Tuesday, June 08, 2010

First Solar (NASDAQ:FSLR): Elevated European CdTe Ban Risk - Hapoalim

Hapoalim Securities is out with a very negative on First Solar (NASDAQ:FSLR) lowering their target price on the name to $65 (prev. $95) while reiterating their Sell rating. According to the firm, First Solar may be banned from the European market by 2015 the latest.

- Based on Hapoalim's review of the updated RoHS draft documents published 12/14/09 & 1/6/10, they now believe CdTe modules have a finite life of 4-to-5.5yrs in Europe;

A new Annex (i.e., page 49 of RoHS Directive published by EU Parliament 12/14/09), has been added to the RoHS directive which specifically bans CdTe thin‐film PV panels after July 1, 2014. However, if FSLR applies for a temporary exemption extension 18 months (i.e., January 1, 2013) before the exemption expires, the commission will decided on a case-by-case basis if it will extend a grace period, which will not exceed 18 months after the expiry of the exemption.

What does this mean? Well, in short, in Hapoalim's view, this new Amendment to the RoHS directive (which did not exist before) implies the underlying technology supporting FSLR’s CdTe technology has a finite life of at least 4yrs, & at most 5.5yrs. Furthermore, adjustments to Amendment 11 added the text: “Exemptions from the prohibition for certain specific materials or components should be limited in their scope and time,” from “Exemptions from the prohibition for certain specific materials or components should be limited in their scope,” denoting that law makers in Europe are decisively looking to implement specific time limits on how long toxic materials are given a temporary pass.

Consequently, when considering: 1) the items highlighted above are public record, meaning they are not opinion, but rather suggested written European law, 2) until now, this information has gone largely unnoticed by FSLR’s RoHS risk disclosure in its 2009 10-K (see page 17 of 2009 10-K), investors, & Wall Street analysts, suggesting acute risk to FSLR’s long-term growth outlook/forward‐multiple as this information is more broadly understood, & 3) FSLR continues to make comments on l-term visibility thru 2015, implying no product viability risk, the firm believes the Street is currently factoring a 0% probability that FSLR’s modules get closed out of the European market (which represents ~80% of global solar demand, & 60%-70% of FSLR’s revs moving forward).

As such, after their review of the updated RoHS Directive & discussions with experts on this topic, crystallizing the subsequent implications for FSLR, the firm is adjusting their 6-month PT for FSLR lower to $65 from $90 (or 12.5x Hapoalim's CY10 EPS est. $5.27/share).

- Isn’t there a loophole that will allow FSLR to avert product extinction in Europe – after all, there is a 20% renewable energy target contained for member states in the 2009 Renewable Energy Directive?:

In short, Hapoalim believes the answer to this question is no. Why? Well, as clearly outlined in Article 5 (pages 10, 11, 12, & 13) of the Compromise package II on Exemptions for the RoHS directive published 1/6/10, only equipment in category 8 (i.e., medical devices) & category 9 (i.e., monitoring devices) will be given exemptions up to eight years; this amendment effectively closes any loophole available beyond the 4-to-5.5yr timeframe referenced above.

Furthermore, (i.e., Annex VIb found on page 14 of the Compromise package II on Exemptions for the RoHS directive), in the event FSLR seeks exemption from the RoHS directive, it must submit: “an analysis of possible alternative substances, materials or designs on a lifecycle basis, including, when available, information and peer-reviewed studies about independent research, and development activities by the applicant.” Consequently, when considering both c-Si PV modules, & thin-film modules that do not contain CdTe are both viable alternatives to CdTe panels (Hapoalim reminds their readers that, due to their higher efficiency, c-Si PV modules also require sig. less space than FSLR’s CdTe modules, meaning a much smaller footprint), the firm finds it hard to see a scenario where FSLR could make a compelling argument to further the life of its panels beyond the 4-to-5.5yr “life-line”. As such, as stressed above, they strongly question the val. multiple (i.e., long‐term growth outlook) investors are currently attributing to FSLR when considering many of them have not considered this as a prevailing risk to the company.

Notablecalls: Well, this is certainly a mess. My first instinct, after reading the Hapoalim call, was to find all the shorts available & short the heck out of First Solar as soon as possible. Yet, after some digging I'm not so sure anymore.

Consider the following:

- FSLR is down 50 pts from its April high of $152 & short interest stands around 20%+. J.P. Morgan is out this morning following their European Alt. Energy tour saing they encountered a couple of investors who remained bullish on the solar sector. In approximately 50 meetings with over 65 investors the firm only found two investors that remained bullish on the near- to mid-term investment outlook for solar energy stocks. Like J.P. Morgan, most buy side investors in Europe have a difficult time in being positive on solar PV given their expectation of significant decline in subsidies over the next two years.

It's worth noting that JPM itself remains Underweight most solar stocks, including SPWRA, WFR, FSLR, and ENER.

- Also, when you have a chance go & visit First Solar corporate website, go under PRESS CENTER (FAQ).

There you will find the following comments:

What is First Solar’s view on the European Parliament Environment Committee’s vote on RoHS, which took place on June 2, 2010?

We welcome the European Parliament Environment Committee’s decision to exclude renewable energies from the scope of RoHS. The exclusion is an encouraging step, and we hope that the Council will confirm the intention of the Commission and Parliament to exclude renewable energies from the scope of RoHS, which was designed for household electronics.

An exclusion from the scope of RoHS will ensure that renewables are not discriminated against and thus support the EU goals regarding climate change, renewable energy, and energy security.

For what it's worth, it looks like FSLR is at least trying to spin the June RoHS Directive change positively. I'm sure Hapoalim has a thing or two to say about this (they have called FSLR's bluff before).

All in all, the stuff Hapoalim has dug up looks & feels bad and is very likely to garner significant attention. The remaining holders may panic and we could have the stock down by 3-5 pts. But do consider that the stock is down a lot, has a big short interest, the sector is hated and the management is fairly promotional. They may step forward and issue press release rebuffing the potential impact of the RoHS Directive.

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