How Making A Dent In Rooftop Solar And China Could Result In A Significant Upside For First Solar

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Trefis
FSLR: First Solar logo
FSLR
First Solar

First Solar (NASDAQ:FSLR), North America’s largest solar equipment manufacturer, has seen its stock price rise by over 200% since 2012, driven by soaring global demand for photovoltaic products, a growing pipeline of utility solar projects, as well as some positive developments on the technology and manufacturing front. However, despite the bull run, the stock still trades at just 16x trailing earnings and 18x forward earnings, which is somewhat low for a high-growth industry. In this note, we take a look at two key catalysts that could result in a meaningful upside to the company’s stock price.

Trefis has a $65 price estimate for First Solar, which is about 3% ahead of the current market price.

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Improving  Panel Efficiencies & Making Deeper Inroads Into The DG Market  (+20%)

Conversion efficiencies are a key metric in the solar industry. All else being equal, higher efficiency panels convert a larger amount of sunlight into electricity and have a more compact size for every watt of rated power output. First Solar’s Cd-Te thin-film panels have traditionally had lower efficiencies compared to polycrystalline panels. This has meant that First Solar has largely had to restrict itself to ground mounted applications and the company’s exposure to the distributed generation (DG) space – where high energy density panels are valued – has been very small. This has been of concern, given that the distributed solar market, which includes residential and commercial installations, represent a lucrative and fast growing segment of the global solar industry. For instance, residential solar installations grew at a CAGR of about 50% over the last 3 years in the United States and growth rates are expected to remain strong going forward, as costs decline and the availability of financing improves. [1] Several other countries have been favoring DG as well. For instance, installations in Japan are typically geared towards the distributed market and China has also been looking to drive DG growth through various incentives. While the distributed solar market does face its share of challenges (expiry of federal investment tax credit in the U.S., financing issues in China, lower feed-in-tariffs in Japan), it is fair to assume that it will remain the fastest growing segment of the solar industry over the long term.

Realizing the potential, First Solar has been taking several steps to improve its competitiveness in the rooftop and distributed solar market. For instance, the company has made significant headway on the energy density front, with efficiency gains of its Cd-Te panels having outpaced the broader industry over the last few years. As of Q4 2014, average panel efficiency stood at about 14.4%, representing a 1% year-over-year improvement. In contrast, most polycrystalline manufacturers have stopped reporting their panel efficiencies altogether – a sure indicator that their gains are not very significant. As per First Solar’s panel efficiency roadmap, the metric is expected to improve to above 19% by the year 2017. Since Cd-Te thin-film panels have a higher theoretical upper limit for efficiency compared to silicon-based panels, First Solar could possibly have among the highest efficiencies in the industry, if it continues to post similar gains. The company is also hedging its bets by developing polycrystalline panels based on high-efficiency (20%+ at the cell level) technology that it acquired from TetraSun in 2013. (related: First Solar’s Acquisition Of TetraSun Highlights A More Diversified Strategy) The company expects to produce about 50 MW of TetraSun panels this year. The combination of improved Cd-Te panels and new high-efficiency polycrystalline panels could help the company to become a more serious contender in the rooftop solar space.

Our $65 price estimate for First Solar assumes that the company will be able to grow its total shipments from around 1.85 GW in 2014 to about 2.9 GW by 2021, with average selling prices for panels declining from around $0.63 per watt in 2014 to about $0.59 per watt in 2021. We presently estimate that panel margins will grow from about 16% to about 20% by the end of the forecast period. However, if the company is able to drastically improve efficiencies and make a significant dent in the rooftop market, it could have a profound impact on its valuation. For instance, if the company were to ship an additional 1 GW of panels by 2021 (total of about 4 GW), while improving panel ASPs to about $0.65 per watt (owing to a price premium for high-efficiency panels) and boosting gross margins to about 28% (due to lower per-watt production costs of high-efficiency modules), this could result in a near 20% upside to our current price estimate implying a price of $78 per share (also assuming a slight decline in our SG&A as % of Gross Profits forecast).

Cracking The Massive Chinese Utility Scale Solar Market (+20%)

China is the world’s largest market for solar products. The country installed over 12 GW of photovoltaic capacity in 2014 and the number is expected to grow to about 18 GW this year, accounting for close to a third of projected global solar demand. The longer-term prospects for the market also look solid with the government targeting about 100 GW of solar capacity by 2020. Moreover, under the climate deal signed with the United States last November, China has committed to generating 20% of its electricity from non-fossil fuels by 2030 and this could require the installation of as much as 1,000 GW of new non-fossil generation capacity. [2]

However, despite the historically rapid growth rate, First Solar and other western solar equipment manufacturers have been unable to make a serious dent in the Chinese market. This is likely to be due to multiple reasons. Firstly, domestic installation growth has largely been met by local solar companies, since China is home to 8 out of 10 of the world’s largest panel manufacturers. Additionally, the recent solar trade war between China and the United States/European Union– which has resulted in Chinese manufacturers facing anti-dumping and countervailing duties – is also likely to have made western players apprehensive about going all-in into the Chinese market fearing repercussions. The Chinese market has also been quite price sensitive and panel ASPs are among the lowest in the world. For instance, First Solar signed a memorandum of understanding with the Chinese government around 2009 to build a 2 GW solar plant in the Inner Mongolia region, but the project was called off as the company failed to reach an agreement on pricing.

That said, the solar landscape in China has been gradually changing as the market matures. For example, project developers are seeing greater value in the differentiated technology, higher efficiencies, and energy yield that imported panels offer. Additionally, Chinese manufacturers are unlikely to be able to keep up with the pace of demand growth in the domestic market owing to capacity constraints. For instance, tier-1 players such as Yingli Green Energy (NYSE:YGE) and Trina Solar have been operating at above nameplate manufacturing capacity and the Chinese government has also been putting the brakes on expansion of solar production capacity. These trends could help western players gain some ground in the Chinese market. For example, First Solar’s rival SunPower has been making some inroads into China through joint venture agreements with Chinese firms to manufacture and deploy its proprietary C7 solar concentrator technology and the company intends to build over 250 MW of projects in China this year. SunPower’s recent momentum indicates that First Solar, too, has a fair shot at success in China. First Solar’s recent panel technology improvements, its relatively high energy yields, and its experience in designing and building some of the world’s largest utility-scale solar power plants, could stand it in good stead in China. If First Solar is able to make significant inroads into the Chinese market, allowing it to increase its total systems sales to about $5.2 billion by 2021 (with related increases in panel shipments), versus our current forecast of about $3.8 billion, this could increase our price estimate for the company to about $77, or about 19% ahead of our current price estimate.

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Notes:
  1. Solar Market Insight Report 2014 Q4, SEIA []
  2. What China’s Climate Commitment Means for Its Electricity Sector, Greentech Media, November 2014 []