Trina Solar (TSL) – Outlook

As of December 31, 2007, Trina’s total R&D employee count stands at 41 with nearly all of them engaged in optimizing their existing solar module production value chain. That number translates to slightly more than 1% of their total employee count of 3487, which is exceptionally low. Trina needs to look into alternative technologies that have higher barriers to entry for competition – Specifically, investments in thin-film and other second and third generation solar technologies should payoff in the long run.

Trina’s investor relations and its relationship with Wall Street in particular need improvement. Specifically, there is a real lack of response from their investor relations department. Further, from listening to the Q1 2008 conference call, it is evident that Trina Solar needs to improve their effort to ensure these calls are conducted in a professional manner. This problem is not isolated entirely to Trina – LDK fared worse in their conference calls as discussed in one of our previous articles. Ultimately, as a US listed company, Trina needs to shore up their investor relations in the US to guarantee that their shareholders are treated right.

Below is a table that looks at Trina’s financials:

Year	2007 (as reported)	2008 (Projected)	2009 (Projected)
Revenue	$301.82M	783.79M	1.24B
Earnings Per Share	1.51	3.14	4.18
Year Over Year (YOY) PE growth rate	68	108	33
Net Margin	11.7	NA	NA

Trina is trading at just 1.3 times 2008-projected revenue and 10 times earnings. When considering the backdrop of 100% growth, the valuation looks very attractive. Further, it is at the rear end among valuations for Chinese solar manufacturers. Heading the spectrum is Suntech power (STP), which is valued at 3 times revenue and 20 times earnings. Such discrepancies are primarily due to market inefficiencies and over time should get corrected. Suntech deserves a premium due to its superior financial strength and long-term supply contracts, but the underlying nature of the business is similar for both companies. The very low valuation along with outstanding growth projections make Trina a good fit in the small-cap growth portion of investment portfolios.

Trina Analysis:

1. Trina Solar (TSL) - Part 1 - Introduction.
2. Trina Solar (TSL) - Part 2 - Business Issues.
3. Trina Solar (TSL) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Trina Solar (TSL) – Business Issues

By its nature, Trina’s business is capital intensive and lofty growth projections makes it all the more critical that the company continues to have finances in place to fund growth. Capex for the next couple of years are expected to be in the range of $250-300M while cash-on-hand is about $158M. Consequently, the company will have to generate cash by issuing more debt or equity in the upcoming months. Following the recent convertible offering Trina’s total short-term borrowings should be down to about 140M at an average interest rate of 7.3%. The existing borrowings already amount to an annual cost of almost $1 per share - it is highly likely that the company will issue equity to fund expansion and debt repayment. Margin concerns along with uncertainties regarding solar subsidies have resulted in an extended slump in the share prices of integrated solar manufacturers. Hence, a better option may possibly be for the company to wait out for a better market environment and issue equity at an opportune price-point.

Dependence on government subsidies is a major business risk for Trina Solar and is predicted to persist until about 2015. This risk has augmented to some extent in the last year as European governments started introducing bills that trim down on subsidies. Germany, the biggest market in Europe recently slashed subsidies and Spain is anticipated to follow suit. The table below represents Trina’s revenue percentage across global markets over the last three years – making it evident, subsidy reduction in Europe will have an immense impact on Trina’s business. Trina’s response has been to diversify into other global markets, especially US, aggressively in the upcoming year. It is too premature to remark on how successful this policy will be:

Country	2005	2006	2007
Germany	86.5	42.8	31.4
Spain	None	37.9	40.0
Italy	None	None	18.1
Others-Europe	10.2	9.6	7.0
China	3.1	9.3	2.1
Others-Rest of the World	0.2	0.4	1.4

Trina had ambitious plans to complete construction of a $1B polysilicon plant by 2012 with a capacity of 10000MT. Even at that level of investment, only a fraction of the feedstock requirements was estimated to be met with production from the plant. No doubt, this plan was a major mistake on the part of Trina’s management. They were already late in the game as projections called for a polysilicon glut in the 2012 timeframe precisely when Trina’s new plant was predicted to come online. Trina took the right approach by reneging on these plans three months after they signed an agreement with Lianyungang Municipality in China's Jiangsu Province that included government support in respect of land and electric power supply. The polysilicon plant saga has resulted in a loss of trust in the company’s management among Wall Street analysts and shareholders – checks need to be in place to avoid such missteps in the future.

Trina’s business has low barriers to entry for competitors. Specifically, polysilicon based solar module manufacturing is labor intensive and requires limited technology. At the moment, supply chain management and financial strengths are the key barriers to entry. Should polysilicon feedstock prices go into freefall, the whole industry can become over saturated with mushrooming of solar module production facilities with low capital outlay. The counter argument is that when polysilicon prices decline drastically, demand should pick up at a very good rate in its turn and be able to absorb the excess solar module production. Trina is yet to adequately address this problem.

Trina is exposed to currency risks as most of their sales are denominated in Euros or US dollars with the rest in Renminbi (RMB) while most of their costs and expenses are denominated in US dollars and the rest in Renminbi. The risks are unhedged and affect the bottom line directly. In particular, during the 1st quarter of 2008, Trina reported $4M in such losses and for the 2nd quarter of 2008, the projection is for another $3Min the same category. The losses are primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. This is an ongoing business issue for Trina and hedging to neutralize such risks is the right strategy. They should implement such a plan as quickly as possible.

Trina Analysis:

1. Trina Solar (TSL) - Part 1 - Introduction.
2. Trina Solar (TSL) - Part 2 - Business Issues.
3. Trina Solar (TSL) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Trina Solar (TSL) – Introduction

Trina Solar a Chinese Solar module manufacturer incorporated in Cayman Islands had an initial public offering (IPO) of their American Depository Shares (ADS) on December 2006 – each ADS representing 100 ordinary shares. The follow-on offering was on June 2007. Combined they totaled roughly 11M shares. At IPO time, the shares traded at around $20 per share. In July 2007, following the announcement of several solar module contract wins in Europe, the share price peaked at $71 per ADS. The current relatively small float of only about 21M shares makes them especially volatile.

As elaborated in our article that compares vertically integrated solar manufacturers, Trina is one of the few fully integrated polysilicon based solar manufacturers. Their standard monocrystalline solar modules range from 160 watts to 185 watts and multicrystalline solar modules range from 190 W to 220 W in power output. Initial production lines were for monocrystalline solar modules, and in November 2007, production began on multicrystalline modules. Though multicrystalline modules tout lower production costs it is to some extent offset by lesser conversion efficiency. For e.g., Trina’s conversion efficiency for monocrystalline and multicrystalline-based products are expected to approach 17% and 15.3% respectively by the end of 2008.

Trina Solar enjoyed tremendous growth in the past five years. Revenue soared from just over $2.7M in 2003 to over $300M in 2007 accounting for an impressive compounded annual growth rate (CAGR) of about 225%. This growth rate is expected to be maintained. Revenue for 2008 is projected to be 770-808M range representing a year-over-year (YOY) growth in the range of 155-170%. For a billion dollar company, growth in those ranges is remarkable. Net margin however has come down from the 20% range in 2003 to the low-teens in 2007 and is anticipated to remain low for 2008.

Polysilicon the base raw material used in the integrated value chain by Trina Solar has seen a multi-fold price hike from the $50-60 range to the $400 range due to increased demand. This has led most solar companies to procure polysilicon from silicon recycling facilities. By using a proprietary mixing mechanism they are able to fabricate solar modules of the same specifications as those produced by the virgin polysilicon sourced modules. This held down the costs during the initial months, but when recycled polysilicon pricing amplified in its turn, all associated advantage disappeared. The Holy Grail with regards to poly pricing is in the offing as a large number of poly production plants are expected to come online in the 2009-2010 timeframe improving supply. Margin contraction over the years can be fully traced back to an increasing pattern of polysilicon sourcing costs combined with a relatively steady average selling price (ASP).

Trina Analysis:

1. Trina Solar (TSL) - Part 1 - Introduction.
2. Trina Solar (TSL) - Part 2 - Business Issues.
3. Trina Solar (TSL) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

LDK Solar (LDK) – Part 3 - Outlook

LDK is valued around eighteen times this year’s earnings estimate. The basis for this valuation is that gross margins could pull back to the teens or lower in 2009 should LDK fail to produce polysilicon from their new plants. Though this is a possible outcome, its probability is very low and of the possible outcomes, many analysts are going by the worst-case scenario. Below is a look at the possible outcomes for 2009:

Gross Margin Assumption	Poly Production Assumption	Earnings/Share
10-15%*	Zero	0.85-1.7
20%**	Zero	2.55
25%***	Zero	3.4
30%	50%	4.25
35%	75%	5.10
40-45%****	90-100%	5.95-6.80

• *Assumes very high silicon acquisition costs in the spot-market along with ASP weakness.
• **Assumes the low end of LDK’s 2008 gross margin projection for 2009.
• ***Assumes the high end of LDK’s 2008 gross margin projection for 2009.
• ****LDK’s projected gross margins for 2009

The primary competition for LDK is from alternate PV cell technologies, specifically, thin-film solar manufacturers boasting a cost advantage as exemplified by the gross margins realized by First Solar (FSLR). Newer technologies that leapfrog current technologies will continue to be a threat and LDK will need to combat this by aggressively pursuing R&D moving forward.

LDK’s challenge in the short-term is managing growth, achieving polysilicon production targets, and funding capital requirements efficiently. Long-term, as alternative technologies become more profitable, a migration strategy should be in place enabling its manufacturing base to be shifted to newer technologies on an on-going basis. The company has already experienced a shift in their production base, as their recycling factory will get shutdown as the new poly production lines come online.

To recap, given the low valuation and the reasonable chance of explosive profit growth in the future, LDK Solar (LDK) is a suitable stock in the long-term growth portion of diversified portfolios.


LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

LDK Solar (LDK) – Part 2 – Business Issues

LDK’s wafer capacity improved from 105MW EOY 2006 to 420MW EOY 2007 and is anticipated to nearly double annually going forward. Shipments for the year 2007 stood at 260MW and again the expectation is to almost double that in 2008. Gross margin slipped from the industry leading level of 39.3% for 2006 to 32.5% for 2007 and is projected to settle on a range of 25-31% in 2008. Declining gross margins are directly related to silicon sourcing costs. Polysilicon costs increased sequentially from an average of $146/kilo for the first two quarters to $176/kilo in the 4th quarter. The company has ambitious plans to rein in those costs to $60/kilo range as poly production gets sourced internally. Gross margin is projected to reverse to the low 40’s then. However LDK is vague on the manner they arrived at these projections. The company needs to outline reasonably conservative estimates for gross margins and provide clear indications to analysts as to how they model it.

LDK’s headcount stands at 6316 at the end of the 4th quarter with previous milestones being 5409 at the end of the 3rd quarter and around 3000 at the time of the IPO. The headcount is expected to cross 10000 in 2008. This level of hiring is fast paced even for LDK’s remarkable growth projection. The growth rate on headcount has to ease going forward for gross margins to reach up to the projected range as they source polysilicon production internally.

LDK’s capital requirements for 2008 are in the range of $600-$800M. The following summarizes LDK’s current plan to meet this funding requirement:

1. $85M cash on hand.
2. $200M expected earnings for 2008.
3. Customer prepayments of $400M expected for 2008.
4. About $350M available from credit facilities. One $100M 5-year credit facility and a $500M line of credit under 1-year revolving terms from which about $250M is drawn already.

LDK has been punished on negative analyst perception. As seen in the 4th quarter analyst call, some of the analysts have been openly displaying animosity and disbelief in these calls. Further, LDK needs to spruce up the manner in which these calls are currently conducted and maintain a professional level.

Solar module pricing is expected to be slashed in the coming years as the industry strives to achieve grid parity without subsidies. The demand for PV modules tracks government subsidies and so a scenario can be visualized where margin squeezes occur following demand drop-off as subsidies get reduced moving forward. That situation should continue till around 2011 when solar module pricing starts to approach grid parity in areas that have both high-energy costs and lot of sunlight. As grid parity approaches, solar module demand should explode and LDK along with other solar businesses that survives the uncertainties should enter their explosive growth phase. That phase should last at least a decade.


LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

LDK Solar (LDK) – Part 1 - Introduction

LDK Solar (LDK) a manufacturer of multi-crystalline solar wafers had its Initial Public Offering (IPO) on May 31, 2007 and 17.384M shares were offered at $27 per share. In the subsequent months the price elevated to peak at $73.95 on September 27, 2007 until allegations of an inventory discrepancy surfaced. Ever since then, the stock has experienced high volatility along with a seesaw ride.

The inventory allegation stems from the fact that the company considers scrap silicon lacking immediate use as part of its inventory. LDK’s contention is that the expectation is for the company to use its entire inventory, and deferred use as such does not call for a write off.

An independent audit cleared LDK off the allegations, but the issue resurfaced after LDK introduced a new classification for “inventory to be processed beyond one year” in its 4th quarter report. Several analysts sounded skeptical about this transformation in reporting during the conference call following the 4th quarter report.

LDK’s operating niche is right at the beginning of the photo-voltaic (PV) module supply chain. Currently, the company manufactures wafers from a raw material mix of virgin and recycled polysilicon. This setup is expected to switch to a structure where polysilicon is also manufactured internally. Gross margins are expected to soar as the production ramp-up bears fruition. Operating in the polysilicon and wafer production areas in the photo voltaic (PV) module supply chain translates to a higher margin and is a coveted position when compared to PV manufacturers operating in the cell and module businesses.

Despite the negative attention associated with the inventory issue, LDK has managed to snag numerous large long-term wafer supply contracts. LDK was able to include favorable terms as ‘10% prepayment’ and ‘fixed pricing’ in some of these contracts. Below is a summary of LDK Solar’s recently announced wafer supply contracts:

Announcement Date	Company	Term	Initial Shipment	Comments
02/22/2008	Hyundai	8 years	Late 2008	More than 450MW total with prepayment for a portion of contract value.
01/17/2008	Neo Solar Power (NSP)	10 years	2009	More than 500MW total with 10% contract value prepayment and fixed pricing.
12/10/2007	Q.Cells	10 years	NR	More than 6GW. 10% prepayment.
10/22/2007	Canadian Solar	3 years	50MW in 2008	Total Value of about $540M
10/16/2007	Solarfun	3 years	NR	Fixed pricing with a total value of about $270M
10/10/2007	ChinaLight	3 years	NR	Fixed pricing with a total value of about $135M

LDK has indicated that 80% of polysilicon requirements for 2008 have been secured. This projection includes 5% in-house production, which takes the output assumption to be around 175MT, and inline with its 2008 guidance of polysilicon production of 100MT-350MT. This is another area that has left various analysts unconvinced. Their argument is that buildup for polysilicon production has historically taken much longer and that these projections are overly optimistic.

To compensate for about 880MT of polysilicon, LDK’s plan is to employ framework contracts with fixed quantities, but at a discount to market prices. The company hopes to supplement this with spot market, auction, and recycled silicon purchases on an as-needed basis.

LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

LDK Solar (LDK) Q4 Call –Incompetence & Animosity All Around!

LDK Solar (LDK) announced Q4 results on February 25th that beat analyst estimates on both revenue and earnings. The forward guidance was a little light compared to analyst projections. The stock price went up during after hours, only to settle after the earnings conference call. This is a repeat scenario of the occurrences after third quarter results were announced too.

Below is a look at some exchanges during the conference call that highlights the incompetence of management and analysts alike.

Exchange 1 – Jesse Pichel, Piper Jaffrey:

Jesse Pichel, Piper Jaffrey: You said Raw Material is at 856 MT. What is that number when adding transit consignment and production. If I divide the inventory figure by $176, I get about 1900 MT.

Jack Lai, CFO: Explained the fact that Raw Material does not equal inventory and the fact that it is a futile exercise to convert back from ingot numbers and come up with an “adjusted” raw material number.

Jesse Pichel, Piper Jaffrey: What was the free cash flow for Q4? Can you update us on capex for ’08? How much for ingot/wafer operation and for the poly plant?

Jack Lai, CFO: We are operating cash flow positive.

Jack then went on to explain certain spending plans expected for the coming year and the company’s funding plans without going into specifics…

Jesse Pichel, Piper Jaffrey: Can you quantify it? – You said the expenditures for the poly plant would be around $400M and $200M for wafer capacity.

Jack replied with more capex details without committing to specifics. Jesse at this point asked whether the original answer was that LDK is cash flow positive or operating cash flow positive. Jack confirmed they were operating cash flow positive. Jesse then asked whether Jack had that number. Jack said we could discuss it after the call. Jesse seemed to push the idea away by murmuring something and then went on to ask about the item on the balance sheet that says “inventories to be processed beyond one year”. Is it included in the inventory number and is it in the Cost Of Goods Sold (COGS) calculation? Jack replied with a random answer about purchasing difficulties. Then went on to present the fact that the silicon powder won’t get used for a year and that is the reason that the company decided to put it under non-current assets and it is not in COGS calculation.

Exchange 2 – Cheryl Tang, Goldman Sachs:

Cheryl Tang, Goldman Sachs: a) Why lower 2008 guidance?, and b) Who takes the risk for breakage rate with thinner wafers?

Nicola Sarno, VP operations: Breakage rates are inline. Some customers cannot do this. The important thing is industry moves in that direction to saves silicon.

Jack chipped in by stating that they are projecting more than 100% growth and are setting the right expectation to meet or exceed guidance.

Cheryl Tang, Goldman Sachs: What is the subsidy per watt?

Nicola Sarno, VP operations: We don’t have that number. 40c/Kilo-watt is the agreement with the government. Everything above that is subsidy. For poly, it will be 75c/Kilo-watt.

Exchange 3 – Satya Kumar, Credit Suisse:

Satya Kumar, Credit Suisse: a) Will it perhaps be more conservative to write down above 1-year inventory instead of capitalizing it? Will you consider taking a write down? Also, has the auditors signed off on this practice?

Jack Lai, CFO: Accounting is normal. Because of tightness in market, when we have an opportunity to purchase, we buy it independent of whether we need it immediately.

Another question about inventory vs raw material reconciliation followed and they agreed to discuss it offline.

Satya Kumar, Credit Suisse: In the second line item on the asset side of the balance sheet, “pledged bank deposits”, is it available for Capex?

It depends on maturity. It is spread out as 3-month, 6-month, 9-month, and 1-year maturity levels and as they mature the cash becomes available for immediate use.

Comments:

LDK projected EOY 2008 polysilicon capacity at 7000 MT and EOY 2009 capacity at 16000 MT. Given that LDK’s expenses are very high for polysilicon procurement, it is high time analysts modeled scenarios that attempt to predict profit margin going forward based on the fact that polysilicon will be sourced internally. Interestingly enough, none of the analysts showed any interest in getting details on polysilicon production costs. The call got bogged down on trivial matters and questions that pointed to backward-looking analysis. Granted that, coming up with forward-looking scenarios accurately is not very easy to do but not even attempting to discuss such issues is incompetence.

Jack Lai, the CFO demonstrated a tendency to give unrelated answers. When responding to certain questions he came back to the point later in the reply but on other occasions, analysts ended up having to prod him. Jesse Pichel, the Piper Jaffrey analyst couldn’t hide his animosity as evidenced in the latter part of the exchange (Exchange 1). Further, the questions he posed about inventory vs raw material and whether LDK was cash-flow positive were both irrelevant: The former was an attempt to spawn doubts about inventory accounting and the latter a veiled attempt at suggesting LDK will be faced with a cash crunch later this year. He should know that cash won’t be an issue given LDK’s cash-on-hand, profitability, and pledged bank deposits. Cheryl Tang, the Goldman Sachs analyst was especially clueless with her questions about who is responsible for the risks associated with increased breakage rates with thinner wafers. Nicola Sarna, the VP of operations ended up having to give a lecture on industry direction and the need for thinner wafers. Satya Kumar, while sounding innocuous was ruthless suggesting the company should consider writing off the inventory slated in the ‘more than one year’ category.

The inventory issue, which first surfaced after the whistle blowing by Charley Situ, was brought up indirectly by a number of analysts. Also, Jesse Pichel put out an analyst note suggesting, "This classification would appear to validate some earlier investor fears that the company holds unusable inventory". This suggestion only confirms Jesse’s preconceived bearishness, given the company elaborated the process by which inventory is categorized.

To summarize, LDK Solar needs to clean up its act when conducting these calls. Also, given the open animosity certain analysts are demonstrating, LDK Solar might be better off giving less verbose answers rather than trying to elaborate. Further, it might be a worthwhile exercise for the company to look at who represents them in these calls and making sure it is conducted in a professional manner.

An analysis of LDK Solar based on the public information available will follow.


Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Owning Cypress Over SunPower Makes Sense; EMC Over VMware Doesn't

Cypress Semiconductor Corporation (CY) and EMC Corporation (EMC) have control over the majority of the outstanding shares of their spin offs as of EOY 2007. Cypress controls 51% of SunPower Corporation’s (SPWR) and EMC holds 86% of VMware,’s Inc. (VMW) outstanding shares. SunPower, which Cypress had purchased when it was a very small PV manufacturer, was spun out November 2005. VMware Inc., which EMC purchased for $625M in 2004, was spun out on August 2007.

The shares of SunPower have appreciated well over 150% since the spin-off in spite of the recent sell off. VMware shares more than doubled by the end of October and has since come down to the price at the time of the IPO. The current market capitalization of $6B and $22B for SunPower and VMware respectively exemplify how favorable these acquisitions have been for the parent companies.

The media has constantly speculated on the advantages of owning Cypress and EMC over their spin-offs SunPower and VMware respectively. The perceived benefits are lesser volatility and cheaper ownership. Below is an analysis that assumes a conservative valuation for the parent companies (at one times the revenue) and calculates the discounts realizable on the spin-offs by buying the parent companies instead of the spin-offs:

Cypress Semiconductor Corporation (CY):

Data Point	Formula	Value
Enterprise value of CY at one times 2007 revenue	A	$821.6M*
Enterprise value of CY	B	$3.07B
Enterprise value of CY attributable to its ownership of SPWR stock	C=B-A	$2.25B
Enterprise value of SPWR	D	$5.9B
Percentage of SPWR’s outstanding shares owned by CY	E	57
Enterprise value of CY’s ownership of SPWR stock	F=D*E	$3.36B
Percentage Premium/(Discount)	G=100*C/F-100	(33.06)

*Total 2007 revenue including SPWR was $1.6B.

EMC Corporation (EMC):

Data Point	Formula	Value
Enterprise value of EMC at one times 2007 revenue	A	11.9B*
Enterprise value of EMC	B	$30.96B
Enterprise value of EMC attributable to its ownership of VMW stock	C=B-A	$19.06B
Enterprise value of VMW	D	$21B
Percentage of VMW’s outstanding shares owned by EMC	E	86
Enterprise value of EMC’s ownership of VMW stock	F=D*E	$18.06B
Percentage Premium/(Discount)	G=100*C/F-100	5.54

*2007 total revenue including VMW was $13.23B

To recap, owning Cypress over SunPower makes good financial sense. One gets to own a mid-cap semiconductor company at one times the revenue and get exposure to the red-hot solar space at a significant discount. However, EMC in place of VMware is a risky option.

Comparison Of Vertically Integrated Chinese Polysilicon Based Solar Module (PV) Manufacturers

Vertical integration in this context refers to integrating the different steps in the Polysilicon Based Solar Module production process. Module production involves four steps in chain event:

• Use the raw material sand (SiO2) to produce a very pure form of silicon called polysilicon.
• Use polysilicon to produce wafers and ingots.
• Use wafers and ingots to produce solar cells.
• Use solar cells to produce solar modules.

Manufacturers are yet to immerse in vertically integrating the whole process. There are a few getting their feet wet - Trina Solar, Yingli Green, Suntech Power, and Canadian Solar.

• Trina produces solar modules from polysilicon and has plans in the offing for very large scale polysilicon manufacturing.
• Yingli also has business plans along similar lines. They are yet to announce any plans to produce polysilicon.
• Suntech is focused on the wafer to module business currently.
• Candian Solar started out focused solely on producing solar modules from cells but since then has expanded to wafer to solar cell production line and has announced plans for a polysilicon to wafer and ingot line.

The table below compares these 4 manufacturers:

Manufacturer	Suntech Power (STP)	Trina Solar (TSL)	Yingli Green (YGE)	Canadian Solar (CSIQ)
Level Of Vertical Integration as of EOY2007 (Announced)	Wafer to Module 100% Integrated Business	100% Integrated Ingot & Wafer, Cell, and Module Business	100% Integrated Ingot & Wafer, Cell and Module Business	Cell Capacity at 25% of Module Capacity. No Ingot & Wafer Production Capacity
Procurement for 2008 projected production	Longer-term wafer contracts with fixed price to account for most of the production.	70% raw material is in place.	Unknown – majority of raw material may be in place.	90% raw material in place.
Projected Vertical Integration going forward	Same	Same. Announced Polysilicon production plant board approval.	Same	Cell and Ingot/Wafer capacity to reach 60% & 10-15% of module capacity respectively by summer 2008.
EOY 2007 Module Capacity (Announced)	540MW	150MW	200MW (Q3 2007)	400MW
2007 Module Shipment Expectation	365MW	75-80MW	135-140MW	80MW
EOY 2008 Module Capacity (Projected)	1GW	350MW	400MW	400MW by Summer 2008.
2008 Module Shipments (Projected)	>530MW	>200MW	>275MW	>200MW
2007 Revenue Expectation	$1.3B	$290M	$500-510M	$285-295M
2007 Net Earnings Expectation	$160M	$32M	$54.61	($2.7M)
2007 Per Share Earnings Expectation	$1.04	$1.38	$0.43	($0.10)
2007 Net Profit Margin	12.3	11	10.92	(0.95)
2008 Revenue (projected)	$1.9-2.1B	$650-750M	$800-900M	$650-750M
2008 Net Earnings (Projected)	$254M	$71M	$107M	$30M
2008 Per Share Earnings (Projected)	$1.65	$3.09	$0.84	$1.11
2008 Net Profit Margin (Projected)	13.37	10.92	13.38	4.6
Forward P/E	38	12.3	29	13.11

Suntech has the edge in most aspects with the closest rival Yingli lagging well below 50% in terms of integrated capacity. On the raw material procurement side, Suntech has procured most of its needs through long-term supply contracts. Yingli may be close too although the exact figures remain unannounced. Trina is at 70% for 2008 and may encounter high spot pricing to procure the rest of the raw material. Canadian Solar claims to have procured 90% of the raw material. Raw materials needs are different for each company. For Canadian Solar it is a mixture of polysilicon, wafer/ingots, and solar cells, for Yingli and Trina it is just polysilicon and for Suntech it is wafers.

Summary:

Since the solar modules produced by these manufacturers are technically similar, the difference in profitability is largely determined by the raw material acquisition costs and efficiency in the production supply chain. Vertical integration along with raw material acquisition through long-term supply contracts is the solution the bigger manufacturers are opting for. The downside to long-term supply contracts is the risk of raw material prices falling as supply approaches or exceeds demand.

There are a couple of business risks associated with the whole group:

• Competition from pure-play solar manufacturers.
• Competition from solar manufacturers that use a material other than polysilicon as the base raw material.

Pure-play solar manufacturers have to their advantage the ability to concentrate on one step thereby realizing better efficiency and ultimately better profit margins. Such solar companies include MEMC Electronic Materials (WFR) and LDK Solar (LDK) in the polysilicon and wafer production business and JA Solar Holdings (JASO) and China Sunergy (CSUN) in the cell to module business. Eventually, some of these manufacturers may become part of vertically integrated businesses.

Competition using raw materials that are alternatives to polysilicon comes from manufacturers such as First Solar (FSLR), which uses cadmium telluride (CdTe) and Ascent Solar (ASTI), which uses copper-indium-gallium-diselenide (CIGS). There are also a number of other technologies that are in early stages of development. First Solar has profit margins well beyond the polysilicon based producers because of lower raw material and production costs. The projections are for the company to grow at an even faster rate keeping cost advantages intact. However this is a moot point. The real challenge for the polysilicon manufacturers is to reduce costs in the production chain swiftly to compete with all such technologies successfully. The biggest advantage that polysilicon manufacturers have is the abundant availability of raw material at the very basic level – silica (found as sand or quartz)

Canadian Solar and Trina Solar have the biggest upside, given the low forward P/E. An announcement regarding procurement of the remaining raw material requirements at reasonable prices for 2008 should allow Trina Solar to reduce the gap in valuation. Canadian Solar is projected to have very low net profit margins. Skepticism surrounding the net profit margins the company will realize going forward is a major reason for the valuation gap.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis.
2. LDK Solar (LDK) - Stock Analysis.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ).
4. Suntech Power Holdings (STP) - Stock Analysis.

Suntech Power Holdings (STP)– Part 3 – Preferring Manufacturing Expertise over R&D

The following table recaps Suntech’s growth since its IPO on 12/14/2005:

Year	2005	2006	2007(P)	2008(E)
Revenue	226M	598.9M	1.3B	1.9B
Net Income/Share	0.31	0.68	1.01	1.6
EOY Production Capacity (MW)	150	270	480	600
Production Output (MW)	67.7	160.1	355	NE
Gross Margin	30.3	24.9	21	NE

• NE – Not Estimated.

Growth in Revenue, Net Income, Production Capacity, and Production Output are all expected to shrink next year. Production Capacity and Output growth are expected to be in the 25% range down from about 50% this year. Gross margin has buckled over the last two years as raw material prices as well as competition increased. Suntech’s growth rate should be in the vicinity of 25% annually, given the capacity projections for 1GW by 2010. This would give the stock a PEG ratio well above 1, qualifying as a fairly rich valuation.


Suntech’s products exclusively based on PV cells made of thin film deposits of silicon semiconductors are second generation technology. Globally, research is underway on the third and fourth generation PV cell technology that could potentially leapfrog Suntech’s technology in both efficiency and price. However, commercial viability of such products is projected to be years away and so this threat can be categorized as a wildcard scenario. To offset such threats, a strong R&D commitment is critical. The table below shows how Suntech’s employee count is split up across the organization:

Function	Employee Count	% of Total
Mfg. & Engg.	2263	68.9
QA	323	9.8
G&A	270	8.2
P&L	142	4.3
R&D	202	6.2
Mktg. & Sales	82	2.5
Others	2	0.1
Total	3284	100

6.2% is a number insignificant for a business that needs very strong R&D. The only silver lining is Suntech’s relationships with certain universities doing research in newer technologies.

All in all, given the magnitude of Suntech’s business issues, under-allocation of resources in the R&D area, and the rich valuation, a long-term investment in Suntech can be expected to yield only average returns.

Suntech Power Holdings Analysis:

1. Part 1 - A Solar Industry Behemoth In The Making.
   
2. Part 2 - Business Issues.
3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Suntech Power Holdings (STP)– Part 2 – Balancing Global Sourcing & Delivery

Recently in an interview with Motley Fool’s Rich Smith, Suntech CEO Zhengrong Shi confirmed that the company is on track to achieve a production capacity of 1GW by 2010. This translates to a growth rate of about 28% in production capacity in the upcoming 3 years. Further, lowest-cost production and the best relative technology were touted as competitive advantages. Shi was especially bullish in the company’s long-term prospects. His vision of Suntech claiming 2% of China’s energy needs by the year 2020 is indeed high octane. Based on that, SunTech’s revenue from China alone in the 2020 timeframe will be in the $12 Billion range. These claims are overly optimistic given China’s energy strategy is all but clear. Hydroelectric power generation might turn out to be a big part of renewable energy strategy, per the indications from the National Development and Reform Commission (NDRC) in China. A bear-case scenario zeroing in on the potential overcapacity and demand slowdown in Germany following reduction in subsidies is available at cbsmarketwatch.

The following table is a look at the geographical mix of Suntech’s revenues:

Year	2004	2005	2006	2007*
Germany	72.1	45	42.5	54
Spain	2	8	20.6	34
Rest of Europe	15.3	18.4	7.3	NC
China	7.8	25	21.7	NC
USA	NC	NC	NC	7
Rest of the world	2.8	3.7	7.9	5

*2007 numbers are as of 2nd quarter.

At the EOY 2006, Germany accounted for 42.5% of the revenues and SolarWorld AG singly accounted for 21% of it. German sales based on a percentage of total revenue are down from 72.1% in 2004. Sales in Spain picked up significantly to compensate for part of the German slowdown. The 2nd quarter 2007 financials available at call transcript at SeekingAlpha indicates of a further shift in the revenue base. Germany and Spain together accounts for 88%, USA accounts for 7% and the rest of the world including China accounts for the remaining 5%. The constant shifting is a result of the company attempting to track government subsidies globally.

Pricing power is a big issue for Suntech because the industry relies on government subsidies. Customers largely base buying decisions on the economic feasibility of installing the PV module. The installed cost of the company’s PV modules is upwards of 35¢ per KWh. This is well above the local utility rates in most areas with a few exceptions (e.g Hawaii). Another factor impacting Suntech’s pricing power is the average sunlight. For the business model to remain viable, Suntech needs to factor in these variables when deciding on global expansion initiatives.

Silicon wafer shortage coupled with the company’s dependency on it as the base raw material is another challenge for Suntech. To its credit, Suntech has been aggressive in securing long-term supply contracts. Currently 50% of the supply comes from supply contracts and the remaining 50% from the spot market. This supply is projected to grow to 80% from supply contracts by 2010. This strategy works very well in an environment of increasing raw material prices, but can prove disastrous once the trend reverses. Wafer shortage is expected to ease with the acceleration in large scale production in China. The following table summarizes the projected minimum obligations from supply contracts (taken from Suntech’s 2006 annual report) and is an indication of the significant risk associated with the strategy:

Year	Minimum Obligation
2007	327,093,000
2008	518,089,000
2009	$633,120,000
2010	$750,496,000
2011	$868,622,000
Thereafter	$5,118,987,000
Total	$8,216,407,000

The MSK acquisition in July 2006 was expected to pave way for Suntech’s entry into the BIPV (Building Integrated Photo Voltaic) space globally as well as for its expansion in Japan. The 2nd quarter 2007 report indicates that BIPV revenues along with sales in Japan are insignificant. The global revenue from BIPV has the potential to accelerate in the coming years, but growth in Japan is a moot point.

Given the magnitude of the issues, it is reasonable to conclude that there is above average risk in the business. The significant role of external factors should not be ignored when making a long-term commitment.

The last part of this article will focus on Suntech’s investment outlook.

Suntech Power Holdings Analysis:

1. Part 1 - A Solar Industry Behemoth In The Making.
   
2. Part 2 - Business Issues.
3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

Solar Green Power – Should you install a Photo Voltaic (PV) module in your house?

A couple of factors need to be considered to help decide whether it makes sense to install a PV solar panel:

• Are you really going greener by doing so?
• Does it make economic sense and if not, should you still go for it?

In most cases, the answer to the first question will be in the affirmative. However, there are areas where the local utility actively discourages use of solar PV panels. Their motivation is three-fold:

• It may be prohibitively expensive in certain areas when compared with the rate the utility charges, especially in areas where sunlight is a premium. This has the unsavory effect of the utility reimbursing you only a small portion of the cost encountered to “sell” the excess power you generated back to the grid – a no-win situation,
• The local utility may already have a green power strategy in place that is more cost-effective and greener than residential PV panels, and
• Local utilities may not participate in state rebate programs making you ineligible for state sponsored buyback rebates.

The second question requires playing with a bunch of numbers in order to arrive at an informed decision. Knowing the numbers for each of the following is key to that measure:

a) Your yearly energy usage in Kilowatt-hours (KWh). This can be obtained from your utility bill.
b) The cost per KWh the utility charges for your electricity. This can also be obtained from your utility bill. The calculation can get a little tricky if the rate is tiered. Dividing the total amount you paid the utility in the last year by the Kilowatt-hours used will be ample for most cases.
c) Expected output in KWh per installed Kilowatt-peak (KWp). Your local utility website or the PV installers should be able to provide this information.
d) Cost per installed Kilowatt-peak from a PV installer in your neighborhood. Ensure that the installer does not take into consideration the federal and state rebates.
e) The size of the PV system needed to meet all your electricity needs. Dividing the number from (a) above by the number in (c) gives you this number in KWp.
f) The dollar value of the federal and state rebates you may be eligible for.
g) Interest rate and the associated closing costs for a loan to fund the amount.


The following example using fictional numbers looks at how to use the above information to get to a cost estimate for any home:

a) Yearly Electricity Consumption: 3,200 KWh.
b) Cost/KWh: 13¢
c) Expected output per Kilowatt-peak: 1600KWh.
d) Cost per installed Kilowatt-peak: $9000
e) Size of the PV system: (a)/(c) = 2 KWp.
f) Total cost before rebates: (e)*(d) = $18000.
g) Total rebates ($2.8 per KWp State + $2K Federal) = $7600.
h) Total cost after rebates: (f)-(g) = $10,400.
i) Interest rate for a Home Equity Loan for $10,400: 8%.
j) Amortized cost/month of the loan over the expected life (assumes 25 years which is the standard warranty period) of the PV panel (Hint: Use an online amortization schedule calculator): $80.27.
k) Cost/KWh: (j)*12/(a) = 30¢.

The cost of solar panels in this example came out twice as expensive as the local utility rate. But, after the 25th year in operation, the power is virtually free till the solar panel reaches its end of life. Though from a peripheral point of view it might not make economic sense to install solar panels per the example cited, it might still be worthwhile to consider paying more especially if the utility is not using renewable sources to generate power. The cost will deviate from the number cited above, as the effect of the federal rebate is reduced if energy consumption is higher.

Here are several links to get educated on residential solar panels:

1. Portal to the world of solar energy.
2. Google Solar Panel Project (the picture on the side is of GooglePlex).
3. Solar Electric Power Association.
4. Wiki entry on Solar Cells.
5. Vote Solar.

01/2015 Update: Solar panel costs have come down tremendously over the last five years. Also, other intriguing options have become available as well. One very cost-effective option that helps reduce the higher marginal energy rates is a hybrid option whereby household lighting needs are met using DC LED light bulbs (much more affordable compared to AC LED bulbs that have the AC-to-DC conversion circuitry inside them)  connected to a low-power low-cost battery (a small 30AH battery can satisfy eight 10W LED bulbs easily) which in-turn is charged from a low-power low-cost solar panel. The overall cost of installation could be as low as one-tenth compared to a larger setup hooked up to existing AC wiring.


Related Posts:

1. Trina Solar (TSL) - Stock Analysis.
2. LDK Solar (LDK) - Stock Analysis.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ).
4. Suntech Power Holdings (STP) - Stock Analysis.


Last Updated: 01//2015. 

Suntech Power Holdings (STP)– Part 1 – A Solar Cell Industry Behemoth In The Making

Suntech Power (STP) is in the business of manufacturing and distributing solar modules. It is the largest provider of such modules globally. As illustrated below, the operating niche for STP is in the middle of the Photo-Voltaic (PV) supply chain. STP is dependent on suppliers to provide Ingots and Wafers, which are essential components in building its modules. The Ingot suppliers in turn depend on solar grade silicon suppliers. The modules produced at STP are then distributed to a variety of business partners including electric utilities, system integrators, installers, and distributors. These modules are used in the On-grid and Off-grid applications of PV systems.

STP is headquartered in Jiangsu Province in China with production sites in Wuxi, Luoyang, Qinghai and Shanghai (under construction). They manufacture both monocrystalline and polycrystalline cells. Monocrystalline cells are more expensive but the additional cost is offset by 4% better conversion efficiency. STP also produces building-integrated photovoltaic (BIPV) cells, which can replace existing roofing materials with solar panel roofs, enabling an integrated look with savings on building materials and installation.

In January 2007, the company announced commercial adoption of the ‘Semiconductor Finger’ technology that has a conversion efficiency of 18%. The major benefits of this technology include

• Use of lower grade silicon wafers
• Use of a smaller number of metal contact strips on the surface of the PV cells, which reduces shading from the sun leading to, increased conversion efficiency.

The 2nd quarter 2007 financial transcript at SeekingAlpha indicates an upcoming advancement in the same area nicknamed Pluto replacing the ‘Semiconductor Finger’ technology as quickly as possible.

In May 2007, the company announced the construction of a solar cell plant that will use microcrystalline silicon thin film on a glass substrate. The major advantage of this technology is that it is expected to use only about 2% of the solar grade silicon used by existing mono and polycrystalline cell manufacturing technologies. The compromise is on the conversion ratio of the end product. It is expected to be in the 6-9% range, which is significantly below the 14-18% conversion ratios of the existing mono and polycrystalline cells. This product will then be used in the BIPV cells manufacturing process essentially increasing its stake in the BIPV value chain. BIPV currently holds only a negligible percentage of SunTech’s sales. Its growth is expected to accelerate as adoption in the residential market picks up in inverse relation to the Average Selling Price (ASP) coming down.

On the wafer supply side, the company entered into a pivotal $6 billion contract over 10 years with MEMC in July 2006. In its wake, the company has been actively signing smaller contracts with other suppliers including the one with Hoku Scientific in June 2007.

With the supply contracts in place, STP is in command to meet its supply needs. The new technologies being introduced should enable it to remain price competitive. Further, from STP’s press releases, it is obvious that there is high-demand for its products. Suntech should continue growing at a reasonable pace for the foreseeable future.

Suntech Power Holdings Analysis:

1. Part 1 - A Solar Industry Behemoth In The Making.
   
2. Part 2 - Business Issues.
3. Part 3 - Preferring Manufacturing Expertise Over R&D.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.