|From CS this morning: |
Solar Capacity Retirement Tracker – Volume 1
Summary – Irrationality still persists. Right now there is not much to do from an investment standpoint with most solar stocks than to wait for the industry to “rationalize” – i.e., reduce capacity from an estimated 50+GW of viable cell capacity to ideally < 30GW, so that eventually pricing and margins reach respectable levels for the surviving companies. Therefore we are introducing the first volume of our “Solar Capacity Retirement Tracker”.
Our conclusions are mixed – meaningful capacity retirements have begun and equipment business reflects the weakness. However, there appears to be evidence of much higher cell capacity adds than what we are seeing in retirements. Clearly it is too early to turn constructive on solar, as we still appear to be in early innings of the industry’s restructuring process. ~3GW of cell capacity is coming offline… Our tracker has now identified about 3GW of capacity that has been either permanently retired or idled indefinitely thus far. The largest shutdown has been from FSLR, which we estimate has reduced ~676MW of capacities in Germany and Malaysia. There have been several assorted retirements of capacities ranging from 10s of MW to a few 100MW that comprises the rest (see charts).
…But, 11GW+ of cell capacity is planned to be added in 2012, mostly in China. While the capacity retirements are encouraging, there also appears to be “claimed capacities” by both brand name and less known manufacturers – if you add those claims, there is actually another ~11GW of cell capacity that is planned to be added in 2012! The issue of course is that there are over 200 aspirants or known manufacturers of solar cells, and it is virtually impossible to accurately track each supplier’s capacity in a timely manner. Some of the notable capacity additions include from Tianwei New Energy, YGE, TSL, JASO, CSIQ – the additions from just the larger players in China is well over 4GW in 2012 – overwhelming the capacity retirements from the likes of FSLR.
Equipment order declines the bright spot. A better indicator of the rate of supply additions may be to track the equipment orders from solar equipment makers. Our solar equipment tracker, which looks at the major US European equipment vendors, shows that solar equipment orders peaked at ~$2.7bb in 2H10, and declined a whopping 87% y/y to just $354mm in 2H11. If there were really 11GW of planned cell capacity additions in 2012, it would require a capex likely in excess of $5bb. This should be reflected in solar equipment orders in 2H11 - given there are no signs of meaningful solar equipment orders, there appears to be some risk to the planned 11GW of additions. It is also possible that local China based equipment suppliers have gained share – but probably not too likely that there would be this much equipment weakness for Western suppliers if there were really 11GW of additions.
Upgraded cell capacity may be the way out. One possibly way this capacity glut is addressed could be through migration of production to higher efficiency capacities. For example, at its analyst day, AMAT claimed that demand will outstrip supply in 2013 and 2014 as improvements in module efficiency make much of the existing capacity obsolete. The company indicated 2011 manufacturing capacity of over 50GW (including ~38GW of competitive capacity) could shrink to under 30GW (including ~26GW of competitive capacity) by 2014 due to obsolescence, leading to new capex in 2013 and 2014. We have seen much higher utilizations for manufacturing of high-efficiency solar cells than for low efficiency, giving some credibility to AMAT’s reasoning.
Companies Mentioned (Price as of 26 Apr 12)
Applied Materials Inc. (AMAT, $11.94, NEUTRAL, TP $13.00)
Canadian Solar (CSIQ, $3.35)
China Sunergy (CSUN, $1.63)
Energy Conversion Devices (ENER, $0.14)
First Solar (FSLR, $18.31, NEUTRAL [V], TP $20.00)
Gintech Energy Corporation (3514.TW, NT$27.60)
JA Solar Holdings (JASO.OQ, $1.35, NEUTRAL [V], TP $2.00)
LDK Solar (LDK.N, $3.00)
Q-Cells (QCEG.DE, Eu0.13)
Renewable Energy (REC.OL, NKr3.26)
Schott Solar (S9S.F)
SunPower Corp. (SPWR, $5.46, NEUTRAL [V], TP $8.00)
Trina Solar Ltd (TSL.N, $6.75, NEUTRAL [V], TP $8.00)
Yingli Green Energy Holding (YGE.N, $3.51, NEUTRAL [V], TP $5.00)