Applied Materials (NASDAQ:AMAT), with a 16% sequential increase in its Q2 2012 revenues, raises hope for a revival in the semiconductor equipment spending (See Our Article – Applied Materials Earnings Raises Hope For a Revival in Equipment Spending). Whereas most of the company’s divisions saw a sequential growth, reinforcing our belief of a revival, the energy and environmental solutions division was a cause of concern with an almost 62% sequential decline in revenues.
As the industry copes with an excess manufacturing capacity, Applied plans to move its solar equipment plant to China to cut down costs. The Energy and Environmental solutions (EES) division contributes around 7.5% to our price estimate and any significant changes in the solar industry could have a marginal effect on our price estimate. Applied competes with other semiconductor equipment manufacturers such as ASML Holding N.V. (NASDAQ:ASML), Tokyo Electron and Lam Research (NASDAQ:LRCX).
Solar Market Adjusts to Excess Manufacturing Capacity
The solar market witnessed a period of boom with years of government subsidies boosting the global installed capacity of solar-photovoltaic (PV) modules, consequently leading to a decline in prices. New producers including China rushed into the market leading to an oversupply in the industry. However, with a slowdown in the recent past, demand has failed to keep pace with increased supply putting downward pressure on margins. Additionally, the government continues to scale back support as they cope with the aftermath of the economic crisis. This has prompted many manufacturers to cut back their operations and tackle increasing costs.
We believe that the current year will be a tough one for solar PV demand, with the global market declining to almost half its current size. However, we estimate the market to steadily increase thereon, regaining the $10 billion mark by the end of our forecast period.
Applied Materials to Move its Solar Equipment Plant to China
With falling subsidies and weak demand hurting the industry in Europe, Asia is expected to overtake Europe as the largest solar power generation hub, aimed by lower manufacturing costs.
After witnessing a steep decline in its orders, Applied announced a restructuring plan for their EES business to lower the cost structure and the operating breakeven level to approximately $500 million. It is scaling back its development program at the LED unit and is moving its solar equipment plant to China, to cut costs and tap into the growing appetite for clean energy in Asia. Though the industry is currently plagued by a situation of oversupply and falling demand, leading to steep decline in prices, the company remains positive in the long-term potential of the EES business.
These actions are expected to improve profitability across cycles while still allowing the company to invest in the products that are critical enablers for customers and for the long-term growth of the business. We forecast Applied’s share in the solar PV equipment market to remain around the current level of 12-13% throughout our forecast period.
Anti Dumping Import Tariffs on Solar Cells Manufactured in China
The imposition of around 31% anti-dumping duties on solar cell manufactured in China is expected to cause changes in the supply chain. While the Coalition for American Solar Manufacturing (CASM) claim that the unfair level of subsidies by the Chinese government gives leverage to Chinese manufacturers to dump their products at below cost of production in the American market, the Coalition for Affordable Solar Energy (CASE) feels that the subsidies fulfill the overriding goal to make solar energy as competitive as possible.
Low-cost Chinese panels have figured prominently in the race to make solar energy competitive with fossil fuels. Panel prices have dropped by 50 percent in just the past year, and the growth has spurred an installation boom that many in the industry feel is unsustainable if prices spike. How the import tariffs effect the solar industry demand and consequent prices, is yet to be seen.
We have a current price estimate of $14.46 for Applied Materials, a premium of almost 40% to the current market price