Suntech Power (NYSE:STP) has used Italy’s enthusiastic adoption of solar power to its benefit in the recent past. But there seems to be a bit of uncertainty over the country’s contribution to Suntech’s revenues in the years to come. Suntech Power competes with other international solar power giants including FirstSolar (NASDAQ:FSLR), SunPower (NYSE:SPWRA), and Yingli Green Energy Holding Com (NYSE:YGE).
Suntech Power is China’s largest U.S.-listed solar player by market capitalization. It has established itself as the world’s largest manufacturer of crystalline silicon photovoltaic (PV) modules through its ability to capitalize on its low production costs and make highly scalable solar components.
We maintain a $10.68 price estimate for Suntech Power, implying a roughly 10% upside to the stock’s market price.
Suntech’s Operations in Italy Have Grown Substantially in Recent Years…
Italy did not contribute at all to Suntech’s $1.3 billion revenues in 2007. But, according to the company’s SEC filings, Italy’s contribution has risen consistently since then, hitting 12% of the company’s $1.7 billion revenues in 2009. Italy’s share was almost 14% for Suntech’s 2010 revenues.
Italy is second only to Germany in sales revenues for Suntech and actually ranks higher than the United States in this regard.
… and the Company Expects the Growth to Continue
Suntech revealed at an analyst meeting in December 2010 that it expects its sales to Italy to increase to almost 300 megawatts (MW) for each of the years 2011 and 2012. However, in terms of dollar revenues and revenue share, this would result in a reduction as the selling price per watt is expected to fall in the years to come due to the growing competition. Italy’s share of Suntech’s revenue would still remain at a healthy 11% in these years.
But the Italian Government Seems to be Sending Mixed Signals Now…
Early this year, the Italian government contemplated an 8,000 MW cap on photovoltaic production incentives that would have choked the growth of solar energy in the country. But a recent decree rejected this cap, and introduced an annual cap of 1 GW for photovoltaic power plants connected to the grid after May 31, 2011. The decree also places a limit on incentives for solar plants located on agricultural land. 
.. which Could Hurt Suntech’s Sales Going Forward
These changes can potentially reduce Suntech’s sales to Italy in the years to come.
To illustrate this affect, consider a 30% decline in sales to Italy from our base case estimates for 2011 and onwards. We currently estimate 300 MW in sales to Italy in 2011, so this scenario would mean a reduction in PV modules sold by about 100 MW for the year. If we carry this hypothetical 30% decline forward, the annual difference from our base case estimate would be about 300 MW by the end of our forecast period. In total, this scenario reveals a potential 5% downside to our $10.68 price estimate for Suntech Power, putting our number below $10.20.
The interactive chart above illustrates our estimates for total PV modules sold, meaning that our 300 MW estimate for 2011 is included in the total 1.82 GW number shown above. You can drag the trend line in this chart to test a variety of scenarios for Suntech’s PV module sales outlook and see how these affect the company’s stock value.Notes:
- Italy: Solar Power and its latest developments on incentive rules, ReedSmith, March 10 2011 [↩]