Investment conclusion: Earnings expectations are
likely to decline from 2009 as supply begins to outpace
solar demand and offset benefits from lower polysilicon
prices. This may be already reflected in stock prices with
the sector down 25% year-to-date, however, given that
we expect profitability to deteriorate relative to current
high consensus expectations, we think it is too early to
aggressively add to positions until we see signs of
stabilized margins. We downgrade our Asia Solar
Devices industry views to In-Line from Attractive.
The solar industry is heading for a turbulent period:
Subsidized markets are unlikely to be large enough to
absorb expected supply over the next 2-3 years, and we
forecast 30-40% price reductions in downstream
components to stimulate new markets. Low barriers to
entry of cell processing and existing overcapacity may
well lead to faster falls in cell ASPs than in other
components. Hence, volume growth should remain
strong, but margins suffer.
New estimates: Our EPS forecasts have been cut by
4% and 10% on average for 2008 and 2009,
respectively. This puts us at 10-40% below consensus.
In the near-term, upstream (polysilicon, wafer) should
continue to enjoy pricing power, while downstream
cell/module companies may face higher earnings risk as
rising input costs continue to pressure margin.
Longer-term, we expect faster ASP erosion due to
higher fragmentation to result in top-line growth to
decelerate and margins to fall from 2H09.
LDK and Trina are our top picks. We would re-visit
Suntech as well. With limited differentiation among
Asian names, a wide valuation gap among PV
companies is not justified, in our view, and hence there
is an opportunity to switch to companies trading at lower
valuation. LDK stands out as the most attractive
risk/reward with earnings momentum mounting again.
We would take another look at Suntech again and keep
our switch to Trina from Yingli trade. Regulatory
developments (mainly US and Spain) and quarterly
earnings provide key catalysts over the coming months.