Here's the Barron's article in full--->
Credit Suisse
We spent a week in China last week, and met several companies in the supply chain. We also met with officials from the National Development and Reform Commission (NDRC) in China to better understand how the country is planning for its energy needs.
We reiterate our cautious stance on solar, our estimates (excluding First Solar (ticker: FSLR)) are 35% below consensus for second-half 2011. The major China-based solar companies are trading at 1.9 enterprise value/replacement capacity off calendar-2010 estimates, and 0.8 times off calendar-2011 estimates.
We think solar stocks can have 20%-30%-plus downside, especially given the recent stock moves higher due to the stronger Euro and positive sentiment on renewables following nuclear issues in Japan.
The solar industry believes falling prices will drive demand -- this has historically been the case the last five years -- but it was due to uncapped subsidies. In 2006 and 2007, demand was driven by uncapped subsidies in Germany and the supply was constrained by poly. In 2008, demand was driven by uncapped subsidies in Spain. In 2009, Germany again drove demand, and financing acted as a constraint for part of the year. In 2010, demand was driven by uncapped subsidies in Italy. In 2011, there are strong policy moves to close the loopholes in Italy, Germany with the result that second-half 2011 will mark the first time in the last five years that the solar industry will experience inelastic demand response as panel prices decline.
Investors are hyper-focused on Italy subsidy trends. However, we think a plain vanilla oversupply is quietly brewing. We think there is 500-plus megawatts (MW) of excess inventory in the channel, and oversupply will manifest regardless of the main outcomes we think are likely in Italy/Germany.
Following our NDRC meeting, we do not think that China will be a backstop for demand until much later in the cycle. We think pricing will need to fall sharply in second-half 2011.
For those who need exposure -- we would be relatively long JinkoSolar Holding (JKS) (competitive cost structure and very cheap), MEMC Electronic Materials (WFR) (semi exposure, and non-US pipelines), growing a bit more constructive on ReneSola (SOL) post the trip (valuations).
Stocks where we think there are potentially large market-cap disconnects (risks) -- First Solar (some level of complacency here given utility pipeline -- but the question will be whether bulls can hold conviction when panel prices fall faster and c-Si (crystalline silicon) channel inventory issues become more apparent), polysilicon stocks (near highs), Taiwan cell stocks. U.S.-listed, China-based solar stocks are much cheaper than some of their global counterparts, but there can still be some downside.
-- Satya Kumar
-- Brandon Heiken
AI
