Suntech does not expect industry profitability for another 6 to 12 months

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Profitability remains tantalizingly elusive at Suntech Power Holdings, having reported a first quarter GAAP loss of US$133 million on the back of certain one-time issues, 27% lower quarterly shipments and 10% price declines. Although management stuck to previous guidance for the year, indicating strong shipments in the second-half of the year, analysts raised concerns over Suntech’s ability to repay a US$540 million convertible note due next year.

A challenge for Suntech and the industry as a whole was that the entire supply chain was at best near break-even and at worse loss-making, something Suntech’s chairman and chief executive officer, Dr. Zhengrong Shi said would last for another six to 12 months.

Suntech reported first quarter 2012 revenue of US$410 million, a 53% decline year-on-year and 35% down sequentially. Shipments were down 27% from the prior quarter, slightly better than the 30% decline previously guided. Although Suntech does not provide quarterly shipment figures, PV-Tech has estimated that shipments in the first quarter of 2012 reached approximately 375MW, down from an estimated 514MW in the previous quarter. Due to low capacity utilization in the first quarter, polysilicon to module non-silicon conversion cost was higher than expected at US$0.74 per watt.

Gross profit was just US$2 million and gross margin was 0.6% due to the provision for US$19 million against preliminary US countervailing and anti-dumping duties as the company continued to ship Chinese cells with modules into the US during the first quarter. However, excluding the provision, Suntech would have matched guided gross margin of between 3-6% but at the higher range of approximately 5.3%.

Investment bank Jeffries was dismayed at Suntech’s approach to the penalty payments in a research note to investors. The bank noted that: ‘If we use an estimated ASP of US$1.10 and PF GM of 5.3%, the US$19.2M charge wiped out the gross profit from 329MW of shipments, which is equivalent to 86% of STP’s [Suntech] 1Q12 shipment. If we add $0.04/W shipping, insurance and warranty cost, the number increases to 1.0GW, which is equivalent to half of STP’s 2011 shipment.

Management said that all future shipments to the US would include cells sourced from its global source of suppliers, not just from Taiwan, which many analysts expect to be the main beneficiaries of the imposed import duties on Chinese cells. The company did not disclose which cell manufacturers they were using.

Production update

Management noted in the conference call that the company had reduced total production cost by 6% in the first quarter of 2012. The company had a new cost reduction roadmap that was expected to take the module cost of goods sold from between US$0.90 and US$0.95 per watt in the second quarter towards US$0.80 in the third quarter and then down towards US$0.75 by the end of 2012.

Key developments towards achieving these goals rested with consolidating wafer operations to concentrate production on its most efficient manufacturing lines. Wafer processing cost would be reduced via better recycling and further reductions in wafer breakage. Lower consumable costs were expected as the company renegotiated with suppliers over prices.

Significantly, management highlighted that 100% of internal ingot/wafer production (expected production of 1.2GW in 2012) had been shifted to quasi-mono, which supported its lower cost efforts for high-efficiency cells on the Pluto technology.  

Suntech guided an end of year wafer processing cost of US$0.15 per watt, down from US$0.22 per watt previously. Overall aim in manufacturing was to continue to upgrade production lines to enable higher efficiency and performance of its modules.

“With these cost reduction initiatives and a clear roadmap in place, we are confident that we can achieve US$0.60 a watt of better silicon to module conversion cost and less than US$0.75 per watt all-in module cost of goods sold by the end of the year. This is US$0.10 below our previously stated targets,” commented Dr. Zhengrong Shi in the conference call.

The company reported capital spending for the first quarter of US$23 million compared to US$129 million in the same quarter a year ago. Management reiterated that 2012 was a year of cash preservation and its shift to a demand-based production strategy. Therefore spending would be minimized and would target spending at the low end of its CapEx guidance of between US$120 million and US$150 million.

Management also noted that its blended polysilicon cost in the first quarter was around US$30 per kilogram, suggesting that the gap between contract and spot market were closing.

However, a perennial issue that analysts have with Suntech over its manufacturing cost structure in comparison to its major Chinese rivals was raised again in the call. Marina Shvartsman from Macquarie Bank referenced Trina Solar’s guidance of reaching US$0.50 per watt or lower by year-end.

In response Dr. Shi said that “the reason Suntech has been able to achieve premium price for solar is because of our quality. So, we are very strict with our material selection to make sure what would reduce the cost. And we don’t compromise on quality. The US$0.70 per watt or better is all in cost of goods sold. So, we believe if we reach this target or lower before the timeline, we will be very competitive in the market.”

Guidance

Suntech’s PV shipments reached 2,096MW in 2011 and the company reiterated that it expected 2012 shipments to be in the range of 2.1GW to 2.5GW. The confidence was due to better than expected demand from its biggest market, Europe as well as expected growth of the US market and various emerging markets in Asia, Africa and Middle East. The company also expected to ship more modules into the China domestic market and be a player in selected large-scale PV projects with emphasis on LCOE, according to the company. The company said it still expected shipments in China to be in the range of 300MW to 400MW in 2012.

“While pricing is currently challenging in this market, we expect that it will improve as customers come to realize the long-term benefit of investing in durable, high-performance solar products,” noted Andrew Beebe, Chief Commercial Officer. “We are also increasingly excited by the potential of the solar markets in Saudi Arabia. Recently, the Saudi government announced a plan to build 41 gigawatts of photovoltaics and concentrated solar over the next 20 years. We don’t expect to see orders here until 2013, but it is the major turning point for solar in the Middle East. Suntech is already well-positioned in the region due to our track record of supplying the (indiscernible) project and other high profile solar systems. The Australian, Israeli, and Thai markets continue to drive demand in 2012 and we expect the South African market to kickoff later this year,” added Beebe.

The second quarter guidance was for module shipments to increase by more than 20% with a further increase in the third quarter.

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