Suntech Power Holdings (NYSE: STP – $31.60)
, based in Wuxi, China, is among the three
largest global providers of solar power products. In 2007 Suntech recorded revenues of $1.3
billion, and it has a market cap of $5.6 billion. We are reducing our estimates on STP,
reflecting the ongoing tight supply of polysilicon, and the likelihood that the company will
scale-back production in the first half of the year. Our new estimates are below consensus.
We are maintaining our HOLD rating on the stock.
• Among the Top Three Producers of Solar Power Products. Suntech ranks among
the top three producers of solar power products, along with Sharp, the Japanese
electronics giant, and Q-Cells, a German manufacturer. Based on production
figures for 2007, each company holds a roughly 10 percent share of the global
market. Data from Photon Magazine suggests that Sharp lost share to Suntech and
Q-Cells in 2007.
• Scaled back Production in the Near Term. Suntech missed Street consensus
estimates in the fourth quarter, due in part, to a scaling back of production, related
to the ongoing high cost of polysilicon, a key ingredient in its manufacturing
process. Suntech expects to produce only 40 percent of its 2008 target of 530 MW
of product in the first half of the year. This is the result of recent severe storms in
China, as well as a desire to scale back its production output as a result of its
reliance on spot market polysilicon, which may comprise as much as 40 percent
of its current polysilicon use.
• Estimates Reduced. We are reducing our 2008 EPS estimate to $1.45, below the
consensus estimate of $1.61. We are also reducing our 2009 EPS estimate to
$2.15, reflecting the concern that the company may again be required to reduce its
output goals. We are maintaining our HOLD rating on Suntech.Battle Road Research, Suntech (STP) Estimates Reduced, HOLD Maintained 3/19/08Company Background and Product Overview
Suntech, based in Wuxi, China, and founded in 2001, makes PV (photovoltaic) cells and
modules. The company’s PV cells are devices which convert sunlight into electricity. The
company makes both mono-crystalline and multi-crystalline PV products. PV cells range in
power from 1.6 watts to almost 4 watts of power, most of which are used in the making of
modules. The company’s PV modules, about 99 percent of total sales, consist of a series of
PV cells which have been connected and laminated on a weatherproof board. Power ratings
for the company’s PV modules range from 50 to 240 watts.
Suntech staged its IPO on the New York Stock Exchange on December 14, 2005 at a price of
$15 per ADS in a transaction led by Credit Suisse First Boston and Morgan Stanley. In
February, 2007, Suntech completed an offering of $425 million convertible senior debt at
0.25 percent. On Mar. 12, 2008, Suntech announced a further debt offering of $500 million at
three percent to be completed on Mar. 17. The conversion rate is 24.3153 ADSs per $1000.
Suntech plans to use $300 million of the proceeds to procure “upstream supplies” (most
likely the raw material polysilicon: see below) and expand production capacity and new
technology commercialization. Remaining funds will be used to purchase additional notes for
potential acquisitions and/or general corporate purposes.
Pricing of Suntech’s products is based on the megawatts (MW) of electricity produced.
Currently, the company’s average selling price (ASP) per watt is about $3.80. High prices for
polysilicon—the key raw material used in making solar panels—are expected to keep ASPs
flat in 2008 versus 2007. Towards the end of this year the company estimates that further
supply of polysilicon will become available, thus dropping the price to obtain it and price
Suntech charges for its products. ASPs in 2009 are expect to drop 10-15 percent over ’08.
The company generally enters into contracts of a fixed-term length that specify the price of
the products at the outset. Pricing for the duration of the contract is set at the time the
contract is signed.Industry Size and Competition
Solarbuzz estimates that the worldwide market for solar power products grew by 62 percent
in 2007, from $10.6 billion to $17.2 billion in sales. In 2007, it estimated that installations of
solar photovoltaic (PV) systems grew by 62 percent over the prior year, reaching 2,826 MW.
Meanwhile, world wide solar production reached a consolidated level of 3,346 MW, up from
2,204 MW in 2006. Germany is by far and away the largest consumer of solar power,
accounting for 47 percent of the market in 2007, with Spain following at 23 percent. Japan
and the US are tied for third place with 8 percent of the market.
Suntech remains among the top three solar power product producers, in a statistical dead
heat with Japanese-based Sharp, and German-based Q-Cells. Photon Magazine estimates
that Suntech, Q-Cells and Sharp each produced about 360 MW of solar products in 2007,
which would give each company about 10 percent of the global market. It appears that Sharp
lost market share to Q-Cells and Suntech, as the latter two companies are growing well in
excess of the market growth rate. Sharp, in the mean-time, reduced its production, in part due
to the high ongoing cost of polysilicon.
Though solar remains a small portion of its overall sales, Sharp, by all indicators, remains
committed to the business, despite its reliance on polysilicon, which places profitability
constraints on the company. Sharp, like several other solar power product manufacturers
seeking to reduce their reliance of polysilicon, has recently invested in thin film
manufacturing technology, as has Suntech.
Q-Cells of Germany (QCE.F) is among the three largest producers of solar power products,
and generated about $1.3 billion in revenue in 2007, nearly doubling 2006 revenue of
roughly $675 million (we use exchange rate of 1€=$1.56 for both figures). The company
staged its IPO in Germany in October of 2005. Like Suntech, Q-Cells has seen its largest
market opportunity in Germany, Q-Cell’s base of operations, where it derived 45 percent of
its total sales in 2006. Q-Cells has also seen growth in Spain, which it cited in its annual
report as its fastest growing market in 2006 (geographic data for ’07 not available).
Suntech competes with U.S.-based solar firms such as SunPower (NASDAQ: SPWR), a
San Jose, CA-based maker of solar cells and panels. SunPower also offers system design and
installation services, one of the few solar product manufacturers to do so. In 2007 it
generated revenues of $776 million, and the company has a market cap of approximately $5
billion. In 2007 the U.S. was SunPower’s largest sales contributor in terms of geographic
area (45 percent), and the company’s top two customers represented 34 percent of total sales.Customer Analysis and Geographic Scope of Operations
Suntech sells its products for use in a wide range of residential, commercial, industrial, and
public utility applications. Sales to Suntech’s single-largest customer in 2006 were 21
percent of total revenue. Furthermore, Suntech expects that one systems integrator, Conergy,
should account for about $270 million in revenue in 2007, or about 20 percent. On a
geographic basis, sales to Europe continue to dominate Suntech’s sales, in part due to its
strength in two of the continent’s largest current markets for solar power: Germany and
Spain. However, the company foresees decreasing reliance on Germany as sales expand in
Spain, Italy, and other areas. Specific customer and geographic data for 2007 will not be
available until Suntech files its 20-F annual report in June.
Suntech acquires polysilicon from a number of suppliers around the world. In Mar. 2008 the
company made a further investment in one supplier in particular, Nitol Solar. Suntech has
purchased a minority interest in the Russia-based company for consideration of $100 million.
This follows a Nov. 2007 announcement that Suntech reached seven-year deal with Nitol for
a polysilicon supply, to begin in 2009. The amount of the deal was not disclosed, and
Suntech entered the agreement before Nitol had even built its first manufacturing plant. As
Nitol has never made polysilicon before, adjustments may have to be made to the deal if it
falls behind schedule on construction or encounters other production delays or problems.Financial Analysis
Demand for Suntech’s products remains quite high. In Q4 2007 (ended 12/31/07), the
company shipped 110 MW worth of product, a new quarterly record, and revenues rose to
$398 million, up 82 percent over the prior year period. On the down side, Suntech’s
manufacturing input costs remained very high. This is mostly due to the sustained shortage,
and resulting high cost, of spot market polysilicon. Some of the silicon Suntech uses in its
products is procured through long-term contracts at fairly low, fixed prices (usually less than
$100 per kg). But this doesn’t cover all of its needs; the company purchases the remainder of
silicon needed to fulfill production plans from the spot market, at prices currently around
$450/kg. Suntech even admitted that the price of polysilicon had risen higher than it
anticipated, which hurt its bottom line. In addition, the company scaled back production in
Q4 so as to limit the need to purchase spot polysilicon at current exorbitant prices, and it
expects to do so again in the first half of 2008 (see next section).
In Q4 Suntech’s EPS was $0.29, not a bad profit as EPS grew 51 percent year over year, yet
fell seven cents short of consensus analyst estimates of $0.36. Gross margin was 21 percent,
flat with Q3 but down modestly from 22 percent a year ago. Operating margin was 13
percent, down on a sequential and year-ago basis, and both gross and operating margins for
the year 2007 were down from ’06. Suntech’s DSOs were 54 as of 12/31/07, the lowest level
of the year though up from 41 a year ago. Inventory turnover improved to 5.9 from 3.8 a year
ago. The company’s debt to tangible book value in Q4 was 67 percent, down from earlier in
the year. However this percentage should rise in Q1 ’08 as a result of the debt offering.Projections
The polysilicon shortage—and resulting high prices on the spot market—will last through the
first six months of this year, after which we expect additional supply to reach the market. As
a result, Suntech –like Sharp—is holding back on production in the first half of the year to
limit its exposure to the high-priced raw material. Of the 530 MW of expected production in the other 60 percent in the second half. The company has issued revenue guidance of $1.9-
2.1 billion for the year, a reiteration of a previous forecast. Production in the first quarter will
be further hampered by severe storms that hit China last month. Q1 revenues are expected at
$370-380 million, an increase of more than 50 percent year over year, but well below the pre-
Q4 results analyst consensus of $455 million.
Suntech does not provide EPS guidance, though it expects gross margin to rise slightly from
Q4 ’07, then remain flat for the rest of the year.
Given Suntech’s planned production pull back in the first half of ’08, and the fact that only
60 percent of the silicon it acquires is under fixed price contracts
, we believe it is appropriate
to be conservative in our estimates. For 2008 we project revenues of $1.9 billion and EPS of
$1.45. The current Street consensus is $2.0 billion and $1.61. For 2009 we project revenues
of $2.7 billion—which would be 40 percent growth over 2008. Our 2009 EPS estimate is
$2.15, a projected increase of 48 percent over 2008. We note that the current Street calls for
revenue of $2.93 billion in 2009, and EPS of $2.57.Investor RisksHigh cost of the raw material polysilicon.
There is currently a shortage of polysilicon
worldwide, as demand for solar products has grown much faster than supply of the key raw
material. Some of the silicon Suntech uses in its products is procured through long-term
contracts at fairly low, fixed prices (usually less than $100 per kg). But this doesn’t cover all
of its needs; it was recently estimated that only 60 percent of silicon used by Suntech is
acquired through fixed price contracts. The company purchases the remainder of silicon
needed to fulfill production plans from the spot market, at prices currently around $450/kg.
Suntech even admitted that the price of polysilicon had risen higher than it anticipated, which
hurt its bottom line. In addition, the company scaled back production in Q4 so as to limit the
need to purchase spot polysilicon at current exorbitant prices, and it expects to do so again in
the first half of 2008.
Of the 530 MW of expected production in 2008, the company forecasts that 40 percent of it
will occur in the first half of the year, and the other 60 percent in the second half. As a result
of high cost of polysilicon and limited production in the current period, Suntech foresees no
margin expansion in 2008. While this is certainly not ideal, what concerns us more is that this
is a best-case scenario. Should the shortage last longer than anticipated—and we believe
there’s a good chance it will—Suntech might be negatively impacted even further. Already
counting on 60 percent of production in the back half of the year, should prices remain high
and more production be delayed, some of it may get pushed into 2009. Margin contraction is
a distinct possibility, and guidance and estimates could be further reduced.Polysilicon supply contracts with new producers, in advance of factory operations.
acquires polysilicon from a number of suppliers around the world. In Mar. 2008 Suntech
purchased a $100 million minority interest in Nitol Solar, a Russian company with which it
signed a multi-year polysilicon supply agreement last year. Suntech entered the agreement
before Nitol had even built its first manufacturing plant. A similar deal was reached with
Hawaii-based Hoku Scientific (NASDAQ: HOKU) as well. As Nitol and Hoku have never
made polysilicon before, adjustments may have to be made to shipment schedules or other
aspects of the contracts if the producers fall behind on construction or encounter other
production delays or problems. Such problems are not uncommon for manufacturers new to
the industry.Customer concentration.
In 2006, 42 percent of Suntech’s sales went to customers in
Germany, 22 percent to China, and 21 percent to Spain. While the company has not yet
released figures for 2007, one estimate puts sales to Germany last year at 50 percent. As with
many other solar product makers, most of Suntech’s sales are concentrated in a select few
countries, and are expected to remain so. This could become problematic should the funding
environment or market dynamics in those countries lead to solar products becoming out of
Although Suntech remains among the top three producers of solar power products, we remain
concerned that the company remains hostage to the ongoing price of spot market polysilicon,
a raw material which remains in short-supply. Suntech has already announced that it expects
to produce only 40 percent of its 2008 target of 530 MW of product in the first half of the
year. The company missed Street consensus estimates in the fourth quarter, and we believe it
is quite possible they will again miss expectations.
We this in mind, we are reducing our 2008 EPS estimate to $1.45, below the consensus
estimate of $1.61. We are also reducing our 2009 EPS estimate to $2.15, reflecting the
concern that the company may again be required to reduce its output. We are maintaining our
HOLD rating on Suntech.