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First Solar Slashes Revenue Expectations By $1B As Demand For Solar In China Slows
First Solar, the world’s largest manufacturer of thin-film cadmium telluride (CdTe) modules and utility-scale solar solutions provider, reported net income of $1.49 per share for the third quarter, beating analysts’ bottom line expectations. Sales, however, fell 45.9% to $688 million, and CEO Mark R. Widmar officially slashed sales guidance for 2016 to $2.8-$2.9 billion from $3.8-$4 billion, due to the timing of certain utility-scale solar project sales.
Widmar withheld comment on the company’s 2017 outlook, deferring until November 17 when First Solar will give an outlook update. But the combination of the enormous outlook decline for 2016 revenues and uncertainty in articulating visibility to future earnings left the investing community with little choice but to sell first and ask questions later.
On the call, CEO Widmar raised the possibility of fast-forwarding from the current Series 4 module straight to the Series 6, given that, in the current pricing environment, the Series 4 and as yet unveiled Series 5 module will likely experience significant margin pressure. Widmar is also considering other cost-cutting measures, but at the end of the day none of this will really make a difference as the company is simultaneously facing several negative macro trends.
Small Share in a Cyclical Industry
The solar industry is highly cyclical and First Solar is a small fraction of the overall share. Though First Solar is the world’s largest manufacturer of thin-film modules with ~3GW of capacity, thin film only has about 6% overall market share relative to polycrystalline silicon, an industry dominated by Chinese manufacturers.
Workers install polycrystalline silicon solar panels in the Guanshui Town of Muping District in Yantai, Shandong Province of China last November.
First Solar, the world’s largest manufacturer of thin-film cadmium telluride (CdTe) modules and utility-scale solar solutions provider, reported net income of $1.49 per share for the third quarter, beating analysts’ bottom line expectations. Sales, however, fell 45.9% to $688 million, and CEO Mark R. Widmar officially slashed sales guidance for 2016 to $2.8-$2.9 billion from $3.8-$4 billion, due to the timing of certain utility-scale solar project sales.
Widmar withheld comment on the company’s 2017 outlook, deferring until November 17 when First Solar will give an outlook update. But the combination of the enormous outlook decline for 2016 revenues and uncertainty in articulating visibility to future earnings left the investing community with little choice but to sell first and ask questions later. First Solar ended the day down over 14% after the release.
On the call, CEO Widmar raised the possibility of fast-forwarding from the current Series 4 module straight to the Series 6, given that, in the current pricing environment, the Series 4 and as yet unveiled Series 5 module will likely experience significant margin pressure. Widmar is also considering other cost-cutting measures, but at the end of the day none of this will really make a difference as the company is simultaneously facing several negative macro trends.
Small Share in a Cyclical Industry
The solar industry is highly cyclical and First Solar is a small fraction of the overall share. Though First Solar is the world’s largest manufacturer of thin-film modules with ~3GW of capacity, thin film only has about 6% overall market share relative to polycrystalline silicon, an industry dominated by Chinese manufacturers.
Solar module pricing has also fallen 29% year-to-date, and the industry is in an over-supplied position.
China’s Changing Targets
Top Chinese solar players like Trina Solar Ltd., Canadian Solar Inc. and JinkoSolar Holding Co., who control well over 90% of the market, are feeding the decline in ASPs. According to Bloomberg New Energy Finance they built out capacity aggressively even as the Chinese government (the number one buyer for solar modules) is lowering solar subsidies and dialing back demand as it digests existing new solar capacity.
In China, there was a rush to install solar in the first half of the year because only solar projects that were operational by June 30, 2016, would be eligible for a ‘feed-in tariff’ of about 1.0 yuan (15 U.S. cents) per kilowatt hour (kwh), while those completed beyond June 30 would get a lower tariff rate.
From the beginning of 2016 year until June 30, China installed 20 Gigawatts (GW) of solar as developers pushed to get their projects in under the more favorable tariff regime. But recently the Chinese government has set a new national target for solar installations of 18 Gigawatts.
Over the long term, China has ambitious goals to increase renewable energy’s share of the overall energy mix to 15%, but in the near term it seems to be taking a breather to make sure that all the new renewable capacity is actually hooked up to its grid.
Roth Securities analyst Phillip Shen downgraded First Solar to neutral from buy this morning, taking his price target to $40 from $55. Shen had correctly predicted the industry over-capacity after traveling to China earlier this year. He said in his note, “Although module ASP declines have recently flattened, the next ramp up of manufacturing capacity from Asia or seasonal slowdown of demand in China could catalyze another leg down.” Shen’s new 2017 EPS estimate stands at $1.55, which is $.05 higher than the roughly $1.50 of 2017 consensus.
Utility-Scale Buyers Showing Increased Price Sensitivity
Complicating matters for First Solar further, on the demand side, utility-scale buyers are increasingly price-sensitive.
Alexander R. Bradley, First Solar’s CFO, said on the call that the company passed on several projects in India and Africa this quarter. “We won’t chase the pricing to the bottom and we won’t go into deals that are uneconomic for us,” Bradley said.
Southern Company and NextEra, two big utility-scale buyers, recently announced they were going to focus less on solar and more on wind and other renewable alternatives. When asked about this on the call, management conceded it was the case, adding there is “somewhat of a scarcity of tax capacity for large utility-scale assets,” referring to financing from lenders interested in tax credits.
Better places for your capital
The management at First Solar is very open and honest, but it’s kind of like watching Hamlet contemplate his options. We’ll get more information at the November earnings update, but in the meantime, how can we overlook the fact that revenue guidance fell by almost 50%?
First Solar remains a price taker in a business characterized by cutthroat pricing. Even with great management, there is little they can do except ride it out. Until pricing firms up, there are better places to put your capital. Milan Lucic Jersey
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