January 12, 2011 - Auriga’s Mark Bachman weighed in on several solar names (Canadian Solar, JA Solar, Jinko Solar, Renesola, Solarfun and SunPower) earlier this week:
Raised rating on Canadian Solar (Nasdaq:CSIQ) to BUY from HOLD and increased price target from $13 to $20, citing shift in valuation to 2012 estimates. Key takeaways: expects operational volatility to moderate and profitability to increase; modeling ASP declines of 11% and 15% in 2011 and 2012, respectively; FY12 EPS estimate is $2.48 (consensus is $1.99); said his forward looking estimates require further wafering additions to 1GW in 2012, while cell capacities increase to 2GW and are 100% aligned with 2GW of module capacity that should be established in 2011; expects cashflow will likely become a concern in 2012 in order to fund another $300mn in capital expenditures, but this is not a large enough deterrent to keep from upgrading rating; noted SEC subpoena is still outstanding, but thinks management has remedied internal control deficiencies; $20 price target is 8x our 2012 EPS estimate of $2.48, noting multiple is more appropriate for CSIQ given its unbalanced manufacturing profile and historic operating volatility.· Raised rating on JA Solar (Nasdaq:JASO) and increased price target from $10 to $11, citing shift in valuation to 2012 estimates and noting that JASO is a standout in the solar cell portion of the supply chain where differentiation is meager. Key Takeaways: Its leading cost structure and better wafer sourcing due to scale should allow earnings to grow with the industry in this portion of its business; sees increased earnings from JASO’s burgeoning module business; prices across the chain are declining into 1Q11. Headline noise suggests the industry is in freefall similar to 08/09 and that prices have no bottom, but in reality prices still have not fallen to the levels which formed our 2011 estimates; for JASO, maintains 1Q11 cell ASP estimate of $1.36/w in spite of such headline noise, but also expect this to decline to $1.16/w by 4Q11; expects costs for JASO to fall in line with prices, models gross margin flattish at 19.5% through 2012 despite an expectation for a 26% decline in cell and module ASPs by 4Q12; expect module sales will increase to 28% of total sales in 2011, up from 21% in 2010; shifting valuation to 2012 estimates and increasing price target to $11, 8x 2012 EPS estimate of $1.38, noting that 8x is more appropriate for JASO than a higher multiple, as this less differentiated portion of the industry is subject to higher price pressure.
Reiterated BUY rating on Jinko Solar (NYSE:JKS), increasing price target to $45 from $40, citing substantial upside to estimates despite industry concerns. Key Takeaways: stock trading 4.2x newly introduced 2012 estimates, noting that shares of Jinko are being unfairly punished versus a bearish industry attitude; recent checks suggest near-term results should be well above constrained consensus estimates, leading to further increases to consensus EPS estimates through the remainder of 2011; estimated non-silicon cost structure of $0.75/w in 4Q10, expects further improvement to $0.69/w in 4Q11 and $0.65/w in 4Q12 - depending on Jinko’s ability to source low-cost poly in 2011, the company could be right on par with its larger peers at producing modules with a $1.00/w less cost structure; gross margin has peaked, but annual EPS is still increasing - despite the declining gross margin profile, and moreconservative average ASP assumptions of $1.53/w in 2011 and $1.34/w in 2012, annual EPS estimates continue to increase; large potential variability in module ASPs vs poly costs represents the biggest risk to the stock – both upside and downside – Bachman’s model assumes JKS’ poly cost peaks at $72/kg in 1Q11 and declines to $55/kg in 4Q11 and $48/kg in 4Q12; price target is 8x 2012 EPS estimate of $5.57....MORE