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Nomura - Asian - Solar

Nomura - Asian - Solar

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 15 November 2010Nomura
NOMURA SINGAPORE LIMITED
ANCHOR REPORT 
Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
Any authors named on this report are research analysts unless otherwise indicated.See the important disclosures and analyst certifications on pages 102 to 104.
Solar 
|
ASIA
 
ASIA POWER, UTILITIES AND RENEWABLE ENERGY
Nitin Kumar 
+65 6433 6967 nitin.kumar@nomura.com
Ivan Lee, CFA
+852 2252 6213 ivan.lee@nomura.com
Too much of a good thing
We are Neutral on the Asian solar sector, where some players are at risk of beingburned by a shift from excess demand in 2010 to oversupply in 2011. Looking atexpansion plans across the industry, we forecast circa 50% y-y capacity expansion byend-2011. Predicting demand is less straightforward, particularly amid heightened policyrisk, but even our best-case scenario has demand growing by a more modest 30%. Thelikely result: more pressure on ASPs and greater impetus for consolidation. Nomura’sown sun screen highlights stocks that we see as best placed to ride these changingmarket dynamics. We like companies with a tight grip on costs, typically those that arevertically integrated, and those concentrating R&D on cell efficiency improvements. Wealso favour companies well covered by geographically diverse sales, taking in newgrowth markets that should give ample protection if demand from Europe dries up. Our three BUYs  Trina, Yingli and Suntech  fit the bill. We are NEUTRAL on CanadianSolar, JA Solar (from Buy), Motech (from Reduce), LDK and GCL Holdings, since theseare stepping up vertical integration and diversifying sales but aren’t yet fully covered, inour view. Our REDUCEs  E-Ton and Solargiga  still seem narrowly focused andthus over-exposed. Also, we include notes on six solar stocks not rated by Nomura.
 
From excess demand to oversupply
 
Market share consolidation in 2011?
 
Nomura’s sun screen: choosing the right companies
 
NEUTRAL
Stocks for action
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 USNEUTRAL
9.04 10.0 10.6Motech Ind.6244 TTNEUTRAL
121.0 119.0 (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;
Upgrading from Reduce
Downgrading from Buy 
Analysts
Nitin Kumar Regional solar analyst, Asia Power,Utilities, and Renewable Energy team
+65 6433 6967nitin.kumar@nomura.com
Ivan Lee, CFAHead of Asia Power, Utilities, andRenewable Energy
+852 2252 6213ivan.lee@nomura.com
Raghvendra Divekar (Associate)
 
 15 November 2010Nomura 1
Solar 
|
ASIA
 
ASIA POWER, UTILITIES AND RENEWABLE ENERGY
Nitin Kumar 
+65 6433 6967 nitin.kumar@nomura.com
Ivan Lee, CFA
+852 2252 6213 ivan.lee@nomura.com
 
 
Action
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.
 
Catalysts
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.
Anchor themes
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;
Upgrading;
Downgrading
 
NEUTRAL
Analysts
Nitin Kumar Regional solar analyst,Asia Power, Utilities, and RenewableEnergy team
+65 6433 6967nitin.kumar@nomura.com
Ivan Lee, CFAHead of Asia Power, Utilities, andRenewable Energy
+852 2252 6213ivan.lee@nomura.com
Raghvendra Divekar (Associate)
 
 
 Solar 
|
Asia
Nitin Kumar / Ivan Lee, CFA15 November 2010Nomura 2
Contents
Investment summary 3 Down to choosing the right companies 8
 
Margin pressure to become acute in 2011F 9
 
Vertically integrated player to outperform pure-play makers 9
 
Balance sheets to remain in focus 10
 
Valuation methodology 11
 
Oversupply across segments in 2011 13
 
Polysilicon makers market to remain in oversupply in 2011F-13F 13
 
Easing the bottleneck of wafer supply in 2011 15
 
Perpetual oversupply in cell manufacturing? 15
 
Demand growth to slow over 2011-13F 16
 
Demand growth ahead a function of policy changes 16
 
European demand growth to slow as risks increase 18
 
US the next key market ahead 19
 
Market share consolidation ahead? 22
 
ASP pressure to increase 22
 
Module ASPs of US$1.4-1.5/W in 2011F enable equivalent IRRs 23
 
Vertically integrated companies have better cost structure 23
 
Pure-play companies likely to suffer the most 24
 
Fundamental shift in competition ahead 26
 
Entry of well-funded leaders from technology industry 26
 
Thin-film looks set to make a comeback 27
 
Project financing setting up the complete plant 28
 
Utility adoption the next lever of growth 29
 
More countries to offer subsidies to solar as costs reduce 30
 
Analysing the global addressable market for renewables 31
 
Solar to account for at least 50% of the renewable TAM 31
 
Latest company views
Trina Solar 33Yingli Green Energy 38Suntech Power 43Canadian Solar 48JA Solar 53Motech Industries 58E-Ton Solar Tech 63LDK Solar 68GCL Poly Energy 73Solargiga Energy 79Solarfun 84DelSolar 87Gintech 90Comtec 93Apollo Solar 96Trony Solar 99

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