Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
The media was bombarded with the news of a Chinese European solar trade war, with top leaders on both sides trying to prevent an all out trade war that could adversely affect the economies in both the countries. The seeds of the war were planted by Solarworld (SRWRF.PK), the same that had instigated the US imposition of anti subsidy and anti dumping duties on Chinese solar panel imports. Despite grave Chinese warnings and opposition by a number of European countries, the EU imposed ~11% duty on Chinese solar panel imports on June 6 and is all set to increase it by 3-5 times if negotiations between the two trade blocs fail. China will not take the imposition of dumping duties lightly and will certainly retaliate. China exported more than 20 billion Euros of solar panels to Europe in 2012, which accounts for almost 7% of its total exports to that region. In comparison, exports to US are much lower and have not affected the solar industry too badly. The major Chinese solar panel companies like Trina Solar (TSL), Yingli Solar (YGE), Canadian Solar (CSIQ), JinkoSolar (JKS) etc. will be adversely affected if the final duties come into play. Despite the Japanese and Chinese solar growth, Europe will still account for ~40% of the global demand in 2013. One Chinese solar stock that will benefit from these duties is ReneSola (SOL). The stock is valued quite cheaply and has underperformed the other Chinese solar stocks in 2013. I think that investors are bracketing ReneSola with the rest of the Chinese solar sector and do not realize that ReneSola will benefit from the ongoing solar trade spat.
ReneSola - A Brief History
ReneSola started as a solar wafer manufacturer in 2005 by processing solar wafers using scrap polysilicon. With the German solar subsidies the solar market expanded in 2007-2008, ReneSola listed itself on the London AIM exchange and started producing ingots and wafers using pure polysilicon. The company was also one of the first ones in China to start polysilicon manufacturing and also started producing cells and solar modules later on. In 2008, the company got listed on the New York Stock Exchange as well. In 2012, the company has focused more on selling panels under the "Virtus" brand. The company is a total solar solution provider building solar power plants as well. The company has also set up marketing offices in a number of countries to take advantage of the increasing demand of solar panels from new markets.
How ReneSola is better than other Solar Stocks
i) Low Cost Vertically Integrated Player - 55c/watt module cost and 21c/watt wafer cost
ReneSola has been reporting low margins as its wafers and polysilicon segments are suffering from an acute overcapacity. However as the upstream segments start returning to a better supply demand balance, SOL should see better growth in margins compared to the other companies. The company is one of the lowest cost producers of solar wafers and is also set to compete with the poly leader GCL Poly in polysilicon costs now. The company has managed to substantially reduce its polysilicon cost over time and has reached a low 20 dollar range now. The company has been continuously lowering its wafer costs and now can sell wafers at just 22c/watt, while its module costs have also become one of the lowest in the world at 55c/watt.
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ii) Market Share Gains - Second Largest Wafer Supplier in the World Now
ReneSola outperformed the other solar stocks in 2012, as the company managed to gain market share, even as highly indebted poorly managed companies like LDK Solar and Suntech (STP) ran into the wall. ReneSola along with Yingli Energy and JinkoSolar grew market share, even as the whole industry faced huge losses. ReneSola is all set to grow market share in 2013 as well. The company shipped more than 650 MW of solar products in Q113 and will ship more than 700 MW in Q213 as the company's plants run at almost full capacity. ReneSola is now the second largest seller of solar wafers after GCL Poly. LDK Solar, which used to be the biggest just 2 years ago, has now been relegated to the 3rd place. The company will ship a total of 2.7-2.9 GW of wafers and modules in 2013, which should give it a global market share of ~8%.
For the second quarter, we expect the total solar wafer and module shipments to be in the range of 700 megawatts to 720 megawatts, with solar module shipments expected to be in the range of 400 megawatts to 420 megawatts.
Revenues are expected to be in the range of USD 310 million to USD 330 million. And gross margin is expected to be in the range of 3% to 5%. We are expecting operating cash flow of over USD 40 million in the second quarter. For the full year 2013, we expect total solar wafer and module shipments to be in the range of 2.7 gigawatts to 2.9 gigawatts, with solar module shipments to be -- expected to be in the range of 1.4 gigawatts to 1.6 gigawatts.
iii) Not a One Trick Pony - Will Become a Top 10 Module Supplier in 2013
ReneSola has continuously expanded into all segments of the solar market. The company, which used to manufacture only solar wafers now makes solar micro inverters, wire saws, polysilicon, cells and solar panels. The company has also invested in the solar system business. ReneSolawill become a top 10 module company in 2013 with ~4-5% globalmarket share. This is extremely impressive, considering the fact that the company did not start module operations till 2010. The increase in its module shipments was an incredible 259%. Its wafer shipments went down as the company was using up most of its wafer capacity for in-house module production.
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Solar Wafer and Module Shipments in Q113
|
1Q13
|
4Q12
|
1Q12
|
Q-o-Q%
|
Y-o-Y%
|
|
Total Solar Wafer and Module
Shipments (MW)
|
662.1
|
713.2
|
466.0
|
(7.2%)
|
42.1%
|
|
Wafer Shipments
|
335.5
|
392.7
|
375.1
|
(14.6%)
|
(10.6%)
|
|
Module Shipments
|
326.6
|
320.5
|
90.9
|
1.9%
|
259.3%
|
Source - ReneSola
iv) Good Management in a Tough Industry
The solar industry has seen numerous executive exits during the current trough. Many CEOs have been shown the door as companies racked up massive million dollar losses. Suntech's famous CEO Zhengrong Shi was also forced out after the company defaulted on a bond payment. However ReneSola's management has performed admirably in the last few years, despite the violent twists and turns of the solar energy industry. Even the top US companies like SunPower (SPWR) and First Solar (FSLR) have made monumental management blunders. SunPower was involved in an accounting scandal, while FSLR's last CEO was forced out after expanding the company in a declining market.
v) Margins Have Hit Bottom
ReneSola's margins have hit bottom as there is no downside left in wafer and module prices, even as SOL decreases costs each quarter. The company will increase its gross margins to 3-5% in Q213 from a negative -2% in Q113. The company's module prices should increase from 61c/watt this quarter to around 65c/watt by the end of the year.
vi) Chinese Government Support
The Government's support plays a crucial role in the solar industry. All the companies even in the western world have received huge amounts of government support (First Solar, SunPower, SolarCity (SCTY) and even Solarworld). The massive overcapacity has meant that the Chinese government is now being selective in supporting only the strong solar companies, while letting the hundreds of small ones fail. ReneSola was one of the few companies to receive a loan from government controlled Chinese Development Bank (CDB).
Solar Industry is Going to Return to Supply Demand Balance by 2014
The silver lining in the solar panel price crash has been the huge demand growth in solar panels throughout the world. Solar energy prices have reached grid parity in a number of places already, which means that it is now more profitable to install solar panels in your home rather than buying electricity from a utility. While there are still intermittency issues, the relentless decrease in solar prices coupled with increasing fossil fuel costs means that solar energy and energy storage might become cheaper than utility electricity, in most parts of the world in the next decade. 2013 should be another strong year for solar demand and the industry should return to demand-supply equilibrium by mid 2014 in my view.
How ReneSola Will Benefit From the Chinese European Trade War
a) Polysilicon Duties
With the implosion of LDK Solar (LDK),ReneSola remains the only large vertically integrated Chinese solar company. ReneSola is the only major solar panel company, which has a large in-house polysilicon plant with hydro chlorination. The polysilicon companies in China have been hurt hard by the global polysilicon oversupply, which has resulted in prices going below costs. LDK Solar had to close its 15,000 ton polysilicon plant as it was unable to produce material at the current prices. However,ReneSola has gone ahead with expansion and will start producing poly at ~$15/kg, which will make it one of the lowest cost producers in the world.
The company will expand and almost treble its poly capacity to 10,000 tons by June 2013, from its earlier 3,500 tons capacity. The company has gone ahead with this expansion even as top companies such as SunEdison (SUNE) and Renewable Energy Corporation are shutting their existing polysilicon plants. It remains the only large polysilicon producer in China, along with GCL Poly. While China has a massive capacity along all parts of the crystalline solar supply chain (ingots-> wafers -> cells -> modules), it does not have enough polysilicon capacity. It imports large amounts of poly from Europe, the USA and South Korea. China is all set to attack the duties on its solar exports, by imposing duties on poly imports from these countries. ReneSola will be a natural beneficiary of this policy as it produces large amounts of poly. The company will get a big edge over the other solar panel makers who will have to pay a higher price for the imported material.
China's pending move to slap anti-dumping tariffs on imported solar polysilicon from key countries will generate a surge in pricing for this key raw material in June and July, but the magnitude of the increase will be limited by market factors, said IHS. The likely imposition of the import duties will cause global solar polysilicon pricing to rise to US$19.50/kg in June and July, up from US$16.50/kg in May, according to IHS. This represents a major turnaround for a polysilicon market that has seen average pricing decline for seven of the last 10 months.
Source - DigiTimes
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Source - ReneSola
b) Diversified Manufacturing Base and Sales
ReneSola has been smartly diversifying its manufacturing base in the last couple of years by setting up factories and joint ventures in foreign countries. This means that the company was almost unaffected by the US duties, as it could satisfy the demand from its US customers using cells and panels made in its non-Chinese JV factories. The company will also largely manage to escape the fallout from the European duties by shipping panels to Germany, Italy etc. from its non-Chinese manufacturing facilities. The company expects to get 1/3rd of its revenues each from Europe, North America and Asia by Q313.
ReneSola Valuation and Probable Price Target
ReneSola trades at a very cheap valuation with a P/S of just 0.2x and P/B of 0.5x. The reason for the low valuation is the extreme cyclical trough that the industry is going through. Many large solar companies such as Q-Cells, Solyndra etc. have gone bankrupt and others are barely surviving (LDK, Suntech). However the industry is starting to recover with the module prices increasing and the supply decreasing; and smaller companies becoming insolvent. ReneSola has been making losses like the rest of the solar companies due to irrational pricing. However as pricing and profitability recover, I think we should also see rational valuations start. The companies such as First Solar and SunPower are currently trading at 0.8-1.1x. I think that ReneSola can easily see valuation increase to 0.8x in the next couple of years, which would mean that its stock price would increase from $2 to $8.
ReneSola Stock Performance
ReneSola has underperformed the other solar stocks in 2013, but its performance will get better as the upstream prices start to follow the downstream prices higher.
SOL data by YCharts
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ReneSola Risks
a) Oversupply Persists - The solar stocks have rallied in 2013 as massive oversupply in the industry has moderated somewhat due to the boom in the Japanese market. Some of the large suppliers such as Suntech and LDK Solar have seen their utilization levels plummet, as they did not have enough cash to run the business effectively. Most of the European solar manufacturers are either dead or are dying. However a return to the supply demand balance is not expected in 2013, as China alone can supply the global solar demand in 2013.
b) Execution Risks -ReneSola has performed admirably in the last few years despite the bad stock performance. The company needs to make sure that it builds the 10,000 ton poly plant on time and in budget. With the whole industry showing huge losses, SOL does not have the leeway to make even a slight mistake.
Summary
ReneSola performed quite well in 2012 as it gained market share and cut costs dramatically. However, the stock has not done that well in 2013, as the other downstream stocks such as Canadian Solar and JA Solar (JASO) did by leveraging the Japanese solar boom. The upstream segments like polysilicon and wafers have also seen a higher price decline as compared to the solar cells and modules. Since competition in the upstream segment is reducing with the bankruptcy of numerous Chinese players, I expect the upstream companies to perform better in the coming days. ReneSola is an excellent company in a very tough industry. However, the company has increased its market share tremendously in the last couple of years. The company has one of the lowest cost structures in the industry and is present in the entire supply chain. As the solar industry returns to a supply demand normalcy, I expectReneSola to be one of the biggest beneficiaries. I think that the stock is extremely undervalued and has a very good chance of becoming a multi-bagger in the coming years. As profitability returns, ReneSola should see its valuation multiply and could easily sport an $8 stock price in the next couple of years.