot of money. And they'll face 20% price declines next year. I have their EPS of 56 cents in 2010, dropping to 52 cents in 2011, despite volume growth of 23%.

Your target price on Suntech is what?
It's 6 bucks. The stock is over 9 now. I'm definitely most cautious on Suntech and First Solar.

What about First Solar?

It's the most highly valued company in the solar universe. They arguably deserved a premium valuation in the last couple of years, because they've had the lowest cost structure and the most attractive module prices. But their competitive advantage is withering away. First Solar uses a thin-film technology, which avoids the high raw material costs of silicon; they are producing a couple of gigawatts a year, so they have the scale to spread out costs. They produced modules in the second quarter for 76 cents a watt, which is lower than the best silicon module producer, Trina. And that doesn't even account for Trina's polysilicon costs.

But crystalline silicon remains a far more efficient product...When silicon modules were priced at $3.50 a watt, a couple of years ago, First Solar saved you more than 60 cents per watt. But as silicon module prices fall to a $1.25 a watt, the savings from thin film narrow to about 20 cents per watt. Then the higher efficiency of silicon delivers more energy for a given land or rooftop area and more value over the life of the system.

That's why First Solar has built a pipeline of utility projects. These are mammoth projects, between 200 and 500 megawatts apiece, compared to a few megawatts for standard commercial projects. You have to go through elaborate regulatory approvals. So delays are likely.

A bigger concern is pricing. The few buyers for these multi-hundred-megawatt projects may pay less for the projects than Wall Street assumes. It is hard to see why project buyers would pay more than $2.75 per watt. Assuming a system gross margin of 25-to-30 cents a watt and non-module costs of around $1, First Solar's module prices on these projects will be less than $1.50 per watt, especially if there are cost overruns.

How will that affect earnings?

I have EPS declining next year, below $5, as their ASP [average selling price] falls 26%. If that is too negative and ASP falls just 15%, you still get 2011 EPS of less than $6—compared to a consensus forecast of over $8. I don't see why investors are paying over 17-times, the consensus forecast for the stock. At 15-times, a more realistic EPS of 6.50, the stock would be at 100.

What about Yingli Green Energy?
For Yingli, I have 72 cents a share for this year, dropping to 55 cents in 2011. I would be more positive on the stock, were it not for my concerns about Yingli's cash flow and capital spending. I expect them to ramp up spending on polysilicon capacity despite the likelihood that worldwide poly capacity will surge over the next couple years. With poly prices under pressure, Yingli may be destroying more value than it is creating. An appropriate valuation for the stock is 7- or 8-times consensus EPS of $1.12. My target for the stock is $8.

Aaron Chew's Punts & Pans

Company Ticker Recent Price
SunPower SPWRA13.92
Trina Solar TSL26.67
Company Ticker Recent Price
First Solar FSLR$143.23
Suntech Power STP9.35
Yingie Green Energy YGE11.65
Source: Bloomberg
How about your other stocks?
I'm cautiously optimistic on Trina and SunPower. Trina has the most attractive cost structure in the group. If you want exposure to the space, they are best-positioned to survive an environment where module prices approach a dollar a watt. My target of 21 for Trina may be too low, but I would be more inclined to buy it on a selloff in the sector and wouldn't pay more than 20 bucks.

What are your estimates on Trina?
I have it earning $2.33 a share in 2010, dropping to $1.81 in 2011.

You mentioned SunPower.
That's an interesting case. Not enough for me to have a Buy rating, but SunPower is exposed to the right markets. Their recent acquisition of SunRay gives them a high market share in Italy, one of the most promising markets. And they don't have much exposure to Germany, one of the more troubled markets going forward. I am growing confident that when SunPower offers 2011 guidance in the next few months they will surprise to the upside.

Isn't it a high-cost producer?
That's a disadvantage, but its new production facility in Malaysia is a joint venture with AU Electronics—the LCD-manufacturing experts. And it sells more finished systems than simple modules. SunPower gets 15%-plus price premiums, because of its highly efficient product. It offers efficiency of around 19%, in terms of the amount of solar energy you convert to usable electricity, versus 15% for competing silicon products. I like the risk/reward of buying SunPower below $11, ahead of what I expect to be a strong first half of next year.
In Hapo's favor, they don't follow the Hope-it'll-Change garbage issues.