The shifting sands of solar trading

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We are abandoning our idea to selectively establish long-positions with certain names within the solar sector.  Investor sentiment is at an all-time low and looks to only sour more as we approach the third quarter earnings period.  We withdraw our previous idea to selectively buy a few names for a 2H11 trade into a solar “gold-rush” as our early signs of improving fundamentals appear to now be a mirage rather than an oasis. 

Specifically, we expected to find demand momentum would improve significantly, but is now only paltry, at best. Module pricing would become more rational, but instead is continuing a steep downward trajectory.

Polysilicon pricing is starting to crack

To cap the fundamentals, polysilicon pricing were expected to average ~US$50/kg through year-end, but we are now hearing of pricing quotes into the ~US$45/kg range.

We are finding polysilicon pricing now at ~US$47/kg for immediate delivery in the remaining weeks of Q3, and quotes of ~US$45/kg for early Q4 deliveries.  While falling polysilicon pricing helps the cost equation for module manufacturers (a US$10/kg price reduction saves US$0.06/W the solar sector is unsurprisingly out-of-favour, and although there may be individual positive achievements for a few companies, the overall trend for the group is likely to maintain a downward trend.

Demand momentum is lacking

Despite attractive IRRs in the most price competitive European markets of Germany and Italy, we are not yet seeing elastic demand.  While the lack of construction financing is slowing the momentum in Italy, we find that module companies are coping with this issue by essentially financing the construction period themselves through the extension of module payment terms up to 180 days. 

While this will produce some ugly balance sheets in Q3 in terms of expanding DSOs, and also creating cashflow concerns for several module manufacturers, this financing crutch has done little to spur additional module sales. 

In Germany, we continue to find a decent lending environment, but with the installation rates through both July and August being miserable, we are not finding a large enough incremental pick-up in the first two weeks of September to suggest that industry shipment expectations for Q3 or 2011 are safe. 

We find a significant disconnect between falling module prices and the lack of incremental demand.  One explanation suggests that developers are waiting for prices to stop falling before committing to volume orders; this generally explain 1H weakness when there is still plenty of time to install in 2H.  

However, a more telling argument might suggest that module pricing does not rationalize such that module price declines into 1H12 will be greater than the expected subsidy cuts on January 1, hence IRRs will remain above hurdle-rates in 1H12.  In short, there is little risk to delaying projects if module prices are expected to fall below US$1/W. 

Pricing has not rationalized

Even if shipment volumes approach the low-end of industry (and company specific) expectations, we believe pricing is going to be the driver of increased negativity toward solar stock investments. 

In general, we are finding Q3 ASPs of roughly ~US$1.25/W and Q4 pricing of ~US$1.05/W.  These prices may allow a positive gross margin at some module manufacturers in Q3, but gross margin is likely to be at break-even for even the most cost competitive manufacturers in Q4 while many less cost competitive companies could actually report negative quarterly gross margins by year-end 2011. 

Low factory absorption (utilization) rates will continue to thwart improvement to non-polysilicon processing costs if demand does not markedly improve, but most manufacturers pin their hopes on the price of polysilicon rapidly declining.

If module prices continue to decline during the remainder of Q3, investors should expect meaningful negative revisions to consensus estimates as we approach Q3 earnings.

19 July 2022
As New South Wales is gearing up to become a renewable energy superpower, an exciting clean energy event is coming to Sydney. Energy Next is a free-to-attend industry event focusing on the latest renewable energy and energy management technologies, which will be held from 19-20 July 2022 at the ICC Sydney in Darling Harbour. Organised by the same people behind the country’s largest clean energy event, All-Energy Australia, Energy Next will bring a quality exhibition and technical session series to NSW. Energy Next will also host the Clean Energy Council’s Solar Masterclass with a program developed for solar designers and installers. Across two days, Energy Next will provide an extensive exhibition, workshops and networking opportunities for those working in the renewable energy industry to meet with leading suppliers, discover the latest technologies and gain an understanding of how to successfully launch new clean energy projects.
21 July 2022
The rooftop solar PV market is set for significant growth, but installers are being held back by complicated design software that is slow, cumbersome and fails to take into account rooftop shading, module compatibility and energy storage. Huawei’s SmartDesign 2.0 is a web-based PV and energy storage system tool that promises to solve all of those issues, and much more. This webinar will provide a live demonstration of the SmartDeisgn 2.0 tool, showing how installers can quickly complete Huawei PV & ESS system designs and assemble a professional report with 3D site view for potential customers, streamlining the design and sales service.
23 August 2022
Intersolar South America, South America’s largest exhibition and conference for the solar industry, takes place at the Expo Center Norte in São Paulo, Brazil, on August 23–25, 2022, and has a focus on the areas of photovoltaics, PV production and solar thermal technologies. At the accompanying Intersolar South America Conference, renowned experts shed light on hot topics in the solar industry. In 2021 – despite the Covid-19 pandemic – Intersolar South America welcomed more than 28,000 visitors and over 1,000 conference attendees over 3 days. 200+ providers showcased their products. Combining local and international expertise, Intersolar South America brings together the PV and solar thermal sector to discuss the current status and strategic trends for Latin American PV markets, as well as technology innovations and new business opportunities. Overall, distributed generation is still driving momentum in the Brazilian market.
6 September 2022
Intersolar Mexico sits at the cross-section of photovoltaics, solar heating & cooling technologies, and energy storage. The event serves as the industry’s go-to source for invaluable technology trends and premier B2B contacts in the promising Mexican solar market. From September 6–8, 2022 Intersolar Mexico together with the co-located The GREEN Expo® and Aquatech Mexico will take place in Centro Citibanamex, Mexico City.
19 September 2022
RE+ 2022 is the umbrella event that includes SPI, ESI, RE+ Power, and RE+ Infrastructure. As North America's largest renewable energy event, it's a catalyst for industry innovation that's supercharging business growth in the clean energy economy.
20 September 2022
From source to generation, from grid to consumer, the boundaries of the sector are blurring and this evolution is being shaped by established players, external disruptors, innovative start-ups and the increasingly engaged end-user. Enlit Asia is the unifying brand for POWERGEN Asia and Asian Utility Week, showcases expert knowledge, innovative solutions and foresight from industry leaders, coherent with Asian strategy to achieve a smooth transition towards a low carbon energy supply. This year, Enlit Asia will be co-located with Sustainable Energy Technology Asia (SETA) & Solar & Storage Asia (SSA).

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