Friday, August 21, 2009

Is Solar Heading for Value Destruction? - Jefferies

In what is probably the biggest call of the day, Jefferies is downgrading Solar sector:

Investment Summary
We expect rapid growth in solar volumes, but a downward pricing spiral and lack of discipline around capital deployment leave us cautious on cell and module manufacturers. Materials providers (ex silicon) appear better positioned to benefit from rapid growth.

Pricing War?
We see the current downward spiral of pricing continuing. While accompanied by reduced production costs, we believe this could lead to weaker-than-expected '10 ests and concerns about value destruction in the sector. In our view, liberal Chinese lending practices encourage over-production and capacity expansions in a market that needs rationalization. While falling ASPs bring markets closer to grid parity, it could also result in the threat (if not actual) political backlash to incentives, as European PV manufacturers are being hurt by the Chinese competition with the help of European taxpayers' and rate-payers' money. While end markets are showing signs of recovery, they are slow and do not appear ready to support the levels of volume production being planned for 2010 (thus our expectations for continued ASP pressure). Even if declining silicon prices help PV companies maintain unit gross margins, much lower ASPs make them more dependent on chasing volumes to support the marketing and distribution networks necessary to drive growth.

Resetting Price Deck.
We are updating our solar models to include faster ASPs declines, using quality Chinese modules as our benchmark. Our new ests call for ~20-25% declines by 4Q09 v2 Q09 and another 15-20% by 4Q10. Please see the text of this note for more details. Note that differences in quality, power levels, style and financeability can lead to big variations in ASPs off this baseline and some manufacturers have been able to maintain substantial premiums.

We are reducing our ratings on Ascent Solar (ASTI), China Sunergy (CSUN), Energy Conversion Devices (ENER), Suntech (STP) and Solarfun (SOLF) to Underperform from Hold. First Solar (FSLR) and SunPower (SPWRA/B) go to Hold from Buy. Evergreen Solar (ESLR) goes to underperform from Buy. We are maintaining our Buy rating on MEMC (WFR).

Action: Pricing war is not exactly new information, but the call is strong enough to send some doubters looking for exit. Expect to see pressure in the mentioned stocks all day. Beware that it is late August and option Friday, so funny things can happen today.

PS looks like Merriman is upping SPWRA to Buy from Sell. On some other day I might highlight this call and expect the stock to be strong.. but today I think of it as a potential help for getting fills for shorts in SPWRA at higher levels.

1 comment:

  1. More rating changes in the sector:
    * STP downgraded to Neutral from Outperform at Cowen
    * YGE upgraded to Overweight from Neutral at HSBC