Near Horizon Isn't Promising for Solar
Credit Suisse downgraded the group to Market Weight.
FOLLOWING OUR ANALYSIS to reflect recent data points on supply growth, we have grown more concerned that subsidy-driven solar-market demand cannot keep up with incremental solar supply coming online from mid-2011. Bottom-up, new cell capacity is being added at a current monthly rate of 2 gigawatts (GW) per month in fourth-quarter 2010, and just the top-20 producers aspire to increase production by 50% year-over-year in calendar 2011.
Top-down we continue to see only a flattish market for demand in 2011. In addition to the top 20, there are new entrants also planning to add production in 2011. As a result, factory utilizations should start falling from first-quarter 2011, and pricing could decline faster than expected.
We are downgrading our solar sector rating to Market Weight, and downgrading the following company ratings from Outperform to Neutral: GT Solar International (ticker: SOLR); Trina Solar (TSL); ReneSola (SOL); and First Solar (FSLR).
We are also downgrading JA Solar Holdings (JASO) and Suntech Power Holdings (STP) to Underperform following this analysis.
We expect that end-demand may still track to a reasonable 10 GW in first-half 11 assuming subsidies remain intact, but suspect stocks may remain under pressure in anticipation of excess supply in second-half 2011.
MEMC Electronic Materials (WFR) is the only stock where we retain our Outperform, as we expect the company's semiconductor exposure should limit downside.
We stress that we are not turning secularly negative -- we still believe that falling solar prices will drive more penetration and that should open up opportunities to reinvest at a later date. From a cyclical standpoint, we are unable to reconcile the supply growth with our still optimistic demand expectations, and hence we think there has to be a period of stock weakness. Also, from a tactical standpoint, note that there can be near-term rallies in the sector -- stocks appear oversold near term, investor sentiment is bearish.
We would especially watch out for positive news flow on incentives – the U.S. cash grants are set to expire in 2010, but there is still a lame-duck session before the Republican-controlled House takes over next year.
Finally note that there appears to be recent stock movements correlated with concerns of inflation/rate increases and slowdown in China (several solar stocks in our coverage are domiciled in China); there has been a shift in investor concerns back toward the European debt crisis, which has resulted in a weakening trend for the euro again. These macro factors appear less supportive of solar stocks near term.Also at Investors' Soapbox:
-- Satya Kumar
-- Darryl Cheng
-- Karsten Iltgen
-- Brandon Heiken
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