Wednesday, December 16, 2009

Renesola (NYSE:SOL): New Kid on the Block, Upgrade to Overweight - Morgan Stanley (Actionable Alert!)

Morgan Stanley is out with a fairly major upgrade on Renesola (NYSE:SOL) upgrading the Chinese Solar name to Overweight from Equal-Weight raising their price target to $6.60 (prev. $2.30).

Analyst notes their upgrade reflects their view that ReneSola will target the profitable module business in FY10 with a low priced strategy to gain significant market share. Having cleared most of the high cost polysilicon inventory, the core wafer business will likely also become profitable. Although the negatives are fading away and the company is migrating into profitable new segments, the stock is still trading below its BVPS, which makes it compelling, in Morgan's view.

They believe that ReneSola is one of the new kids on the block to target the attractive module market. With the acquisition of JC Solar earlier this year, the company is well placed, in their view. It is expanding in high margin solar module business to displace high cost EU module makers and limit the share gains of integrated cell-module makers such as Yingli, Trina and Suntech. With a pricing spread of $1.1/Wp between modules and wafers and incremental manufacturing cost of $0.60/Wp and limited capex, there is ample margin (and profit to be gained. It could ship 150MW to 250MW of modules in FY10 adding an incremental $50m+ to gross profit.

Due to its low market cap and high inventory drag for almost a year, ReneSola has been unloved and has underperformed its peers. It is now one of the cheapest solar stocks globally, trading at 11.0x earnings and 0.9x book on our 2010 estimates. With a new business model with reasonable margin recovery, we believe ReneSola is ready to enjoy higher profitability and well poised to gain market share and potentially surprise on the upside.

Likely Catalysts
Morgan Stanley expect ReneSola’s stock price to be driven by four key catalysts:

1. Strong growth in 1H’10: They expect ReneSola’s total shipment to grow from 322MW in 2H’09 to 378MW in 1H’10, which is much better than the industry growth and peer group growth. Furthermore, share of modules (higher profitability) will grow significantly from Q1’10 onwards, in their view.

2. Slowdown in ASP Declines: Morgan Stanley expect ASP declines to slow for the entire industry, resulting in a positive revenue inflection.

3. Digestion of high cost inventory: For the past one year, ReneSola has incurred a significantly higher than market cost of polysilicon. However, most of this high cost polysilicon inventory has been digested now and they believe this should result in a margin recovery from Q1’10 onwards.

4. Cost Reduction (1H’10): In Q4’09, ReneSola should be able to deliver non-Si manufacturing costs of US$0.37/Wp (incl. depreciation), down from US$0.39/Wp in the previous quarter, in firm's view. Management is targeting a further reduction in non-Si cost. If it were to reduce the non-Si cost to US$0.33/Wp by mid 2010, it could make a significant positive impact on the company’s gross margin.

What could it be worth in three years?
Morgan Stanley believes that if ReneSola executes well on its module strategy it could be worth US$11-12 in three years time. Based on 27% shipment growth for the three years beyond FY10, they estimate that ReneSola may be able to generate net profit of $80m+ based on a net margin of 6.3%, which likely translates to EPS of US$0.90. With a slowdown in prospective earnings growth to 18%, they would expect the market to accord a P/E of 13-14x to the stock, implying a stock price of US$11.7 to 12.6 per share. Firm expects its BVPS to grow to US$7.4 per share. By that time, with normalized ROE at 12%, they would expect the market to accord a P/BV of 1.5x, which would imply a stock price of US$11.1 per share.

Notablecalls: All systems 'GO' on Renesola (SOL) - this one is cleared for takeoff. Actionable Call Alert!


- I trust you have seen the action in some of the Chinese Solar names lately. They are flying.

- Renesola (SOL) has been a notable laggard in the space and with a blessing from a firm the size and reputation of Morgan Stanley it can't get much better.

- I'm sure many of you Solar watchers saw the positive comments on Ja Solar (JASO) from Morgan Stanley's Solar team on Monday. Look at what the stock did afterward. It went from ~4.50 to around 6.00 in two days. This was of course helped by the guidance raise on Monday evening but that was what Morgan Stanley was calling for. They now have a lot of credibility in the space.

Renesola (SOL) is among the smaller names in the space which should amplify the expected move in the name today and over the coming days. A forgotten name brought back to life. That's the way we like it.

This one will trade up 10-15% today putting $5.00-5.30 levels in play.

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