Tuesday, September 13, 2011

Grim times for current solar investors

I clearly picked the wrong 6months to be invested in solar. The news has been nonstop terrible since March. LDk now sells for $5/sh and JKS is just above $10/sh.

Pricing for solar panels fell from $1.85/W in Q4 2010 to $1.65/W in Q1 to $1.35/W in Q2 and is now around $1.20/W & hopefully stabilizing.

While the cost of the most important inputs into solar panels (cells, wafers, silicon) has also fallen in line with prices, it is very difficult for manufacturers to deal with such large pricing declines so quickly. Cracks are certainly showing...bankruptcies and factory closures in the US and Europe are increasing, and even the best run solar companies are missing earnings. Stock valuations are down across the board.

My favorite solars have been whumped. JKS is now trading around $10.30 (it dipped under $10 yesterday) down from $25 where I first bought it--and around $15 just a few weeks ago. JKS earned about $8 in the past year so the trailing P/E is now ~1.3, although clearly investors are no longer expect it to earn the same in the coming year. $4/sh is a fair guess for the coming year. In a difficult Q2 JKS earned $1.35/sh. Also the company has authorized, but apparently not executed, a $30Million share buyback. At current prices that is enough to buy back 13% of the 24 million shares outstanding, and over 25% of the float. About 50% of JKS float is shorted.

Meanwhile LDK is trading at $5/sh. LDK completed its $110 Million shareback last month (paying an average $5.9/sh), reducing sharecount by 18.7M or ~13%, and the float** by 30% (see note about float at bottom). Unfortunately LDK also missed Q2 by a suspiciously large fraction of revenue (28% or $200 million in one quarter) and reduced full year guidance by $1B and reported a loss in Q2 of 60cents/sh mostly due to ~$60M of inventory write-downs. All of the revenue miss can be attributed to selling (~125MW) fewer solar panels in the quarter. Q2 was a difficult quarter, but other chinese firms met revenues or missed by at most ~10-12%. So something odd is/was happening at LDK. The most charitable view is that LDK threw the quarter--i.e. missed on purpose, so it could complete its share buyback on the cheap. The less charitable view is that LDK is having difficulty selling its panels and will have extreme difficulty selling 700MW of panels that its 2011 guidance assumes (as of midyear it has only sold 200MW) and therefore will miss the coming quarters and FY as well. Given that LDK bought back around 10M shares AFTER it warned for Q2, I'm really hoping it threw the quarter and is now set for a strong second half. That said this type of "gaming" of investors, if that is what they did, hardly inspires confidence. Given the massive number of shares shorted (currently--after buyback--over 110% of the float), it is clear that both sides are fighting dirty with LDK.

Sentiment toward solars is terrible, almost nobody likes 'em, and even I'm finding it is hard to be optimistic near term. Most public solar firms had capital for about 1 yr of rapid growth--they all assumed they could raise money in secondary offerings down the line. At current valuations public solar companies that are able to, are repurchasing shares (i.e. valuations are so low the solar companies see their own shares are a better investment than continued rapid growth). This year solar companies have instead raised money from debt offerings (especially easy for the chinese solar companies). But as equity prices are pushed down by sellers (all the solars have extremely high short interest levels) it becomes more difficult to maintain, let alone raise debt levels. Unless share prices recover substantially within the coming year, solar industry capacity growth will grind to a halt--without debt or equity the companies cannot grow. At that point the stronger solar companies will devour the weak ones--and companies outside the industry may "buy in".

Total already bought 60% of SunPower earlier this summer. FSLR the leader in thin film solar (with ~1.6GW of production capacity; 8B market cap; 15.5 P/E), could nearly double its capacity by buying JKS (240M market cap; P/E < 1.5) while adding $100M (based on JKS making $4/sh in the coming year) to FSLR earnings--accretive by more than $1/sh to FSLR. I dont expect this to happen, but with less than 5% of their shares FSLR could add almost 20% to its earnings--I think this illustrates just how messed up valuations are.

Low panel prices are the ultimate cure for low panel prices. Reports are starting to emerge that installations in Italy and Germany are booming. Given that what initially set off the plunging prices was fears about subsidy cuts in Europe (which oh by the way--were rather mild), this is not surprising to me. Italy is on track to install 6.5GW this year (but as smaller rooftop installations rather than big solar farms) and although Germany had such a slow spring (<1GW installed) that it didn't even cut its subsidy as planned in July, regulators are now hinting that larger cuts must now be planned for January, meaning they expect 6GW for the year...together these two countries will buy 50% of the year's solar panel capacity (estimated at ~25GW globally). [There are much higer capacity estimates out there, like 35GW+ but those should be interpreted as the most that could possibly be installed by year-end of 2011. It usually takes a quarter or more for a company to fully ramp its capacity. Plus with lower panel prices, some of that "projected" capacity already is being pushed out.]
The US is on pace to install 2GW (double what it did last year) and China is now expected to install 1.5GW about triple last year--China just instituted a national FIT (subsidy) paying solar producers the equivalent of 15cents/kwh. While not overly generous by western standards, installation labor is cheap and the China FIT will put a floor under solar panel pricing. In the past two weeks Japan passed legislation to boost solar power, which will take effect in 2012--it is not known what the incentive level will be I'd guess closer to Germany's 22eurocents/kwh (~30cents/kwh) than China's rate, given higher cost labor and less average sunlight in Japan. Finally utilities in California started ordering solar in 250MW chunks in 2010 when solar panels fell below $2/W, with solar panels now in the $1.2/W range, I expect to see them ordering solar in 1GW chunks.

As a local example, at the end of 2009 Exelon paid $6/W for 10MW of solar installed on the former Pullman factory, by the end of 2010 that same 10MW would have cost $5.25/W installed. By the end of 2011 the same 10MW will cost under $4.50/W, and a larger size plant (50-100MW) will cost under $4/W. These are just massive price changes that take utilities time to adjust to...and so long as prices are falling each quarter...there is an incentive to wait and see where prices go next quarter (even if they are already at a good price today). About two weeks ago, a large solar developer that had been planning to build a 1GW solar thermal plant out west announced a change of plans to install the first 0.5GW as PV instead, and depending on how that goes may install the remaining 0.5GW as PV. Note that $4/W installed cost for the utility does not count the 30% fed tax credit meaning the utility only pays a net $2.8/W. And people often state that accelerated depreciation is worth another $0.80/W to a corporation. The result is that for ~$2/W investment utilities in the SW can buy an asset that will yield $0.40/yr (retail) for 20 years+ before counting the fact that solar panels produce power during peak hours (the electricity that by defintion costs them the most to produce).

**The reason the float is important is because legally short sellers can only sell borrowed shares and the freely traded float (i.e. outstanding shares not held by company insiders or institutional investors) is the usual source for borrowing these shares. Over 37M LDK shares are now reportedly sold short, suspiciously close to the 37.5M shares remaining in the float following the buyback. Another words every share that can be legally sold short has been. In any case it seems almost certain that more shares are actually sold short than are reportedly sold short. For the past 3 weeks LDK shares are on the Reg SHO list, which means that more than 5% of the outstanding shares have "failed to deliver". If naked short selling is occurring, when someone sells a stock without first borrowing the shares, they have no shares to deliver to the person buying the shares and therefore "fail to deliver" shares to the buyer. Naked short selling is illegal and if the SEC were a competent regulatory body it would prosecute this. 3 weeks (stocks typically settle in 3 days) on the Reg SHO list is basically the smoking gun that proves the crime is taking place. However, the SEC may not feel compelled to protect shareholders in a Chinese firm--since LDK shares are listed on the NYSE that shouldn't matter--or it may be understaffed or any number of reasons why the SEC has been shown not to work in the interest of shareholders.


At 10:21 PM, Blogger Unknown said...

Very good analysis on the demand and stock side. That naked short sell is obviously both illigal and conspiratorial - International Finance appears to be trying to kill solar with illegal stock attacks, or if not kill it then starve it to buy control very cheaply. The problem for these criminals: Chinese companies are the real deal and can survive this manipulation. Further, their complaints to the Chinese government may stimulate investigation. Meanwhile, STP is converting its production to its ownw new thin-film near-mono-crystal panels that should allow it to approach $1/W in silicon-based panels. And as China ramps demand, the installation price will drop, with standards and eventually automation.

By the way, the illegal stock attacks to undermine new industries is a common technique by the International Finance powers. Railroads, canals, oil, autos, merchandizing, all new industries have been "squeezed to debt", with control passing to conspiring lenders. China is the new part to this - can China help its PV industry weather financial (and soon legal, patent and trade)attack after attack?

At 8:54 PM, Anonymous Anonymous said...

Hello Daniel,

Thanks for the insight into the solar equities and Jinko Solar's performance. I had also invested a bit heavily in Jinko Solar in the first week of August, which has demonstrated solid growth in profits and revenues on its income statement. Even at the time (under $19) it seemed quite under valued relative to most solar product manufacturers (SOL, TSL, STP LDK etc..) especially in regards, to earnings per share and P/E. It was rated as a buy or overweight by 8 out of 9 analysts, and even today,they all have price targets that are substantially higher (mid 20's)than current trading levels.

At first, it seemed as if the rapid decline in the stock price was just due to market forces:
-debt crisis in Europe/US
-subsidy reduction
-Plunging prices of panels and polysilicon

However, I never considered the impact of the high short interest. It is diminishing the value of solar stocks to unprecedented levels. JKS hit a low of 8.86 in the after hours of trading on Sept 16. If naked short-selling or something of this sort is occurring, then how can natural market forces ever counteract this effect and restore the stock price to a reasonable and fair valuation.

Will the panic sell-off and short selling ever come to an end?

Should investors go long on JKS for months/quarters/years to come or cut their losses and move on now? (just asking for personal opinion)

Please respond to my comment on this blog post and let me know where you stand on this issue.

At 11:06 PM, Anonymous Solar Panels said...

Solar Energy is sparkling, and renewable that helps to protect our environment...

At 12:23 PM, Anonymous farmland investments said...

And Solyndra is not helping matters. What a disaster that was!


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