Solar shakeout less likely to hit wafers, silicons
Tue Feb 10, 2009 9:29am EST
By Christoph Steitz - Analysis
FRANKFURT (Reuters) - Solar energy companies which operate further away from end-customers -- such as wafer and silicon producers -- are likely to fare better during a looming shakeout in the sector than their cell and module-making peers.
In recent years, solar companies have enjoyed significant growth rates and a keen appetite from investors. But the crisis in financial markets has taken its toll on the industry and a falling oil price has curbed demand for renewables, prompting analysts and industry experts to predict a wide-ranging consolidation is around the corner.
This is less likely to hit high-quality producers of wafer and silicon -- both needed to make solar cells -- than cell and module makers suffering from low prices and oversupply, analysts say.
"Producers of wafer and silicon will come out as the likely winners from the shakeout as they are under less pricing pressure than the cell and module producers," said Bjoern Glueck, portfolio manager at Lupus alpha which has 1.3 billion euros ($1.69 billion) under management in European micro-, small- and mid-cap stocks.
Analysts at HSBC forecast average selling prices for solar systems will drop by about a fifth in 2009 given oversupply and a tighter credit environment, but prices for cells and modules have so far fallen much faster than those for silicon and wafer. Several industry bellwethers, such as cell producers Q-Cells and Sharp as well as module maker Solon have had to revise outlooks.
"While we forecast margin erosion through the whole solar value chain, we believe investors should focus on the beginning of the value chain given longer-term contracts, more stable cash flows and the tighter supply/demand balance," HSBC analysts wrote.
They say that in the long term this will favor silicon producers with low-cost operations such as Germany's Wacker Chemie and Hemlock Semiconductor Corp, a joint venture of Dow Corning, Shin-Etsu Handotai and Mitsubishi Materials Corp.
VALUATIONS
Valuations back up this view. Wacker Chemie, a wafer producer, trades at 8.5 times estimated 12-month forward earnings, according to StarMine, a premium to module makers such as Solon at 4.5 times or Aleo Solar at 6.1 times.
At 12.1 times 12-month forward earnings, Norwegian silicon maker Renewable Energy Corporation ASA, too, trades at a large premium to Chinese solar cell maker JA Solar Holdings, which trades at 6.9 times.
But experts also said that all-rounders that operate in several parts of the solar sector are also less likely to fall victim to the crisis, said Arthur Hoffmann, who manages the New Power Fund at Bank Sarasin & Cie AG, with about 200 million euros under management.
"It's those companies that have the highest margins and that are active in more than one sector of the solar value chain, such as SolarWorld, Sunpower, and First Solar," Hoffmann said.
SolarWorld, which manufactures everything from solar-grade silicon to solar cells and solar panels, trades at 11.5 times 12-month forward earnings and Sunpower and First Solar trade at 14 and 20.8 times, respectively.
However, despite the current issues in the sector -- which analysts believe will lead to wide-ranging consolidation -- the industry remains one with "longer term potential," as JP Morgan wrote in a note.
In fact, there are first signs of an overall recovery of the industry with regard to project funding. Executives including Phoenix Solar Chief Executive Andreas Haenel said that financing conditions have improved from the dire fourth quarter of 2008 and that banks' willingness to grant credit lines for solar projects have grown.
U.S. peer GT Solar hit a similar note last week, saying financing conditions in major growth market China had improved over the last two months, comments that led to a positive read-across for German companies.
($1=.7672 Euro)
(Additional reporting by Nichola Groom in Los Angeles; Editing by Jon Loades-Carter)
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