First Solar Inc. is the world’s largest thin-film PV solar module manufacturer and one of the world’s largest PV solar module manufacturers. Our attention toward this company is due to it’s amazing stock performance during this year (+48%) and the fact that it will probably be the main beneficiary of the solar panel trade case filed by Suniva on the 17th of May (Suniva is a US-based Chinese owned solar modules producer, now in bankruptcy).
Chart 1: First Solar stock price (NASDAQ: FSLR) (Source: Alpha Vantage)
Summary of the ITC filling
Here we provide a summary of the timeline of the solar panel trade case filled at the ITC.
September 22: ITC’s determination on ‘injury’ to the domestic industry. If the decision is ‘yes’ (which is the case after ITC voted unanimously in favour of Suniva and SolarWorld), the case proceeds to the ‘remedy’ phase;
October 3: a public hearing is held and the remedy phase begins. Suniva and SolarWorld have modified the original proposal to lower tariff from $0.40/watt to $0.25/watt and the minimum floor price from $0.78/watt to $0.74/watt, but it added to put also a $0.32/watt tariff for CSPV modules. SolarWorld’s request is different and includes putting 0.22 GW (gigawatts) import quota for CSPV cells. The ten-hour hearing closed with no clear indication on the final remedy. The two petitioners said they believe the effective remedy shall either be the requested tariff plus Suniva’s requested module floor price or the requested tariff plus SolarWorld’s requested quota. Two dozen solar executives and industry experts, including representatives from Solar Energy Industries Association (SEIA), spoke against the ruling and claimed it would cripple demand and cost American jobs;
November 13: the latest date on which ITC could make a remedy recommendation to the White House. The White House has no obligation to accept either the finding of injury or the remedy. However, considering president Trump’s ‘America-first’ attitude and no interest on climate change issues, we believe the tariff is likely to be imposed;
January 12, 2018: President’s decision and transmittal of the report to the congress;
January 27, 2018: Effective date of the remedy if the remedy is consistent with the one proposed by ITC;
April 12, 2018: Effective date of the remedy if the remedy is not consistent with the one proposed by ITC;
First Solar Valuation
The US ITC found injury in the Section 201 Petition filed by Suniva and Solarworld in an injury phase ruling issued September 22nd. The Suniva Section 201 Petition requesting the imposition of minimum prices and tariffs on the importation of Chrystalline Silicon Photovoltaic Cells (“CPSV”) but since FSLR does not manufacture Crystalline Silicon Photovoltaic cells or modules, it should benefit from tariffs and/or minimum prices imposed by the ITC on CSPV imports.
In order to estimate the impact of this case on First Solar fundamentals we analized it in more details. The company operates in two businesses: the Components and the Systems segment.
1. The Component segment is specialized in designing, manufacturing and selling CdTe solar modules. The company flagship Series 4 solar module is manufactured using the advanced CdTe thin-film technology. Based on publically available information, First Solar Inc. is the PV solar module manufacturer with the lowest module cost per watt basis. This efficiency is achieved thanks to the vertical integration of the company and the technology of CdTe solar modules, which uses approximately 1-2% of the amount of semiconductor material that is used to manufacture traditional crystalline silicon solar modules. The company has recently announced the transition to the new Series 6 solar module, expected to be more efficient in the energy transformation process and entail lower manufacturing costs.
2. The System segment provides complete turn-key PV solar power systems which primarily use First Solar Inc.’s modules. Additionally, within the Systems segment, the company may temporarily own and operate certain PV solar power systems. The systems operations entail three services. The former is the Project Development, consisting in selecting the site for PV solar power systems, securing rights to acquire the site, construct and operate a PV solar power system. The second service provided is the EPC (Engineering, Procurement and Construction), consisting in engineering, design and related services, advanced development of grid integration solutions, construction contracting and management. Finally, the Systems segment provides O&M (Operations and Maintenance) services to system owners that use the company’s solar modules or modules manufactured by third-parties.
In FY 2016, the Systems segment generated revenues for $1,467 mln and the Components segment for $1,484 mln. The two most important revenue drivers for any business are volumes and prices. In the Components segment, volumes are measured in terms of PV modules shipments expressed in Giga Watts, while prices are measured in terms of Average Sales Prices (ASPs) of the modules. Since the inception of the company, shipments have constantly increased reaching a maximum of 4.2 GW in FY2015. However, in FY2016, PV modules shipments tumbled YoY 33.33%, dragging down revenues that fell to $2,951 mln from FY2015’s record of $3,579 mln. In FY2016, the company recorded a net loss of $357.96 mln. The net loss reflects both the fall in PV modules sales and the one-off charge of $818.79 mln, due to the restructuring plan put in place to shift the production from Series 4 modules to the new Series 6.
Chart 2: PV Modules Shipments (Source First Solar Quarterly Reports)
As far as prices are concerned, solar modules ASPs have fallen worldwide, eroding one of the primary historical constraints to widespread solar market penetration: its affordability. Nowadays, intense price competition set module ASPs at all-time lows. According to our estimates, First Solar Inc. module ASP for FY2016 has been $0.53/watt. In FY2010, the module ASPs were above $2.00/watt, showing a long-term declining trend due to technological improvements and cost efficiency achievements.
Now, we will try to perform a rough valuation of First Solar Inc. based on the prospect of growth triggered by the ITC case. A tariff on Chinese solar module and cell imports would benefit First Solar Inc., boosting US demand for solar modules. This is likely to result in increasing sales volumes, pushing up PV modules shipments. According to First Solar Inc. Q2 FY2017 report, the company expects for FY2017 PV modules shipments of 3.7 GW. Before the ITC case, in Q1 the company expected mild PV modules shipments of 3.0 GW for FY2017. Moreover, possible tariffs on Chinese imports will increase First Solar Inc. pricing power: Sunviva and SolarWorld, in fact, asked the introduction of a floor price for modules of $0.78/watt and a tariff on imports of $0.40/watts. In accordance with Gordon Johnson from Axiom, one of the most respected solar analysts around, we will assume an ASP lower than the floor price proposed. The resolution, in fact, has not been approved yet and we want a conservative estimate. Following, Gordon Johnson’s view, we assume a $0.09/watt markup for FY2017, reaching an ASP of $0.62/watt. It is clear that this increased pricing power will be a temporary effect of the ITC resolution. In the long-run, we believe that solar module ASPs will continue to follow their falling trend, due to high competition in the industry and technological improvements.
At this point, we have all the elements to project First Solar Inc. revenue for FY2017. For simplicity, we will assume a constant revenue from the System segment. Our conservative estimate of First Solar Inc. FY2017 revenue is thus $3,761 mln, lower than that of Gordon Johnson from Axiom who anticipates FY2017 revenue of $4.2 bn.
At this point, we can perform a rough valuation of First Solar Inc. using stock-market ratios for comparable companies operating in the solar module manufacturing industry. For simplicity, we will use Bloomberg peers. The industry EV-to-Sales ratio is ≈ 1.49. Using our estimate of First Solar revenue, the expected market cap is $5,443 mln, implying a target price of $52 for First Solar share (last price $48.21 as of October 6, 2017; 7.86% premium).
The options with underling First Solar currently have an implied volatility that average from 40 to 55, making the options strategies very expensive. An option strategy would have offered the flexibility necessary to enter in such an uncertain investment, but since we have a conservative view on the target price, the cost/benefit ratio does not justify the strategy. Thus, given the small estimated premium of 7.86% and a 3-month investment horizon, we suggest overweight First Solar’s stock in your investment portfolio.