Friday, March 27, 2009

Cap of 180MW Is Going to Ruin This One-Day Solar Party! - FBR

Friedman Billings Ramsey (FBR) is out with some comments regarding the Solar sector noting the stocks rallied by an average of 20% yesterday (with China-based names, such as STP and TSL, up 40%-plus, compared to a 2% strengthening of the S&P 500) following the news from the Chinese government that it will provide RMB20/watt in incentives for (most likely) ground-mounted solar PV installations. What the press release did NOT provide is any color on how such incentives will be implemented or whether there is a cap.

After extensive checks with contacts in China, it is now clear to them that: 1) there is a cap of 180MW in CY09 (RMB20/watt, total incentives of RMB2.5B, of which 70% comes from the central government); 2) not even the people in the government (that they contacted) know the details, implying that the details would still need to be worked out and no installation is going to take place tomorrow!; 3) there is a lack of color and clarity on whether this ONE-TIME incentive would be extended next year. Their industry model suggests a best-case demand scenario of 6Gwatt in CY09, with China accounting for 100Mwatt (versus 70Mwatt in CY08), implying 80Mwatt upside, which, in firm's view, will not really matter much.

Such a best-case demand scenario, combined with estimated “shippable” capacity of more than 8Gwatt, suggests that there is still a considerable downside risk to current consensus estimates. To make the point clear, FBR believes they have also learned this week that the solar PV manufacturing industry has yet to see the kind of pickup in orders (shippable and installable in 2Q) that it was “hoping” for only a month ago, when 4Q08 results were reported. This also illustrates the increased downside risk to 2Q revenue/EPS expectations across the board.

- Does this 1% potential (best-case) upside to their best-case industry estimate of 6Gwatt warrant the near-20% upside to solar stocks (from yesterday)? They say, “NO WAY!” Do names such as FSLR even have a chance of getting into the Chinese market to benefit from this 180Mwatt incentive? Again, they say, “NO Way!” Is Europe or the U.S. picking up so quickly as to soak up the current excess capacity (which is being written off every time a solar manufacturer reports earnings)? They say, “Absolutely not!”

Stock net. With their downgrade of TSL shares this morning, they encourage investors to use yesterday’s rally to take profit/short STP and TSL. The firm also expects other names under coverage, such as FSLR, QCE, SOLR, and WFR, to also trend down towards theior price targets.

Notablecalls: I've always liked FBR's approach to Solars and I know their comments carry a lot of weight among the investing community.

I'm not entirely sure though one must approach these stocks on the short side today. Momentum has a funny way of continuing beyond everyone's expectations. I may be wrong here but getting caught short in these can be a cruelsome experience.

Just FYI.

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