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Italy And China Bright Spots In Solar Market

Posted on Wednesday, Apr 14th 2010

The solar power industry is going through a cloudy patch right now. The solar-focused exchange-traded fund, TAN, is down 24% this year driven by increasing price pressure, subsidy cuts, and the growing capacity of Asian, in particular, Chinese, players. Earlier this year, the world’s largest solar panel market, Germany, announced a subsidy cut of 10%. Subsidies are expected to be further reduced by 15% in the coming summer. Analysts are also expecting average selling price of modules to decline 20%–25% in the current year. Falling input costs, for silicon-based modules in particular, and capacity exceeding demand are driving these price cuts. Further, as the euro weakens against the dollar, the solar power sales of U.S. companies in Europe will be impacted, adding to the margin pressure. But, the most recent fiscal results did look promising.

First Solar (NASDAQ:FSLR) reported Q4 revenues of $641 million, which represented an increase of 48% over the year and was significantly higher than the market’s target of $581 million. EPS of $1.65 too exceeded the target of $1.52 but dropped significantly from the previous quarter’s $1.79. The company ended the year with revenues of $2.1 billion, recording 66% growth. EPS for the year was $7.53 compared with $4.24 earned a year ago.

First Solar’s efficiency grew to 11.1% with module costs falling to $0.84 compared with $0.85 a quarter ago. Total annual costs fell 19% over the year from $1.8 to $0.87. First Solar is continuing to expand capacity and is building additional lines in Malaysia. The company generated 311 MW during the quarter, up 6.4% over the previous quarter, and began the ramp-up of its new Ohio line. First Solar ended the year with annualized capacity of 53.4 MW per line.

To address the growing concern over the German market, First Solar is diversifying its geographic reach and will focus on growing customers in North America and China. The American market is already being driven by the tax and funding sops offered by the Obama administration announced last year. As part of its international expansion strategy, First Solar recently joined the Desertec Industrial Initiative. The Desertec Industry Initiative aims to convert the Middle East and North Africa into solar- and wind-powered renewable energy hubs. First Solar is the first pure solar photovoltaics player to join the initiative.

The company is also expanding its reach in China and are currently in the early stages of developing a 2-gigawatt project in the Inner Mongolian desert. The company’s Chinese plant is expected to be thirty times bigger than the existing power plants in Europe and will be the world’s largest solar power plant.

The company projects revenues of $2.7 billion–$2.9 billion for the year 2010 with EPS of $6.05–$6.85 with an average sales price of $1.50–$1.60 per watt.

The stock price is trading at $126.75 with a market capitalization of $10.8 billion. It touched a new 52-week low of $98.71 earlier this year.

Meanwhile, SunPower (NASDAQ:SPWRA) had a difficult quarter since it had to restate earlier reported financials due to accounting issues at its Philippines operations. The company is lowering earlier reported net income for the past two years by $16.9 million due to “unsubstantiated accounting entries” in the Philippines operations.

SunPower’s Q4 revenues of $548 million were significantly higher than previous year’s $400 million and surpassed the market’s expected target of $490 million. By segment, Components accounted for 62% of the quarter’s revenue and Systems 38%. For the quarter, SunPower reported EPS of $0.47 compared with the previous year’s $0.70 and the market’s projected earnings of $0.49.

SunPower too is expanding globally and is partnering with and acquiring companies to increase its footprint. It recently acquired SunRay Renewable Energy, a leading European solar power plant developer, for $277 million. SunRay is spread across Europe and the Middle East and has a pipeline of more than 1,200 MW of solar photovoltaic projects in various stages of development in Italy, France, Israel, Spain, the United Kingdom, and Greece.

SunPower also partnered with K6 S.a.S, an Italian investment and management company, to build two 1-megawatt photovoltaic solar power plants in the Puglia region of Italy by August 2010. It tied up with Sol.In.Build Srl, a majority owned subsidiary of Veronagest SpA, to build seven solar photovoltaic power plants totaling 16.5 megawatts on the island of Sicily.

Italy is becoming a high-growth market and already has 1 gigawatt of solar power in place. Italy had earlier planned to cap annual solar power at 1.2 GW, after which the reduction in feed in tariffs were to kick in. But the government has now announced its decision not to implement the reductions till January 2011.

Going forward, SunPower projects revenues of $330 million–$350 million with EPS of $0.05 for the current quarter. For the year, the company expects revenues of $2.0 billion–$2.25 billion with EPS of $1.65. The Street was expecting revenues of $2 billion and EPS of $1.78.

The stock is trading at $18.15, taking its market capitalization to $1.77 billion. Earlier this year it touched a 52-week low of $17.82.

Solar power companies need to focus on alternate markets to diversify from their current subsidy-based German markets. China is another big market worth exploring. Being the second-biggest energy consuming nation, after the United States, China plans to invest 2 trillion yuan (~$290 billion) in the alternative-energy industry over a fifteen-year period through 2020. It may surpass Europe, Japan, and the United States to become the largest user of renewable energy by the end of this year. It remains to be seen how SunPower and First Solar harness their energies to explore this market.

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