15 November 2010Nomura 1
ASIA POWER, UTILITIES AND RENEWABLE ENERGY
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Ivan Lee, CFA
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As the solar industry moves from excess demand in 2010 to oversupply in 2011F,we expect companies with better cost control to outperform with relatively sustainedmargins and market-share gains. Among Asia-based solar names, we like Trina,Yingli and Suntech for their vertical integration and brand presence.
Continued policy support and faster-than-expected utility adoption of solar arepotential key catalysts for demand, which could soak up the excess supply,although we caution competition could change with new stronger players.
Vertically integrated companies have better cost control management and we seethem capable of sustaining margins and expanding market share. Pure-playmakers unable to increase integration are likely to underperform.
Too much of a good thing
From excess demand to oversupply
Looking at the expansion plans across the industry, we see mean availablecapacity across the chain at 23-24GW (+50% y-y) by end-2011F. While demandprediction has become harder with increased policy risks, we see oversupply in2011F under our best-case scenario, with demand at 19.3GW (+29% y-y). In our base-case scenario, we expect demand of 16.5GW, suggesting oversupply at40-45% of demand in 2011F.
Market share consolidation in 2011?
Deteriorating demand-supply dynamics are likely to raise ASP pressure and wesee module ASPs falling 12-18% y-y to US$1.4-1.5/W in 2011F from US$1.7-1.8/Wcurrently. This will have a ripple effect across the solar value chain and we expectcompanies with better cost management to drive market-share gains, resulting inconsolidation. Here, we see vertically integrated companies better placed withevidence coming from rising vertical integration capabilities across pure-playmakers.
Nomura’s sun screen: choosing the right companies
We believe companies best positioned to ride the market dynamics in 2011Frequire key characteristics of: 1) better cost management, which favourscompanies with vertical integration; 2) R&D in cell-efficiency improvements – key tocontinued cost reductions in the segment, in our view; and 3) geographical salesdiversification to capture demand from new growth markets as demand growthfrom Europe comes to a halt.Among our coverage, we have three BUYs (Trina, Yingli and Suntech, which meetour above-mentioned criteria), five NEUTRALs (Canadian Solar, JA Solar, Motech,LDK and GCL Holdings, which are increasing vertical integration and salesdiversification), and two REDUCEs (Solargiga and E-Ton, which continue to remainnarrowly focussed).
NOMURA SINGAPORE LIMITED
Stocks for action
Within our coverage we prefer vertically integrated companies over pure play manufacturers due tobetter cost structures. We maintainour BUY on Trina Solar, Yingli GreenEnergy and Suntech Power.
Stock Ticker CurrentratingCurrentpricePricetargetUp/down (%)
Trina Solar TSL US BUY 27.74 36.0 29.8Yingli Green YGE US BUY 11.87 15.0 26.4Suntech Power STP US BUY 9.05 11.0 21.5Canadian Solar CSIQ US NEUTRAL 15.22 17.0 11.7JA Solar JASO US NEUTRAL
9.04 10.0 10.6Motech Ind. 6244 TT NEUTRAL
121.00 119.0 (1.7)E-Ton Solar 3452 TT REDUCE 39.55 37.0 (6.4)LDK Solar LDK US NEUTRAL 13.23 14.0 5.8GCL Holdings 3800 HK NEUTRAL 2.58 2.45 (5.0)Solargiga 757 HK REDUCE 1.94 1.1 (43.3)Pricing as of 10 Nov closing;
Nitin Kumar Regional solar analyst,Asia Power, Utilities, and RenewableEnergy team
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Ivan Lee, CFAHead of Asia Power, Utilities, andRenewable Energy
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Raghvendra Divekar (Associate)