Monday, November 26, 2007

More Concerns about Solar ASP Pricing from Jeffries

As I just wrote in my JA Solar (JASO) commentary and wrote a very lengthy entry on this weekend [Price Concerns Already an Issue], Notable Calls blog is out with a note by Jeffries [Solar Module ASP likely to decline by 15% in 2008E] indicating a very aggressive erosion in prices throughout the entire supply chain. This is very interesting to see, because thus far I have felt like quite the outlier calling for ASP declines to start affecting things much sooner than 'the consensus' think, but this analyst seems to agree with me; although in fact he is calling for much more lower prices than even I assumed (and much earlier). Combined with the survey we saw this weekend from the industry itself it surely is food for thought for solar bulls. I continue to stress for investors to stick to those companies with scale/size/R&D and cash. Not all companies can be winners in any industry - despite the mania that currently envelops solar investors. Those with weaker margins in this industry are only going to get crunched as prices (eventually) fall. As I wrote earlier, I think Spain is masking the situation this year and probably for another 2 quarters.... but I think the next 4-6 quarters should be very interesting in this space.
  • Jefferies is out with an interesting call saying they believe that global solar module ASP is set to decline by 15% in 2008E due to the rising percentage of sales to mature and lower priced solar markets. They expect that solar module supply will expand from 2.5 GW in 2007E to 4.6 GW in 2008E. Most of this increased supply is driven by new silicon capacity coming on line in the coming months.
  • The firm expects that the leading solar markets of Germany, Japan and (to a growing extent) the USA will have to absorb a significant portion of this new supply. These markets already have the lowest module ASPs and are the most price sensitive which will force further price reductions in order to stimulate demand.
  • Jeffco expects that the pain of this price erosion will be shared unequally throughout the solar value chain. Their base assumption is that a 15% module price decline will lead to a 10% decline in cell prices and a 5% decline in wafer prices while silicon price will be unaffected. Margins will be most affected in the module and cell production segments.
  • Notablecalls: The consensus estimate for solar module ASP decline for 2008 is around -5%, which certainly makes Jeffco's call an out-of-consensus one. I'm not sure if this call is an outright actionable one, but would not be surprised to see weakness is many of the high-flying solar names in the n-t.
So if this call is accurate the module makers will take the largest hit (15%), then down to cells (10%), and then down to wafers (5%). Wafers is the domain of LDK Solar (LDK) a much maligned company I am slowly (very slowly until mid December) building a position here near $29-$30.

Long LDK Solar in fund; no personal position

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