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8/6/2019 42856960 Nomura Asian Solar
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15 November 2010Nomura
N O M U R A S I N G A P O R E L I M I T E D
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Nomura Anchor Reports examine the key themes and value drivers that underpin oursector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated.See the important disclosures and analyst certifications on pages 102 to 104.
Solar| A S I A ASIA POWER, UTILITIES AND RENEWABLE ENERGY
Nitin Kumar +65 6433 6967 [email protected]
Ivan Lee, CFA +852 2252 6213 [email protected]
Too much of a good thing
We are Neutral on the Asian solar sector, where some players are at risk of beingburned by a shift from excess demand in 2010 to oversupply in 2011. Looking at
expansion plans across the industry, we forecast circa 50% y-y capacity expansion by
end-2011. Predicting demand is less straightforward, particularly amid heightened policy
risk, but even our best-case scenario has demand growing by a more modest 30%. The
likely result: more pressure on ASPs and greater impetus for consolidation. Nomuras
own sun screen highlights stocks that we see as best placed to ride these changing
market dynamics. We like companies with a tight grip on costs, typically those that are
vertically integrated, and those concentrating R&D on cell efficiency improvements. We
also favour companies well covered by geographically diverse sales, taking in new
growth markets that should give ample protection if demand from Europe dries up. Our
three BUYs Trina, Yingli and Suntech fit the bill. We are NEUTRAL on CanadianSolar, JA Solar (from Buy), Motech (from Reduce), LDK and GCL Holdings, since these
are stepping up vertical integration and diversifying sales but arent yet fully covered, in
our view. Our REDUCEs E-Ton and Solargiga still seem narrowly focused and
thus over-exposed. Also, we include notes on six solar stocks not rated by Nomura.
From excess demand to oversupplyMarket share consolidation in 2011?Nomuras sun screen: choosing the right companies
NEUTRAL
Stocks for action
Stock TickerCurrent
ratingCurrent
pricePrice
targetUp/
down (%)
Trina Solar TSL US BUY 27.74 36.0 29.8
Yingli Green YGE US BUY 11.87 15.0 26.4
Suntech Power STP US BUY 9.05 11.0 21.5
Canadian Solar CSIQ US NEUTRAL 15.22 17.0 11.7
JA Solar JASO US NEUTRAL 9.04 10.0 10.6
Motech Ind. 6244 TT NEUTRAL 121.0 119.0 (1.7)
E-Ton Solar 3452 TT R EDUCE 39.55 37.0 (6.4)
LDK Solar LDK US NEUTRAL 13.23 14.0 5.8
GCL Holdings 3800 HK NEUTRAL 2.58 2.45 (5.0)
Solargiga 757 HK REDUCE 1.94 1.1 (43.3)
Pricing as of 10 Nov closing;
Upgrading from Reduce Downgrading from Buy
Analysts
Nitin Kumar
Regional solar analyst, Asia Power,
Utilities, and Renewable Energy team
+65 6433 6967
Ivan Lee, CFA
Head of Asia Power, Utilities, and
Renewable Energy
+852 2252 6213
Raghvendra Divekar (Associate)
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15 November 2010Nomura 1
Solar| A S I A ASIA POWER, UTILITIES AND RENEWABLE ENERGY
Nitin Kumar +65 6433 6967 [email protected]
Ivan Lee, CFA +852 2252 6213 ivan.lee@nomura .com
ActionAs the solar industry moves from excess demand in 2010 to oversupply in 2011F,
we expect companies with better cost control to outperform with relatively sustainedmargins and market-share gains. Among Asia-based solar names, we like Trina,
Yingli and Suntech for their vertical integration and brand presence.
CatalystsContinued policy support and faster-than-expected utility adoption of solar are
potential key catalysts for demand, which could soak up the excess supply,
although we caution competition could change with new stronger players.
Anchor themes
Vertically integrated companies have better cost control management and we see
them capable of sustaining margins and expanding market share. Pure-play
makers unable to increase integration are likely to underperform.
Too much of a good thing
From excess demand to oversupplyLooking at the expansion plans across the industry, we see mean available
capacity across the chain at 23-24GW (+50% y-y) by end-2011F. While demand
prediction has become harder with increased policy risks, we see oversupply in
2011F under our best-case scenario, with demand at 19.3GW (+29% y-y). In our
base-case scenario, we expect demand of 16.5GW, suggesting oversupply at
40-45% of demand in 2011F.
Market share consolidation in 2011?Deteriorating demand-supply dynamics are likely to raise ASP pressure and we
see module ASPs falling 12-18% y-y to US$1.4-1.5/W in 2011F from US$1.7-1.8/W
currently. This will have a ripple effect across the solar value chain and we expect
companies with better cost management to drive market-share gains, resulting in
consolidation. Here, we see vertically integrated companies better placed with
evidence coming from rising vertical integration capabilities across pure-play
makers.
Nomuras sun screen: choosing the right companiesWe believe companies best positioned to ride the market dynamics in 2011F
require key characteristics of: 1) better cost management, which favours
companies with vertical integration; 2) R&D in cell-efficiency improvements key to
continued cost reductions in the segment, in our view; and 3) geographical sales
diversification to capture demand from new growth markets as demand growth
from Europe comes to a halt.
Among our coverage, we have three BUYs (Trina, Yingli and Suntech, which meet
our above-mentioned criteria), five NEUTRALs (Canadian Solar, JA Solar, Motech,
LDK and GCL Holdings, which are increasing vertical integration and sales
diversification), and two REDUCEs (Solargiga and E-Ton, which continue to remain
narrowly focussed).
N O M U R A S I N G A P O R E L I M I T E D
Stocks for action
Within our coverage we prefer
vertically integrated companies overpure play manufacturers due to
better cost structures. We maintain
our BUY on Trina Solar, Yingli Green
Energy and Suntech Power.
Stock TickerCurrent
ratingCurrent
pricePrice
targetUp/
down (%)
Trina Solar TSL US BUY 27.74 36.0 29.8
Yingli Green YGE US BUY 11.87 15.0 26.4
Suntech Power STP US BUY 9.05 11.0 21.5
Canadian Solar C SIQ US NEUTRAL 15.22 17.0 11.7
JA Solar JASO US NEUTRAL 9.04 10.0 10.6
Motech Ind. 6244 TT NEUTRAL 121.00 119.0 (1.7)
E-Ton Solar 3452 TT REDUCE 39.55 37.0 (6.4)
LDK Solar LDK US NEUTRAL 13.23 14.0 5.8
GCL Holdings 3800 HK NEUTRAL 2.58 2.45 (5.0)
Solargiga 757 HK REDUCE 1.94 1.1 (43.3)
Pricing as of 10 Nov closing; Upgrading; Downgrading
NEUTRAL
Analysts
Nitin Kumar
Regional solar analyst,
Asia Power, Utilities, and Renewable
Energy team
+65 6433 6967
Ivan Lee, CFA
Head of Asia Power, Utilities, andRenewable Energy
+852 2252 6213
Raghvendra Divekar (Associate)
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Contents
Investment summary 3
Down to choosing the right companies 8Margin pressure to become acute in 2011F 9Vertically integrated player to outperform pure-play makers 9Balance sheets to remain in focus 10Valuation methodology 11
Oversupply across segments in 2011 13Polysilicon makers market to remain in oversupply in 2011F-13F 13Easing the bottleneck of wafer supply in 2011 15Perpetual oversupply in cell manufacturing? 15
Demand growth to slow over 2011-13F 16Demand growth ahead a function of policy changes 16European demand growth to slow as risks increase 18US the next key market ahead 19
Market share consolidation ahead? 22ASP pressure to increase 22Module ASPs of US$1.4-1.5/W in 2011F enable equivalent IRRs 23Vertically integrated companies have better cost structure 23Pure-play companies likely to suffer the most 24
Fundamental shift in competition ahead 26Entry of well-funded leaders from technology industry 26Thin-film looks set to make a comeback 27Project financing setting up the complete plant 28
Utility adoption the next lever of growth 29More countries to offer subsidies to solar as costs reduce 30Analysing the global addressable market for renewables 31Solar to account for at least 50% of the renewable TAM 31
Latest company views
Trina Solar 33
Yingli Green Energy 38Suntech Power 43
Canadian Solar 48
JA Solar 53
Motech Industries 58
E-Ton Solar Tech 63
LDK Solar 68
GCL Poly Energy 73
Solargiga Energy 79
Solarfun 84
DelSolar 87
Gintech 90Comtec 93
Apollo Solar 96
Trony Solar 99
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Summary
Investment summaryOver FY10, pure-play cell makers and wafer makers have benefitted from a surge in
demand and thus ASP improvements, which are reflected in their relative
outperformance within the solar sector. We believe pure-play cell and wafer makers
are likely to see their earnings margins peak in 3Q10F, with continued bullish
comments, as impacts from the changed industry dynamics are only starting to
manifest, in our opinion. We expect 2011F to see three changes:
Undersupply to oversupply. Looking at the expansion plans of companies in the
different segments of the value chain, we see mean available capacity across the
chain at 23-24GW (+50% y-y) by end-2011F. In contrast, even under our best-case
scenario, we see demand growth of merely 29% y-y to 19.3GW in 2011F,
suggesting oversupply. Under our base-case scenario, we assume demand growth
of 10% y-y to 16.5GW, also suggesting oversupply at 40-45% of demand.
ASPs to see pressure across supply chain. With Germany likely to see an
additional 12-14% cut in feed-in-tariffs from January, we believe ASP pressure will
increase across the supply chain. We estimate a 12-18% y-y decline in moduleASPs in 2011F.
Polysilicon industry enters oligopoly. With the exit of GCL Polysilicon from the
pure polysilicon market, only three key suppliers remain Hemlock, Wacker and
OCI in the market. Note that GCL has forward integrated into wafers and is
unlikely to be a key supplier of poly in future. As such, we expect pricing wars to be
minimal and spot prices to revert to long-term pricing contracts. Based on our
checks with companies, we understand polysilicon ASPs under long-term contracts
will fall to US$45-50/kg by 2H11F from US$55-60/kg currently. Thus, ASP pressure
is unlikely to be offset by sharp declines in poly ASPs.
Market share consolidation likely in 2011FDeteriorating demand-supply dynamics are likely to raise ASP pressure and we see
module ASPs falling 12-18% y-y to US$1.4-1.5/W in 2011F from US$1.7-1.8/W
currently. This will have a ripple effect across the solar value chain and we expect
companies with better cost management to drive market-share gains, resulting in
consolidation.
We believe companies best positioned to ride the market dynamics in 2011F require
key characteristics of: 1) better cost management, which favours companies with
vertical integration; 2) R&D in cell-efficiency improvements key to continued cost
reductions in the segment, in our view; and 3) geographical sales diversification to
capture demand from new growth markets as demand growth from Europe comes to a
halt.
Vertically integrated model the winning strategy
Within the solar industry, we believe vertically integrated players are best placed to
stabilise margins, given: 1) streamlined cost structure; 2) better access to diversified
end-markets; and 3) strong supplier relations. We reaffirm our BUY ratings on Trina
and Yingli, as we see their margins defensive due to the following:
Leaders in vertical integration. Both companies have vertically integrated since
the start of their businesses. As such, they have the best cost structure among
China-based peers we estimate their 2010F gross margins will come in at 32-
33%, 10-15pp higher than at peers;
2011F to see R&D efforts bearing fruit. Both companies will start mass
production of high-efficiency cells (which are able to improve efficiency by 1-1.5pp
over the current generation, according to management) in 2011F. We estimate
2011F to see steady shift change
as industry moves to oversupply,
given demand growth from
Europe looks set to slow
Pure-play makers likely to see
peaking margins in 3Q10F
Switch to companies with:
1) vertical integration; 2) strong
R&D roadmap; and 3) sales
diversification outside Europe
Trina and Yingli look best placed
to outperform the industry;
reiterate BUY
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these cells will have about 6-7pp higher gross margins than those of the current
generation cells in 2011F.
Investments into improving brand name. Both companies have heavily invested
in marketing in 2010 to create brand awareness, which we believe is the first step
to faster and better geographical sales diversification. Yingli has already witnessed
improved results, noting that its 2011 demand is at 4x end-2010 capacity.
Valuations look attractive for both Trina and Yingli FY11F P/E at 8.0x and 8.1x,
respectively, and FY11F ROE at 20.4% and 17.1%, respectively, at the higher end of
the ROE range across China-based peers.
In our view, Suntech has the best brand name among China-based peers and a well-
documented R&D programme, although its progress in 2010 has been disappointing
due to balance sheet restructuring and execution delays in the launch of its high-
efficiency Pluto cells. We see potential positive catalysts in 2011F from: 1) expected
upstream integration into wafers; and 2) a wider Pluto cell launch looks to be on track
in 2011F. While the company trades at a higher FY11F PE multiple of 8.9x versus
Trinas 8.0x and Yinglis 8.1x, it trades at an FY11 PEG of 0.3x versus 0.5x for both
Trina and Yingli. Its balance sheet woes also look to have been appropriately
discounted with Suntech trading at FY11F P/BV of 1x versus Trinas 1.5x and Yinglis
1.3x. We reaffirm BUY on Suntech.
We reaffirm NEUTRAL on Canadian Solar, which has successfully moved away from
being a module maker with 50% of its cell supply coming from pure-play cell makers at
the start of 2010 to ~80% of cells coming from in-house by end-2010F. With further
expansion of in-house wafer capacity likely in future, we see Canadian Solar ahead of
other peers in vertical integration. However, this looks to be priced in.
Pure-play makers transitioning to vertically integrated model
We see companies with a pure-play business model as most vulnerable to ASP
pressure, given they have lesser avenues for cost reductions and are exposed to
market share shifts at their customers. Here, among the pure-play makers, we see a
business model shifting towards increased vertical integration, which we believe is the
right step forward.
Among our coverage, we see cell makers JA Solar and Motech expanding capacity in
both modules and ingot/wafers. Wafer maker LDK, which has previously integrated
upstream into Polysilicon, recently announced aggressive expansion of cell and
module capacity. Lastly, polysilicon maker GCL Holdings has expanded its in-house
wafer capacity to 3.5GW at end-2010 and looks set to exit from the polysilicon market
to focus only on wafer sales. Given that these integrations remain a work-in-progress
in the near term, we see benefits from integration largely offset by the worsening
industry dynamics.We downgrade JA Solar to NEUTRAL, as we believe market optimism from strong
2010F flowing into 2011F has been fully priced in. We upgrade Motech to NEUTRAL
to factor in better-than-expected cost reductions in 3Q10, which brought its cost
structure on par with China-based peers. We reaffirm our NEUTRAL ratings on LDK
and GCL Holdings, as we believe potential upsides have been priced in.
Solargiga and E-Ton have lagged in their vertical strategies. In our view, the slower
business transformation will manifest in declining margins and we expect the stocks to
underperform unless there are new investments to change their profiles.
Increased upstream integration to
enable Suntech to narrow cost
gap with leaders; reiterate BUY
Reiterate NEUTRAL on Canadian
Solar as benefits from its vertical
integration strategy look priced in
Pure-play makers evaluating
vertical integration strategies
Benefits from increased vertical
integration to be offset by change
in industry dynamics at JA Solar,
Motech, LDK and GCL Holdings
NEUTRAL on JASolar, Motech,LDK and GCL Holdings as weexpect performance in 2011 to bein line with broader industry
Reiterate REDUCE on Solargiga
and E-Ton given slower business
transformations
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Exhibit 1. Valuation summary
Trina Yingli Suntech Canadian GCL
Solar Green Power Solar JA Solar Motech E-Ton* LDK Solargiga Holdings
Bloomberg code TSL US YGE US STP US CSIQ US JASO US 6244 TT 3452 TT LDK US 757 HK 3800 HK
Price 27.74 11.87 9.05 15.22 9.04 121 39.55 13.23 1.94 2.58
Issued shared (mn) 79 148 180 43 168 380 249 131 1,807 15,473
Market cap (US$mn) 2,190 1,762 1,630 650 1,519 1,529 328 1,739 452 5,150
Primary business model Vertically Vertical ly PV Cells PV Cells PV Cells PV Cells PV Cells Poly and Wafer Poly and
Integrated Integrated Module Module Wafer Wafer
Rating BUY BUY BUY NEUTRAL NEUTRAL NEUTRAL REDUCE NEUTRAL REDUCE NEUTRAL
Price target 36.0 15.0 11.0 17.0 10.0 119.0 37.0 14 1.1 2.45
Upside / downside (%) 29.8 26.4 21.5 11.7 10.6 (1.7) (6.4) 5.8 (43.3) (5.0)
Target 2011 P/E (x) 10.4 10.4 10.4 10.4 7.2 9.0 17.5 8.3 6.0 30.6
Implied Target P/BV (x) 1.9 1.6 1.2 1.2 1.4 1.6 0.85 1.4 0.9 2.2
P/E (x)
2009 15.5 na 18.9 26.9 na 1,120.6 na na 33.9 na
2010F 9.2 10.4 na 15.4 6.9 10.2 na 9.0 na 26.5
2011F 8.0 8.1 8.9 9.1 6.5 9.4 19.2 7.7 9.7 25.8
2012F 6.9 7.6 6.4 7.5 6.7 9.1 14.0 8.1 8.2 45.0P/BV (x)
2009 2.2 1.7 1.0 1.4 1.5 2.9 0.9 1.9 2.2 0.0
2010F 1.8 1.5 1.1 1.2 1.6 2.0 1.0 1.6 1.9 2.5
2011F 1.5 1.3 1.0 1.1 1.3 1.7 0.9 1.3 1.6 1.9
2012F 1.2 1.1 0.8 1.0 1.1 1.4 0.9 1.1 1.3 1.7
Gross margin (%)
2009 28.1 23.6 20.0 12.4 12.7 5.5 1.3 (10.3) 15.1 30.2
2010F 31.8 33.3 17.8 14.1 23.0 21.1 7.3 19.3 (0.9) 27.9
2011F 28.8 27.9 18.7 13.6 20.0 18.4 5.2 18.8 21.3 23.5
2012F 27.3 26.6 19.7 13.5 17.3 15.6 5.7 18.2 20.3 15.2
EBIT margin (%)
2009 18.4 6.6 10.3 3.7 2.4 0.6 (2.0) (19.8) 7.8 21.4
2010F 21.2 20.9 9.5 6.1 17.3 14.8 4.0 13.8 (17.7) 23.7
2011F 18.2 17.4 10.1 5.5 14.0 11.8 2.5 12.4 16.4 20.9
2012F 16.7 16.1 11.1 5.4 11.3 9.1 3.1 11.8 15.3 13.1
Net margin (%)
2009 11.5 (6.3) 5.1 3.7 (2.4) 0.2 (17.9) (20.2) 5.36 (4.0)
2010F 14.0 9.8 (3.3) 3.0 13.0 12.0 (12.9) 8.7 (14.9) 22.2
2011F 14.2 9.8 6.4 3.8 11.0 10.2 1.9 7.9 12.3 20.8
2012F 13.2 8.4 7.7 3.7 8.9 8.0 2.4 7.1 11.1 12.1
Net profit
2009 98 (459) 86 23 (13) 33 (2,340) (222) 203 (176)
2010F 211 1,173 (88) 41 213 4,569 (2,311) 192 (98) 3,319
2011F 242 1,467 183 69 225 4,968 433 224 278 3,358
2012F 282 1,564 252 84 220 5,094 596 215 315 1,940
Net profit growth (%)
2009 59.1 na (3.0) na na (98.6) na na (40.9) (109.1)
2010F 115.8 na na 74.7 na N/M na na (147.3) na
2011F 14.8 25.0 na 68.5 5.7 8.7 na 16.7 Na 0.3
2012F 16.7 6.6 38.0 22.1 (2.4) 2.5 37.7 (4.1) 18.5 (42.7)
ROE (%)
2009 17.6 (8.0) 6.1 5.9 (1.9) 0.2 (29.8) (26.6) 8.8 na
2010F 24.2 16.1 (5.6) 8.4 26.7 25.2 (26.6) 19.5 (7.4) na
2011F 20.4 17.1 11.4 12.7 22.2 19.3 5.0 18.8 18.2 na
2012F 19.4 15.5 13.8 13.6 17.7 16.7 6.4 15.2 17.3 na
Share price performance (% y-y)
2008 (82.7) (84.2) (85.8) (77.1) (81.2) (64.4) (55.4) (72.1) (32.9) (83.7)2009 480.9 159.2 42.1 346.1 30.4 135.6 18.8 (46.6) 3.1 280.3
YTD2010 2.8 (24.9) (45.6) (47.2) 58.6 (50.1) (16.9) 88.7 (2.0) 13.3
Note: Pricing as of 10 Nov, 2010
Source: Bloomberg, Nomura research
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Exhibit 2. Catalysts summary module makers
Trina Solar Yingli Green
Bloomberg code TSL US YGE US
Growth drivers
New subsidies in emerging markets New subsidies in emerging markets
Further capacity expansion Further capacity expansion
Entering system integration System integration project wins
Positive share price catalysts
Continued cost reductions PANDA ramp
Stronger than expected ASPs Expanding market share
Expanding margins In-house poly production
Expanding market share
Supply agreements for poly/wafers
Wafer/ingot capacity expansion
Negative share price catalysts
New entrants New entrants
Price competition Price competition
Rise in inventories Rise in inventories
Key risk factors
Subsidy reduction in key markets Subsidy reduction in key marketsOversupply Oversupply
Double-ordering Double-ordering
Slower demand growth outside Europe Slower demand growth outside Europe
Source: Bloomberg, Nomura research
Exhibit 3. Catalysts summary module makers (contd)
Suntech Power Canadian Solar
Bloomberg code STP US CSIQ US
Growth drivers
New subsidies in emerging markets New subsidies in emerging markets
Further capacity expansion Further capacity expansion
System integration project wins Entering system integration
Positive share price catalysts
Pluto ramp Vertically integrated model
Continued cost reductions Reduced use of spot market
Stronger than expected ASPs Stronger than expected ASPs
Expanding market share Cost reduction roadmap
Supply agreements Wafer/cell supply agreements
Vertically integrated model
Negative share price catalysts
New entrants New entrants
Price competition Price competition
Rise in inventories Rise in inventories
Further write-downs of investments Increased use of spot marketKey risk factors
Subsidy reduction in key markets Subsidy reduction in key markets
Oversupply Oversupply
Double-ordering Double-ordering
Slower demand growth outside Europe Slower demand growth outside Europe
Source: Bloomberg, Nomura research
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Exhibit 4. Catalysts summary cell makers
JA Solar Motech Industries E-Ton Solar
Bloomberg code JASO US 6244 TT 3452 TT
Growth drivers
New subsidies in emerging markets New subsidies in emerging markets New subsidies in emerging markets
Further capacity expansion Downstream integration into modules Strategic partnerships
System integration project wins Expansion of BOS product line
Downstream integration into systems
Partnership with TSMC
Positive share price catalysts
Increased vertical integration Launch of high efficiency cells Strategic investment into the company
Module supply agreements Strengthening of module brand Faster module sales at GloriaSolar
Expanding market share
Stronger than expected margins
AE Polysilicon ramp up
Negative share price catalysts
Price competition New entrants New entrants
Rise in inventories Price competition Price competition
Rise in inventories Rise in inventories
Delays in AE Polysilicon ramp-up Equity dilution through FPO
Key risk factors
Subsidy reduction in key markets Subsidy reduction in key markets Subsidy reduction in key markets
Oversupply Oversupply Oversupply
Double-ordering Double-ordering Double-ordering
Contract renegotiations Contract renegotiations Contract renegotiations
Source: Bloomberg, Nomura research
Exhibit 5. Catalysts Summary wafer makers
LDK Solar GCL Holdings Solargiga
Bloomberg code LDK US 3800 HK 757 HK
Growth drivers
New subsidies in emerging markets New subsidies in emerging markets New subsidies in emerging markets
Polysilicon plant ramp up Ingot/Wafer ramp up
Downstream integration
Positive share price catalysts
Polysilicon ramp Ingot/wafer margins
Stake sale in poly business Stronger than expected poly ASPs
Stronger than expected poly ASPs
Negative share price catalysts
Price competition Price competition
Rise in inventories Rise in inventories
Execution issues in poly ramp up Execution issues in wafer ramp up
Key risk factors
Subsidy reduction in key markets Subsidy reduction in key markets
Oversupply Oversupply
Double-ordering Double-ordering
Contract renegotiations Contract renegotiations
Source: Bloomberg, Nomura research
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Valuations
Down to choosing the right companiesYear to date, solar stocks across the industry have fallen 8% as the strong demand
environment remains tempered with rising policy risks. Thus far, the best performers
have been pure-play cell makers followed by wafer makers with module makers
(mostly vertically integrated) being the worst performers. On a geographical basis,
China-based companies saw a 6% rise in market capitalization whereas Europe-based
solar companies saw a 40% drop in capitalization, reflecting a shift in market share.
For the rest of 2011, we expect China-based companies to continue to fare better than
US and European peers. We expect vertically integrated module makers to perform
better than cell makers and wafer makers. We believe three things have changed:
Over-demand to oversupply. Looking at the expansion plans of companies in
different segments of the value chain, we see mean available capacity across the
chain at 23-24GW (+50% y-y) by end-2011F. In contrast, even under our best-case
scenario, we see demand growth at merely 29% y-y to 19.5GW in 2011F. In our
base-case scenario, under which we assume demand of 16.5GW in 2011F, we see
oversupply at 40-45% of 2011F demand.
ASPs to see pressure across supply chain. With Germany likely to see an
additional 12-14% cut in feed-in-tariffs from January, we believe ASP pressure will
rise across the supply chain. We estimate a 12-18% y-y decline in module ASPs.
As such, we estimate cell ASPs for China-based peers to fall to US$1.1-1.15/W
from current US$1.3-1.4/W levels.
Polysilicon industry enters oligopoly. With the exit of GCL from the pure
polysilicon market, only three key suppliers remain Hemlock, Wacker and OCI.
As such, we expect pricing wars to be minimal and spot prices to revert to long-
term pricing contracts. We understand polysilicon ASPs under long-term contracts
will fall to US$45-50/kg by 2H11 from US$55-60/kg currently. Thus, ASP pressure
is unlikely to be offset by sharp declines in poly ASPs. Note that GCL joins the list
of poly+wafer competitors such as MEMC, REC, LDK and M.Setek.
Exhibit 6. Segment performance in 2010
60
70
80
90
100
110
120
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
Wafer Cell
Module Industry
(Relative market cap)
+2%
(1)%
(8)%
(14)%
Source: Bloomberg, Nomura research
Exhibit 7. Regional performance in 2010
40
50
60
70
80
90
100
110
120
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
USA Greater China
Europe Industry+6%
(3)%
(8)%
(40)%
(Relative market cap)
Source: Bloomberg, Nomura research
Within our coverage universe, we see margins most sustainable at Yingli and Trina
Solar. Trina also has the lowest cost structure. In addition, we believe Suntech is likely
to see marked improvement in its cost structure with increased vertical integration. Webelieve E-Ton will remain capital constrained and thus continue to lag cost reductions
at peers. We believe Canadian Solar, JA Solar and Motech will perform in-line with the
Supply shortages in 2010 have
enabled pure-play makers to see
better ASPs and performance
Performance by segment in 2010:Cell makers > wafer makers >
module makers
2011 to see steady shift change
as industry moves to oversupply
since demand growth from
Europe looks set to slow
3Q10 to see peak in margins at
pure-play makers as ASPs to
come under pressure
Drop in poly ASPs unlikely to bail
industry in 2011F
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industry. Among wafer makers, we see LDK and GCL performing in-line with the
industry as they integrate in-house poly and wafer capabilities.
Margin pressure to become acute in 2011F
Given concerns of a considerable supply-demand mismatch in FY11F, we see margins
across the solar value chain coming under pressure. While margins have expanded
YTD, we note that this is primarily due to: Strong demand primarily emanating out of Europe where subsidy cuts in
Germany, Italy and other markets have resulted in an order pull-in through 2010.
Capacity constraints primarily in cell and wafer segments, which has led to a
strong ASP environment through the solar supply chain.
We believe these factors will be absent in FY11F, suggesting a risk of margin
compression. With most of the large module manufacturers continuing to vertically
integrate, we see the use of outsourced wafers and cells decreasing in FY11F. With
pure play cell and wafer makers competing for an ever shrinking market, we expect
their margins to be the worst hit. Within our coverage, we expect margins of cell and
wafer companies to come under pressure in FY11-12F.
Vertically integrated player to outperform pure-play makers
We believe companies best positioned to ride the changes in 2011 and raise market
share will have key characteristics of: 1) better cost management, which favours
companies with vertical integration; 2) R&D in cell-efficiency improvements key to
continued cost reductions in the segment; and 3) geographical sales diversification to
capture demand from new growth markets as demand growth from Europe comes to a
halt.
Exhibit 8. Value chain exposure of companies under coverage
Silicon Cell Module Inverters Installation
System ASP breakdown (%) 10~12% 8~10% 15~18% 8~10% 35~45%
Typical Cost (US$/W) 0.12~0.20 0.20~0.25 0.30~0.35 0.25~0.35 N/A
Gross margins* (%) 40~60% 15~25% 5~10% 35~40% N/A
Partial fulfilment
JA Solar White-brandMotech Own Brand
E-Ton via subsidiary
Ramping
GCL Holdings
2011 performance expectations
- Pure play NEUTRAL UNDERPERFORM UNDERPERFORM
- Vertically Integrated
Expansion in 2011
Future expansion
Yingli Green
Suntech Power
Canadian Solar
Future expansion
Ingot/Wafer
Solar panel (45~55% of system ASP) Balance of System (45~55% of system ASP)
0.30~0.35
15~25%
12~15%
OUTPERFORM
NEUTRAL
OUTPERFORM
Trina Solar
Future expansion
LDK Solar Ramping capabilties
3.5GW capacity by end-10
Solargiga
UNDERPERFORM
Source: Bloomberg, Nomura research
As shown in the table above, we expect companies that have integrated across four to
five value chain segments to outperform, while companies with two to three value-
chain segments to largely perform in-line with the broader industry. Companies which
narrowly focussed on only one value-chain segment are likely to see both their ASP
and cost coming under pressures and thus underperform the broader industry.
Switch to companies with:
1) vertical integration; 2) strong
R&D roadmap; and 3) sales
diversification outside Europe
Missing 2010 margin catalysts in
2011F margins to compress
across value chains
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Trina and Yingli are integrated across four value-chain segments. This enables them
to have control over 35-40% of system costs or 70-80% of module costs. We expect
their 2010 gross margins to come in at 32-33%, 10-15pp higher than other peers.
Suntech Power and Canadian Solar are integrated across two segments, enabling
them to control over 50% of module costs (about 25% of system costs). They are
looking to integrate into more segments. However, with Suntechs upstream integration
into ingots/wafer further, we expect Suntech to derive better cost managementcompared to Canadian Solar.
JA Solar, Motech and E-Ton have the least control over the value-chain, although JA
Solar and Motech look well positioned to integrate both downstream and upstream,
which should enable them to control up to 70-80% of the supply chain, in our view.
E-Ton was integrated via its subsidiary Gloria International Holdings; however, it was
unable to manage costs or execute meaningfully given a lack of available capital.
E-Ton is now only left with module capability, and one that lacks a meaningful scale,
after writing off its integration (Adema).
Meanwhile, LDK Solars integration is more impressive given that it has integrated
across the entire module value chains from poly to module. While this could improve
its cost management, we remain wary of execution risks in the near term, given that it
needs to manage new sales channels and customer backlash as it enters their domain.
In the longer term, we believe LDK could be a producer with the lowest cost.
As the poly market stabilizes, we see GCL Holdings forward integration into
ingots/wafers as positive. This should enable it to capture 40-50% of module costs (20-
25% of system costs), on our estimates. Moreover, GCLs strategy to build just-in-time
wafer plants at proximity to its key customers should enable it to make demand captive.
Balance sheets to remain in focus
While solar companies continue to expand capacity in anticipation of a strong demand
environment in FY11, we see cashflows remaining under pressure. Moreover, the highcapacity and oversupply situation will result in utilizations coming down sharply, in our
view. Motech, Trina, JA Solar, Canadian Solar and Yingli have relatively good balance
sheets, with Trina and Motech having a net cash position. That said, we continue to
monitor the high gearing condition at LDK, E-Ton and Suntech, which could limit cost
reduction and expansion capabilities.
Exhibit 9. Net debt to equity (recent quarter)
4
30 36
52
94
135
(6) (6)
(20)
0
20
40
60
80
100
120
140
160
Trina
Solar
Motech JA Solar Canadian
Solar
Yingli Suntech E-Ton LDK
Note: For E-Ton, Motech, JA Solar and LDK we use 3Q10 data. For the rest of the companies we use 2Q10 data
Source: Company reports, Nomura research
Trina and Yingli ahead in vertical
integration
Suntechs upstream integration
provides upside catalysts
Vertical integration at JA Solar
and Motech a work-in-progress;
E-ton constrained by capital
availability
LDK is most aggressive among
peers, although risks remain
GCL to enter wafer business
While debt in general is easily
available for companies based in
China, we remain wary of
excessive levels
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Within our coverage universe, LDK, with its net debt-to-equity of 134.8% at end-3Q10,
has the most stretched balance sheet. It recently secured a strategic financing
agreement of RMB60bn (US$8.9bn) from China Development Bank (CDB), helping to
ease its near-term capital constraints. We see LDK aggressively ramping up its internal
polysilicon plant, which has the potential to lower its input costs and thus offset margin
pressure.
However, we are concerned about E-Tons net debt-to-equity of 94.2% at end-3Q10F.We expect high net gearing to restrict E-Tons ability to add capacity and lower cell
processing costs meaningfully. We expect the company to address its FY11F capacity
requirements and continue to work on cost reductions. We also expect it to raise
capital through a public offering and / or debt.
Suntechs balance sheet woes largely came in 2Q10 when it wrote-off most of its
underperforming investments and assets. We believe that these write-offs have now
removed a major overhang from its balance sheet. While some risky assets including
Glory Silicon and Xian Longi still remain on the companys balance sheet, we believe
Suntech is now better placed to continue expanding capacity and reduce costs.
Valuation methodologyIn 2009, sharp changes in demand resulted in sudden shifts in market dynamics and
increased earnings volatility, due to shipment and ASP uncertainties. In 2010, earnings
continue to witness high volatility, a result of excess demand this time. That said, while
demand visibility into 2011 remains relatively poor, we believe the supply dynamics will
enable us to better forecast earnings growth. Thus, we believe our earlier method of
valuing the company on a P/BV basis to weed out uncertainty is no longer appropriate.
As such, we revert to a PER based valuation methodology.
To create a reasonable and fair valuation methodology for companies, we: 1) evaluate
three peer groups module makers, cell makers and wafer makers based on the
primary sales segment; 2) create a sub-segment index group to evaluate performance
across the sector in a similar business model; and 3) use 2010 YTD average forwardPER of the sub-segment index group.
We derive our price targets by pegging our FY11F PER to a multiple of the YTD
average forward PER of the corresponding segment. We believe this keeps our
comparable peer group relevant to the business model of the company while removing
the impact of volatility from our target multiples.
Module companies. We apply a 10% discount to the 2010 YTD average forward PER
to reflect our concerns over margin pressure amidst slowing market demand. Despite
this, we see Trina, Yingli and Suntech as undervalued and expect potential upside
catalysts. Canadian Solar, however, looks fairly valued, in our view.
Cell companies. We do not give any discount to the 2010 YTD average forward PERof the cell peer group. Despite this, we see JA Solar as fairly valued. For Motech, we
apply a 20% premium for its stronger balance sheet and the 20% stake held by TSMC.
We see Motech as fairly valued. For E-Ton, our weak earnings outlook has skewed the
PER-based valuation to unrealistic valuations. As such, we revert to 2010 YTD
average forward PBV and apply a 20% discount to reflect its weak balance sheet. As
such, we see further potential downside from current levels.
Wafer companies. We apply a 10% discount to the 2010 YTD average forward PER
to reflect market concerns about slowing growth. We see LDK as fairly valued.
As earnings variability improves,
we revert our valuation
methodology from PBV-based to
PER-based
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Exhibit 10. Peer valuation comparison
P/E (x) P/BV (x) ROE (%)
Company FY10F FY11F FY12F FY10F FY11F FY12F FY10F FY11F FY12F
Wafer peer group
LDK Solar 9.0 7.7 8.1 1.6 1.3 1.1 19.5 18.8 15.2
REC 625.3 13.6 na 0.9 0.8 na 0.1 6.2 na
Renesola 28.8 20.7 15.0 2.2 1.8 1.5 7.6 8.7 9.7PV Crystalox 9.0 7.7 6.7 0.9 0.8 na 9.5 10.3 na
Green Energy Technology 13.0 8.7 10.1 1.6 1.4 na 15.5 14.1 12.2
Solargiga 23.4 23.4 12.9 2.1 1.8 1.7 9.2 7.8 13.5
Sino American Solar 12.0 9.5 9.2 2.2 2.0 1.6 14.6 18.3 na
MEMC 29.2 12.4 9.6 1.3 1.2 na 4.3 9.3 na
Cell peer group
JA Solar 6.9 6.5 6.7 1.6 1.3 1.1 26.7 22.2 17.7
E-Ton Solar (20.0) 18.7 13.6 0.9 0.9 0.8 (26.6) 5.0 6.4
Motech 10.0 9.2 8.9 1.9 1.6 1.4 25.2 19.3 16.7
China Sunergy 5.9 8.6 6.3 0.9 0.8 na 15.4 9.4 na
Q-Cells 22.5 15.4 12.2 0.6 0.6 0.5 2.6 3.6 4.4
Gintech 6.8 7.3 5.9 1.6 1.4 1.2 24.4 19.0 21.0
Neo Solar 7.7 7.1 6.2 1.6 1.3 na 21.2 17.9 na
Solartech Energy 11.4 5.7 NA 3.0 1.8 na 38.1 44.4 na
Module peer group
Suntech (18.5) 8.9 6.4 1.1 1.0 0.8 (5.6) 11.4 13.8
Trina 9.2 8.0 6.9 1.8 1.5 1.2 24.2 20.4 19.4
Yingli 10.0 8.0 7.5 1.5 1.3 1.1 16.1 17.1 15.5
Canadian Solar 15.4 9.1 7.5 1.2 1.1 1.0 8.4 12.7 13.6
Solarworld 17.8 14.1 14.3 1.2 1.1 1.0 6.5 7.6 na
First Solar 18.3 16.5 13.6 3.6 2.9 na 21.9 19.6 na
Solarfun 5.5 5.7 4.4 1.1 1.0 na 20.0 17.9 na
SunPower 9.7 7.8 8.4 0.9 0.9 na 9.4 11.1 naEvergreen Solar (2.3) (3.5) (8.6) 0.6 0.7 na (25.8) (19.9) na
Note: Pricing as of 10 Nov, 2010
Source: Bloomberg (for not rated stocks), Nomura research
Exhibit 11. Valuation methodology summary
Forward PER Discount / Target P/E (x) Upside /
Company 2010 YTD avg (Premium) (%) FY11F Price target Rating (Downside) (%)
Trina Solar 11.5 10 10.4 US$36.0 BUY 29.8
Yingli Green 11.5 10 10.4 US$15.0 BUY 26.4
Suntech Power 11.5 10 10.4 US$11.0 BUY 21.5
Canadian Solar 11.5 10 10.4 US$17.0 NEUTRAL 11.7
JA Solar 7.2 0 7.2 US$10.0 NEUTRAL 10.6
Motech 7.2 (25) 9.0 NT$199.0 NEUTRAL (1.7)
E-Ton* 1.1 20 0.9 NT$37.0 REDUCE (6.4)
LDK 9.2 10 8.3 US$14.0 NEUTRAL 5.8
Note: For E-Ton Forward PER 2010YTD average and Target PER (x) reflect PBV based metrics
Source: Bloomberg, Nomura research
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That said, we do not see poly ASPs tumbling to cash costs, as with the exit of GCL
from the poly supply market, we see only three main suppliers to the solar industry
Hemlock, Wacker and OCI. As such, we expect spot poly pricing to revert to mean
long-term contract pricing. We understand contract ASPs will drop to US$45-50/kg by
2H11F from US$55-60/kg currently.
Exhibit 13. Polysilicon capacity to rise 22% y-y in FY11FPolysilicon capacity (MT) 2009 2010F 2011F 2012F
Hemlock 27,500 36,000 46,000 50,000
% growth 31 28 9
Wacker 15,650 25,650 25,650 35,650
% growth 64 0 39
REC 14,825 16,413 18,000 18,000
% growth 11 10 0
Tokuyama 8,200 8,200 8,200 11,200
% growth 0 0 37
Mitsubishi Materials 3,300 4,300 4,300 4,300
% growth 30 0 0
MEMC 10,000 12,500 12,500 12,500
% growth 25 0 0
Sumitomo Titanium 1,400 1,400 3,600 3,600
% growth 0 157 0
Tier-1 Capacity (Incumbents) 80,875 104,463 118,250 135,250
% growth 29 13 14
Tier-2 Capacity (Strong execution) 56,600 69,100 93,000 93,000
% growth 22 35 0
Tier-3 Capacity (Unproven players) 34,960 58,960 86,260 87,260
% growth 69 46 1
Total polysilicon capacity (MT) 172,435 232,523 297,510 315,510
% growth 35 28 6
Realistic Tier-1 72,788 94,016 106,425 121,725
Realistic Tier-1+2 120,898 152,751 185,475 200,775
Realistic Tier-1+2+3 143,622 191,075 241,544 257,494Realistic average polysilicon capacity (MT) 112,436 145,948 177,815 193,331
% growth 30 22 9
Polysilicon demand (MT)
Semiconductor demand 29,364 33,768 37,145 40,117
% growth 15 10 8
Solar demand 37,175 69,891 78,534 84,269
% growth 88 12 7
Total polysilicon demand (MT) 66,539 103,659 115,679 124,386
% growth 56 12 8Source: Company reports, Nomura research
Oligopolistic nature of industry to
keep pricing relatively stable
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Easing the bottleneck of wafer supply in 2011
Wafer capacity shortages have resulted in wafer spot ASPs rising 20% to US$0.90-
1.0/W in 2H10 from US$0.80/w at the start of 2010. Our checks with wafer makers
suggest they do not expect supply to reach a balance in the near term. Nevertheless,
from announced / expected capacity expansion plans of various wafer manufacturers,
we see a sharp increase in wafer capacity to 25.6GW by end-2011F. (Note: We
understand most of capacity expansion is 1H11F loaded). We see the immediate riskcoming from GCLs wafer supply, which we believe is on target for supply from 1Q11.
Exhibit 14. Wafer capacity to grow 8GW in FY11F
Year-end capacity (MW) 2010F 2011F y-y % chg
Taiwan 2,480 4,615 86
Green Energy 1,000 1,500 50
Motech 180 360 100
SAS 800 1,100 38
Wafer Works 500 655 31
SAS / Solartech JV 0 1,000 N/M
China-based companies 11,470 14,950 30
Canadian Solar 350 450 29
Comtech 1,000 1,500 50
GCL Holdings 3,500 3,500 0
JA Solar 300 500 67
LDK Solar 2,800 3,600 29
Renesola 1,200 1,800 50
Solarfun 400 500 25
Solargiga 420 500 19
Suntech 0 1,000 N/M
Trina Solar 700 1,000 43
Yingli Solar 1000 1,200 20
US/European companies 3,350 5,400 61
TOTAL 17,500 25,565 46Source: Company data, Nomura research
Perpetual oversupply in cell manufacturing?
Global cell/module manufacturing capacity has been known to be in oversupply for
long. This looks to continue in 2011F with productive cell capacity likely to rise a
massive 10GW-30GW by end-2011F (1H11F loaded). We believe Chinese makers are
the most aggressive with Suntech, Yingli, Trina and JA Solar all targeting at least a
10% market share each in 2011. We believe with a better cost structure than other
global peers, China-based companies could be more aggressive in terms of production,
resulting in faster ASP declines.
Exhibit 15. Cell capacity to grow 10GW in FY11F
2010F capacity - 20.8GW
Europe
11%
Japan
19%
Taiwan
21%
China
38%
USA
11%
2011F capacity - 31.0GW
Taiwan
22%
Japan
18%
China
40%
Europe
8%
USA
12%
Source: Company data, Nomura estimates
Acute shortages in wafer supply
in 2010 have prompted multiple
companies to expand in-house
capacity
Cell supply growth continues to
remain ahead of other segments,
driven by expansions at China-
based peers
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Demand dynamics
Demand growth to slow over 2011-13FOver the past six months, practically all major demand centres for the solar industry
have announced some sort of subsidy adjustments. Subsidy cuts were most acute in
Germany, Czech Republic and Italy, comprising 65% of 2010 demand. The worst was
Czech Republic (~1.5GW, ~10% of demand in 2010), which has practically eliminated
all subsidies for the solar market after it faced a similar problem as Spain burgeoning
subsidy burden with little domestic industry growth.
Exhibit 16. A number of countries have reduced subsidies over the last 6 months
Shipments (MW)
Country 2010F 2011F Subsidy action taken
Czech Republic 1,200 0 FITs cut 50%; tax holidays removedNew bill proposes complete subsidy end
France 432 796 12% FIT cut from Sep 2010Further cuts and subsidy cap in FY11 likely
Germany 6,896 5,228 FITs lowered by 12-16% from July, 2010FITs to drop 12-15% in FY11FCurrently evaluating an installation cap
Italy 1,481 2,442 FY11F FITs to be cut 9.3% for first 4 months14.2% cut for >5MW projects. Additional cuts thereafter
Spain 400 500 Proposal to cut FY11F FITs by 45%
Canada na na FITs cut 25% for
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Exhibit 17. Base case: Share of Europe to reduce to 41% by FY13F
Market size (MW) y-y chg (%) Breakdown (%)
2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F
Germany 3,502 6,896 5,228 4,182 3,346 88 97 (24) (20) (20) 47 46 32 22 16
Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 3 3
Italy 690 1,481 2,442 2,973 1,669 187 115 65 22 (44) 9 10 15 16 8
France 103 432 796 1,034 1,241 211 321 84 30 20 1 3 5 5 6
Greece 76 196 235 235 282 154 157 20 0 20 1 1 1 1 1
Rest of Europe 281 1,451 870 1,036 1,222 14 415 (40) 19 18 4 10 5 6 6
Japan 482 1,005 1,407 1,689 1,942 110 108 40 20 15 7 7 9 9 9
USA 485 1,182 1,867 2,558 3,633 35 144 58 37 42 7 8 11 14 18
Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 2
China 95 323 458 623 798 229 238 42 36 28 1 2 3 3 4
India 54 125 175 526 789 75 131 40 200 50 1 1 1 3 4
Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 6 8 9
Total Grid installations 6,430 14,059 15,155 17,086 17,742 8 119 8 13 4 87 93 92 91 86
Off-grid installat ions 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 8 9 14
Total demand 7,378 15,050 16,542 18,821 20,518 8 104 10 14 9 100 100 100 100 100
Source: Solarbuzz, Nomura estimates
Best case (Policies remain intact and/or are expanded). In our best-case
scenario, we forecast a solar demand CAGR of 23.8% over FY10-13F. Here, we
expect Europe to witness a CAGR of 13.0% during the same period, down from the
74.3% CAGR over FY06-10F, assuming that these countries would continue to
support higher subsidies and solar installations. We also assume nationwide FITs
being implemented in the US and China, resulting in fast solar growth in these
regions.
Exhibit 18. Best case: Global solar market to grow to 29GW in FY13F
Market size (MW) y-y chg (%) Breakdown (%)
2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013FGermany 3,502 6,896 6,309 6,694 5,355 88 97 (9) 6 (20) 47 46 33 27 19
Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 2 2
Italy 690 1,481 3,327 5,280 6,271 187 115 125 59 19 9 10 17 21 22
France 103 432 908 1,180 1,416 211 321 110 30 20 1 3 5 5 5
Greece 76 196 235 235 282 154 157 20 0 20 1 1 1 1 1
Rest of Europe 281 1,451 1,160 1,393 1,671 14 415 (20) 20 20 4 10 6 6 6
Japan 482 1,005 1,407 1,689 1,942 110 108 40 20 15 7 7 7 7 7
USA 485 1,182 2,175 2,979 4,231 35 144 84 37 42 7 8 11 12 15
Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 1
China 95 323 587 799 1,022 229 238 82 36 28 1 2 3 3 4
India 54 125 175 526 789 75 131 40 200 50 1 1 1 2 3
Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 5 6 6
Total Grid instal lat ions 6,430 14,059 17,960 23,005 25,800 8 119 28 28 12 87 93 93 93 90Off-grid installations 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 7 7 10
Total demand 7,378 15,050 19,347 24,739 28,575 8 104 29 28 16 100 100 100 100 100
Source: Solarbuzz, Nomura estimates
Worst case (Proactive sharp corrections in policy). In our worst-case scenario,
we forecast a solar demand CAGR of only 3.9% over FY10-13F. Here, we expect
demand from Europe to drop to a 13.4% CAGR during the same period, from a
74.3% CAGR over FY06-10F, given our assumption of aggressive policy
adjustments at Germany, Italy and France, which are directed towards lowering
subsidy burdens. In addition, we expect the US will witness a 17.2% demand
CAGR over FY10-13F to 1.91GW by 2013 from 1.18GW in 2010, assuming
constrained financial availability.
Assuming policy support despite
possible over-installations, we
see a demand CAGR of 24% over
2010-13F
Assuming proactive policy
changes in Europe, we see a
slower demand CAGR of 3.9%
over 2010-13F
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Exhibit 19. Bear case: Global solar market to remain stagnant over 2010-13F
Market size (MW) y-y chg (%) Breakdown (%)
2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F
Germany 3,502 6,896 4,277 3,422 2,738 88 97 (38) (20) (20) 47 46 29 21 16
Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 4 4
Italy 690 1,481 2,061 2,502 1,400 187 115 39 21 (44) 9 10 14 15 8
France 103 432 778 934 747 211 321 80 20 (20) 1 3 5 6 4
Greece 76 196 235 235 282 154 157 20 0 20 1 1 2 1 2
Rest of Europe 281 1,451 870 1,036 1,222 14 415 (40) 19 18 4 10 6 6 7
Japan 482 1,005 1,206 1,327 1,393 110 108 20 10 5 7 7 8 8 8
USA 485 1,182 1,454 1,701 1,905 35 144 23 17 12 7 8 10 10 11
Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 2
China 95 323 458 623 798 229 238 42 36 28 1 2 3 4 5
India 54 125 175 526 789 75 131 40 200 50 1 1 1 3 5
Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 7 9 11
Total Grid installations 6,430 14,059 13,191 14,535 14,094 8 119 (6) 10 (3) 87 93 90 89 84
Off-grid installations 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 10 11 16
Total demand 7,378 15,050 14,578 16,269 16,869 8 104 (3) 12 4 100 100 100 100 100
Source: Solarbuzz, Nomura estimates
European demand growth to slow as risks increase
A common theme in all the three scenarios above is that demand from Europe is
growing at a slower pace than the rest of the world. Here, we believe two functions are
at play:
The feed-in-tariff subsidy model has reached its useful life. The global solar
panel manufacturing capacity has reached a point where the risks of the feed-in-
tariff subsidy model are being exposed. Note that the key risk of the FIT subsidy
model is runaway growth in installations in locations with attractive financial returns.
As such, with memory of the policy debacle at Spain (2008) and the Czech
Republic (2010) fresh in minds, we believe policymakers in Europe will keep a
sharp eye on installation growth and make unscheduled adjustments. We see Italy,France and Germany still exposed to such a risk and thus we expect policy
adjustments in these countries.
Risk of unbalancing the electricity infrastructure in the country. Stephan
Kohler, Head of DENA (German Energy Agency) on 17 th October noted that
installed capacity of solar could reach -30GW by end-2011 (equal to Germanys
weekend power consumption). Such capacity installations creates a risk of
unintended blackouts as the remaining electricity production infrastructure will be
unable to adjust to sharp variability in power output at the renewable energy
sources. (Note: this is not including wind installations which also have high
variability for electricity production) We believe other regions in Europe, which
have been at the forefront of renewable installations to face the same dilemma.
Italy to face a boom market in 2011 further FIT cuts likely
In 2011, we expect Italy to become the second-largest market after Germany, given its
very attractive IRRs of 15-17%. Up to now, Italy has been in the shadow of Germany,
and we think that its attractive solar characteristics and returns can lead to it
compensating any decline from Germany. Italy, in the third Conto Energia adopted in
September 2010, has also signalled continued support for solar installations beyond
2011 and set forth targets of: 1) 8GW of nominal PV installed capacity by 2020;
2) 3.5GW of installations over 2011-13F with a grace period of 14 months once the
target is reached; and 3) post the 27% subsidy adjustments over 2011, only a 2% y-y
decline in FITs for 2012 and 2013.While these are very attractive terms for the industry, we believe Italy has set itself up
for significant demand growth similar to that seen in Spain and thus, further FIT cuts
are necessary, in our view. From our channel checks, Italy is absorbing increased
Policy adjustments in Europe a
question of when not if, given:
1) risk of uncontrolled demand
has increased; and
2) Pace of installations could
leave grid infrastructure unstable
Italy likely to become the next
growth market in 2011F risk of
uncontrolled growth
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amounts of panels. In the exhibit below, we conduct a sensitivity analysis of the
subsidy burden that the Italian government has planned for in the third Conto Energia
and the likely subsidy burdens it will face under a base-case scenario and a best-case
scenario. As shown, we believe the likely subsidy burden is potentially 4.2x the
planned budget in our best-case scenario for demand and, thus it is not optimal for
continuation.
Exhibit 20. Italy: comparison of subsidy burdens accumulated over 2011-13F
Installations (2011-13) Subsidy burden Compared to budget
(GW) (mn) (x)
Third Conto Energia 3,500 978.1 1.0
Base Case Scenario 7,085 2,015.6 2.1
Best Case Scenario 14,878 4,091.3 4.2
Source: Nomura estimates
This could imply faster-than-currently-planned reductions but to what extent they would
hit demand is an uncertainty, given the very high levels of current returns. We believe
huge reductions and/or a hard cap without a grace period are needed to materially
slow the market. However, we would not be surprised if there are effects showing in
2012 or beyond. That said, if Italy continues its policy until the end of 2013, the country
could be at the forefront of global solar demand with a CAGR of 61.8% over FY10-13F
under our best-case scenario.
Germany risks of subsidy revision ahead when will it slow themarket?
Germany has seen the frothiest market in 2010, despite the unscheduled feed-in tariff
reduction in July. With another 12-14% cut in Germany expected in 2011 per the
current policy, it theoretically sets a stage for demand to deflate. However, it is worth
noting that abundant financing makes for attractive returns, and that there could be
further run-up in demand. At this stage, we assume demand from Germany would fallto 5.2GW in 2011 (base case) and continue to decline further in 2012-13F.
That said, the key risk to growth in Germany installations comes from a potential cap
introduced to limit the impact on grid infrastructure. This risk could get compounded if
installations continue to materially surpass the governments targets, but we think it
might take into 2012 for stronger action. Stephan Kohler, Head of DENA (as
referenced above) has suggested a cap (we understand 1GW) being implemented on
solar installations at the earliest. While we agree with the concern of grid instability as
solar installations rise, we believe a more likely scenario is a higher cap on
installations with lower guaranteed feed-in-tariffs. We envisage this will be
accompanied with higher subsidies to installations with a certain proportion of battery
systems installed. Note that the use of batteries has enabled load balancing andhelped smooth outputs sharp variability. There is an intense discussion under way
over the future of renewable subsidies and the countrys energy policy, and we think
that the possibility of another solar tariff revision at mid-year is very strong.
US the next key market ahead
We believe the US will see fastest solar demand growth driven by its subsidy policy,
which is budgeted in its fiscal policy and auto-adjusted for system ASP reductions. The
main US subsidy policy is based on a federal Investment Tax Credit (ITC) whereby
30% of installations costs for the solar plant are tax deductible. The US government
has earmarked US$17bn over 2009-16F, of which we estimate only US$2bn has been
utilized till date. Current ASP installation cost in the US is about US$4/W. Theremaining US$15bn implies 12-13GW of further potential support.
A devils advocate will suggest that the ITC alone is insufficient, given that the ITC only
offsets tax and thus a complete installation cost is needed upfront, and further
Subsidy burdens could be up to
4x planned burdens in our best-
case scenario
Germany looks set to see another
round of unscheduled subsidy
changes
The US to become the secular
market driven by policies better
suited for oversupply conditions
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subsidies via state incentives or FIT are needed to make solar attractive. We agree
that the ITC subsidy structure does require a higher rate of return given that the
subsidy becomes available only at the end of a year. That said, we believe the ITC
alone is capable of enabling meaningful IRRs at multiple locations. Moreover, the
structure is particularly attractive for companies/corporate functions which can offset
tax credits with tax liabilities in other operations.
Module ASPs in the US stand at around US$1.6/W currently. Assuming a solarelectricity vendor needs a 20-year payback period (a typical depreciation period for PV
system) and a 7% discount rate, we examine the operating conditions needed for ITC
to be viable. The table below shows a sensitivity analysis between utility grid prices
and annual sun hours to module ASPs. The conclusion is that 2011F module ASPs of
US$1.4-1.5/W with the ITC alone would have already enabled meaningful IRRs in
multiple regions (shaded in grey).
Our channel checks suggest that strong growth momentum is emerging from Florida,
Texas, Nevada, Rhode Island, Arizona. We expect further ASP reductions to take
place in regions like Massachusetts, New York, Colorado, Maine, New Mexico, etc.
With further state incentives, the demand from the US looks set to witness strong
growth ahead.
Exhibit 21. Breakeven module ASPs for different locations in US
Annual Sun Hours (hrs)
(US$/W) 1,200 1,400 1,600 1,800 2,000 2,200 2,400
0.06 0.7 0.8 0.9 1.0 1.1 1.2 1.3
0.08 0.9 1.0 1.2 1.3 1.5 1.6 1.8
0.10 1.1 1.3 1.5 1.6 1.8 2.0 2.2
0.12 1.3 1.5 1.8 2.0 2.2 2.4 2.6
0.14 1.5 1.8 2.1 2.3 2.6 2.8 3.1
0.16 1.8 2.1 2.3 2.6 2.9 3.2 3.5
0.18 2.0 2.3 2.6 3.0 3.3 3.6 4.0
0.20 2.2 2.6 2.9 3.3 3.7 4.0 4.4
0.22 2.4 2.8 3.2 3.6 4.0 4.4 4.8
Local Gridprice(US$/kW-hr)
0.24 2.6 3.1 3.5 4.0 4.4 4.8 5.3
Source: Nomura research
Exhibit 22. Select conditions include California, Nevada
Annual Sun Hours (hrs)
1,200 1,400 1,600 1,800 2,000 2,200 2,4000
0.06 West Virginia Washington Idaho
0.08 Illinois Oregon Alabama,Arkansas,Indiana,Minneosta,Missouri,Tenessee,Virgina
Georgia,Kansas,Kentucky,Montana,North Dakota,Nebraska
SouthDakota, Utah,Oklahoma
Wyoming
0.10 Michigan,Ohio,Pennsylvania
DistrictColumbia,Iowa,Maryland,Mississippi,Wisconsin
Louisiana,NorthCarolina,SouthCarolina
Colorado New Mexico,Arizona
0.12 New Jersey Florida,Texas,
Nevada
0.14 Alaska Maine California
0.16 Massachusetts,New York
Rhode Island
0.18
0.20
0.22
LocalGridprice(US$/kW-hr)
0.24 Hawaii
Source: Nomura research
Shaded area highlights regions
where federal subsidies are
enough for positive project IRRs
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Exhibit 23. Financial incentives from states to provide push
C alifo rnia 3GW by 2016 US$ 3bn in incentiv es
Installatio ns < 50kW: US$2.5-3.25/W subsidy
Installations > 50kW: US$0.39-50/kW-hr FIT for 5 years
Net M etering available upto an individual system size of 1M W
Florida Property tax exemptions of up to the installation value
Net M etering available upto 2M W
Rebate of $4/W
Texas State-wide net metering available upto 50kW
N ev ada 1.5% by 2025 2.4-2.45x grid pric e c redit f or P V
Selective rebate programs ($2.30-$4.60)
Pro perty tax exemptions o f up to the installation value
Net M etering available up to an individual system size of 1M W
Rebate o f $2.10 - $4.20/W
Arizona 4.5% distributed provisions by 2025
Net M etering available up to 125% of custo mer's to tal connected electric load
Rebate of $2-$3/W
25% stat e tax credit for resident ial and 10% stat e tax credit for no n-residential
New Mexico 4% by 2020 0.6% dis tr ibuted generat ion by 2020
Net M etering available for certain utility types up to an individual system size of 80M W
C olo rado 0.8% by 2020 0.8% s olar elec tric by 2020
Net M etering available up to an individual system size of 2MW
Rebate of
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Margin discussion
Market share consolidation ahead?We understand low-cost producers are aiming to increase their market share
meaningfully. Suntech, Trina, Yingli and JA Solar have all noted their target of more
than a 10% cell market share each. We believe Motech and Gintech are also likely to
target similar market share numbers. In addition to their China peers, Sharp and First
Solar also have meaningful thin-film capacity with First Solar having the right cost
structure, in our view. This suggests that the companies are willing to drive ASPs lower
in order to gain meaningful market shares. We believe the success will be a function of
cost management.
Exhibit 24. 7 companies can have a market share of over 10% each in FY11F
0
500
1,000
1,500
2,000
2,500
3,000
E-Ton
SunPower
Delsolar
NeoSolar
Q-Cells
LDKSolar
Canadian
Trina
Gintech
Yingli
Motech
Sharp
FirstSolar
Suntech
JASolar
10% of FY11F
base case demand
Source: Company data, Nomura estimates
ASP pressure to increaseIn our opinion, the operating environment looks to worsen sharply with oversupply
conditions amidst slowing demand growth (as discussed elsewhere) and calls for a
strong reduction in ASPs. We forecast blended ASPs to fall from current US$1.7-1.8/W
to US$1.4-1.5/W in 2011F and further fall to US$1.3/W in 2012F and US$1.2/W in
2013F.
Exhibit 25. Module ASPs to fall to US$1.2/W in FY13F
0
5,000
10,000
15,000
20,000
25,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010F
2011F
2012F
2013F
0
1
2
3
4
5
6Annual Production (LHS)
Price per Watt (RHS)
(US$ / W)(MW)
Source: Nomura estimates
Under such ASP pressure, we believe companies need two key characteristics to ride
the downturn: 1) optimal cost structure enabling faster cost reductions, which are keys
Market share targets suggest
companies willing to drive ASPs
lower
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for margins and profitability; and 2) geographical diversification away from core
markets of Germany and Italy, which could help lend better support to shipments.
Module ASPs of US$1.4-1.5/W in 2011F enable equivalent IRRs
While oversupply conditions suggest faster ASP declines in the marginal cost of higher
cost producers, we believe 2011F ASPs are relatively buffered. As shown in the table
below, module ASPs of US$1.4-1.5/W enable meaningful IRRs (unlevered) inGermany and Italy, offsetting the impact from subsidy reductions. This should help
stop further ASP declines in 2011F although runaway installations conditions could
occur resulting in faster subsidy changes.
Exhibit 26. IRRs remain attractive if ASPs fall to US$1.4-1.5/W
Country 2010 IRRs (%) 2011 IRRs (%)
Assumption Module ASP (US$/W) 1.75 1.45 1.75
Germany (ground) 13 13 11
Germany (rooftop) 12 - 16 12 - 16 10 - 14
France 15 - 18 15 - 18 15 - 18
Italy 23 20 18
Greece 31 - 48 35 - 53 31 - 48
Spain 20 11 10
Czech Republic 21 10 9
USA
California 23 - 36 28 - 42 23 - 36
Hawaii 22 24 22
Nevada 14 16 14
New Mexico 8 9 8
New York 8 9 8
Rhode Island 9 10 9
Texas 10 12 10
Japan 36 42 36
Canada 16 13 11
China 2 - 23 3 - 26 2 - 23
Source: Nomura research
1Q11F pricing strength a transitory phase
We acknowledge that our checks with solar companies suggest that pricing for 1Q11F
is relatively firm at US$1.5-1.6/W with strong demand seen from Italy and the US;
however, we believe this is a transitory phase and price declines to US$1.4-1.5 will
resume from 2Q11F. We think there are two contributing factors:
Pull-in of demand from Italy before the next 9% FIT cut scheduled at the end of
April 2011. Our checks suggest Italy could be a more-than-1GW market in 1H11F.However, a faster market growth rate in Italy could result in another round of
unscheduled subsidy reductions later in the year;
Oversupply conditions not yet apparent. Given the contrasting signs from spot
markets, we believe distributors and developers are willing to support a higher
pricing level in 1Q11F. However, as more capacity additions done in 2H10 become
productive, we see pricing strength dissipating.
Vertically integrated companies have better cost structure
As shown in the exhibit below, we estimate that among the Greater China companies,
those with a vertically integrated model (wafer to module) have the lowest cost
structure for the same polysilicon cost. This is also borne out by the 30%+ gross
margins seen at Trina and Yingli in contrast to 15~25% at other peers.
We see module 2011F ASP floor
at US$1.4~1.5/W levels
Supposed 1Q11F pricing strength
looks a transitory phase; unlikely
to continue through the year
Vertically integrated model
enables better cost reduction
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Exhibit 27. Typical ASPs and processing costs at China-based peers
Likely ASPs (US$/W) 2010F 2011F 2012F 2013F
Polysilicon (US$/Kg) 55 45 40 38
Wafer 0.9 0.7 0.6 0.5
Cell 1.3 1.1 0.9 0.8
Module 1.8 1.5 1.3 1.2
Typical processing costs (US$/W)
Ingot/Wafer 0.33 0.28 0.25 0.23
Cell 0.23 0.20 0.19 0.18
Module 0.33 0.30 0.28 0.26
Note: These are indicative costs and ASPs by our estimates and not reflective of any particular company
Source: Nomura research
Solar companies move to vertical integration to lower costs
As shown in the table below, we foresee more companies increasing their vertical
integration capabilities to improve their cost structures. That said, we believe Trina and
Yingli, with a well-established vertically integrated model, are likely to maintain their
cost advantage over peers.
Exhibit 28. Companies increasing vertical integration to improve costs
FY10F capacity (MW) FY11F capacity (MW)
Company Wafer Cell Module Wafer Cell Module
LDK 2,800 180 1,500 3,600 1,260 2,500
Suntech 0 1,800 1,800 1,000 2,400 2,400
Canadian Solar 350 900 1,300 450 1,300 1,800
Yingli 1,000 1,000 1,000 1,700 1,700 1,700
Trina Solar 700 950 950 1,000 1,500 1,500
Solarworld 1,250 750 1,250 1,500 750 1,250
Solarfun 400 550 900 500 820 900
Renesola 1,200 240 375 1,800 600 600
JA Solar 300 1,800 500 500 2,400 500
Source: Company data, Nomura research
Pure-play companies likely to suffer the most
In contrast to the vertically integrated companies, the pure-play companies are likely to
see pressure from both suppliers and customers. Here, we believe the worst
positioned are pure-play wafer makers followed by pure-play cell makers.
Wafer makers most exposed to acute margin pressure
So far in 2010, wafer makers have been among the best performing stocks in the solar
space, with sharp improvements in margins and profitability. We believe this was
largely driven by wafer capacity shortages resulting in stronger ASPs. As such, wafer
spot ASPs have risen by 20% YTD. Driven by such strong profitability, we have seen a
lot of wafer capacity expansion which we expect to start ramping in 2011. We believe
supply-demand balance will be reached in 1H11 and as such see ASPs coming under
pressure.
The entry of GCL which is ramping 3.5GW of wafer capacity by end-2010 is likely the
biggest negative catalyst. While some pure-play wafer makers remain dismissive of
GCL, our supply chain checks suggest that ramp remains on target and initial wafers
are of optimal quality. In addition, despite our expectations of poly ASPs to resume
their ASP decline, we believe incremental cost benefits do not materially offset the
ASP pressure on wafer makers.
Changing dynamics prompt
companies to adopt vertical
integration
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Cell makers to see pressure from both ends
Despite our expectations of supply-demand balance being reached in 1H11, we note
wafer makers are unwilling to drop quotes yet citing: 1) capacity ramps at new players
are likely to take time; and 2) demand expectations remain high, particularly from
Germany and Italy. In contrast, cell makers are already seeing their ASP outlook
deteriorate. Spot ASPs for cells remained flat m-m at US$1.35~1.4/W with forward
spot quotes for December showing a 10% m-m decline. We see further declines toUS$1.1~1.2/W levels likely by end-1Q11F as the market adjusts to the new reality.
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Risks
Fundamental shift in competition aheadOver 2005-2010, companies based in China and Taiwan backed by lower costs gained
significant share from European incumbents. However, despite these companies
continuing to outperform on costs over the next one to two years, we see the potential
risk of a fundamental shift in competition which could potentially result in another
market shakeup.
New competition seems to be emerging from: 1) well-established leaders in technology
manufacturing sector; 2) new-technologies which aim to lower costs while enabling
equivalent efficiencies to current solar technologies; and 3) new business models
which could meaningfully change the demand environment. As such, we await the
success of these incoming changes to evaluate the impact on incumbents.
Entry of well-funded leaders from technology industry
As shown in the exhibit below, many leading technology manufacturing companies
have announced entry into the solar industry. A devils advocate would suggest that
these companies have no experience in solar and thus are unlikely to outperform theincumbent China-based companies. However, the large abundance of listed and
unlisted solar companies in China suggests that entry-barriers are low and learning
curves short. As such, we see the availability of capital as the only meaningful entry
barrier in the solar industry, though this is not a concern for the new entrants as seen
by their capacity ramp targets.
Exhibit 29. Entry of new strong companies
Company Polysilicon Wafers Cells Module s Thin-filmProject
development
Project
installationInverters Solar Thermal
SamsungConducting CIGS
R&D
Agreement with
Satcon
LGLG Chem
5000MT by '11
LG SiltronLGE - Pilot
productionHanhwa
Hyundai
TSMCInvest in Stion
CIGSS in '11
BYDInverters,
batteries
AUOJV with
Sunpower
Outsource to
Flextronics
Building pilot
lineFinancing
GEAcquired
Astropower
Acquired
PrimeStar
Intel Venture fundingTrony Solar,
Sulfur CellFinancing
GoogleSolar thermal
reflector
50% stake in Solarfun
internal: 1GW by 2015
7 year contract with LDK
JV with KCC (3,000MT)
Partnership with Raser Tech
240MW plant with Matinee & LG1GW by 2012
Targetting
Owns stake in Fotowatio
130MW by 2011
To invest KRW6tn over '10-20
LG CNS / LG Solar EnergyLGE
240MW
JV with Enco Utility Services
130MW (US), 500MW (Canada)
Building a vertically integrated plant in Shaanxi - 5GW target capacity
UMG-Si based technology; RMB5bn target sales in 2011
Acquired M.SETEK
20% stake in Motech
China focussed
Been given utility rights in the US
Source: Company data, Nomura research
Leveraging current strengths to accelerate cost reduction
In addition to having capital to enable fast project ramps, we see synergistic benefits
from existing operations:
Process technologies enabling cell efficiency improvements. Process control
is a key determinant of yields which in turn enables incremental improvements in
average cell efficiency output. Here, semi and LCD companies have significant
know-how which could potentially be transferred to a solar process. Case in point is
TSMC which in December 2009 took a 20% stake in Motech, and we understand it
is now doing joint R&D to accelerate cell efficiency improvements.
Complimentary products enabling better market access. Case in point is DeltaElectronics which is aiming to become a leading player in the solar inverter market
with 3GW of capacity coming onstream in 2011. Here, its subsidiary DelSolar has
Risks are rising as new set of
competitors emerge
Tech companies could potentially
outspend solar incumbents to
muscle them out
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Exhibit 31. CIGS can enable narrowing of pricing gap versus crystalline
Typical crystalline modules
First Solar CIGS Mono Multi SunPower
Size (m) 0.72 1.1 1.3 - 1.4 1.5 - 2.1 1.2 - 1.6
Power (W) 70 - 80 120 - 130 175 - 190 210 - 280 210 - 315
Module efficiency (%) 11.2 10.0 - 11.8 14.5 - 14.9 14.1 - 14.4 16.9 - 19.3
ASP (US$/W) 1.5 1.5 1.8 2.3- discount to STP (18.8) (18.1)
Indicative 2012
Module efficiency (%) 12 14 16.6 - 16.8 15.4 - 15.6
ASP (US$/W) 1.0 1.2 1.3
- discount to STP (25.0) (18.8)
Note: We have used TSMC's projected efficiency as base case for CIGS
Source: Company data, Nomura research
Project financing setting up the complete plant
Unlike traditional coal-based thermal plants where plant costs are low followed by a
regular operating cost (ie, fuel), solar plants are investment heavy. We estimate that
once solar has reached cost parity with wind, a typical solar plant of 1GW would costan upfront ~US$2bn necessitating financing. Here we see companies with finance
arms as well placed to both provide the system and the associated financing for the
complete solar system. This concept is already gaining momentum with multiple
incumbent solar companies setting up funds/subsidiaries to provide equity capital for
solar projects and system integration teams to take, build and operate projects with
IPPs as shown in Exhibit below.
Exhibit 32. Solar players expanding into downstream
Company Downstream expansion
MEMC Acquired project developer SunEdison in FY09; to interconnect 150MW of solar in FY10F
First Solar Has a contract PPA pipeline of 2.2GWSuntech Has agreements to develop 1.8GW of solar projects in China
SunPower Constructing small power systems in the US
Sharp Acquired US Solar developer Recurrent Energy
Yingli Has a 20% stake in Chinese project developer Green Islands Power
Canadian Solar Implementing solar projects in Korea and China
Q-Cells 150~200MW of project business in FY10F
LDK JV with Q-Cells to build solar power projects
Conergy Develops turnkey large scale projects in Europe and the US
Solon Constructing small solar power projects in the US including a pilot project for PG&E
Renesola Building utility scale power projects in China
Source: Nomura research
However, new entrants could change this landscape via: 1) financing not just the
equity portion but also helping secure debt; and 2) a significantly larger asset base
which would be able to handle the size of projects these companies can take. In the
Exhibit below, we compare the asset base, annual capex and net debt-to-equity ratio
with the key players in solar industry. We see financing availability as a key threat to
incumbents for the large projects.
Case in point being GE, which recently announced its intent to address the solar space
with CdTe (Cadmium Tellurium) based thin-film (similar technology is used by current
market leader First Solar). GE has used the financing model with great effectiveness in
the aerospace industry where it manufactures and finances the engines used in planes.
Backed by such financing availability GE Energy (a subsidiary of GE) is the second-largest supplier of wind-energy systems globally, ie, a repeat could be possible in the
solar industry.
Project financing could enable
select companies to control the
next lever of demand from
utilities
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Long-term catalysts remain
Utility adoption the next lever of
growthWe believe the single biggest lever for demand growth for Solar will come from wider
utility adoption beyond 2012. To date, utility adoption of solar has been very low we
understand less than 15% of solar installations to date are utility-scale. We see twoconcerns this holding back 1) most IRR calculations do not include the transmission
losses and distribution costs. Including these costs makes these projects unattractive
despite government subsidies in most cases; and 2) better investment opportunities
are available in wind where lower generation costs are able to offset the distribution
and transmission costs, thus allowing government subsidies to accrue as excess
returns. Note: the cost of electricity generation for wind is US4-10/KW-hr, in contrast
to US18-34/KW-hr for Solar (2Q09 base) according to the US government.
Market consensus is that wind will be the primary source of renewable energies over
2010-20F. That said, we believe we are at the cusp of a change when the momentum
will shift from wind to solar over the next two years. We anticipate solar to account for
at least 50% of total renewable electricity capacity installed over 2011-20F as cost ofgeneration from solar reaches parity with wind by 2012.
Exhibit 33. Forecasts for RE addressable market
Company Wind (GW) Solar (GW)
EIA 200
ENEL 800 210
McKinsey 820 206
Global Wind Energy Council 350-1000
Frost and Sullivan 491
Note: RE Renewable electricity
Source: Industry data, Nomura research
Exhibit 34. Wind accounted for 72% of RE pipeline
FY09
Wind
72%
Solar PV
14%
Solar
Thermal
14%
FY10
Solar PV
28%
Wind
26%
Solar
Thermal
46%
Note: RE Renewable electricity
Source: Industry data, Nomura research
Solar: Accelerated cost reductions over FY10-12
We see cost of generation in solar falling 35-45% over 2010-11F (compared to 3Q09),
followed by an additional 25