Solar stocks rally following tax advantage news

30. April 2013 | Top News, Global PV markets, Industry & Suppliers, Investor news, Markets & Trends | By:  Cheryl Kaften

Solar stocks in New York rallied this month on the back of news that a bill introduced in the U.S. Congress would provide solar companies with a tax advantage enjoyed to date only by fossil fuel producers. The sector also received several votes of confidence that increased market momentum, including ABB’s Power-One acquisition, and BNEF’s elevation of Japan to the number-one market for PV installations.

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At its 2013 Analysts Meeting on April 9, First Solar revealed its decision to recognize revenue sooner rather than later, thus boosting its income outlook and guidance for the rest of the year.

There were several other positive indicators – as well as a rumored big-name buyer for Suntech and a short-lived controversy about First Solar’s guidance to analysts.

However, when the dust cleared on April 26, First Solar and SolarCity continued to lead the sector, followed by SunPower (up 30.7%for the last full week of the month), JinkoSolar (up 45.8%); and Canadian Solar (up 33.5%). Yingli Green Energy held its own (up 16%); while LDK Solar, amazingly enough, remained listed.

Tax advantages

On April 24, a bipartisan group of four U.S. federal lawmakers – Senators Chris Coons (Democrat-Delaware) and Jerry Moran (Republican-Kansas), along with Representatives Ted Poe (R-Texas) and Mike Thompson (D-California) – unveiled The Master Limited Partnership Parity Act.

Why a "parity" act? Since 1987, firms that mine oil, gas, and coal resources have been able to form master limited partnerships (MLPs) under Section 7704 of the U.S. Tax Code; however, renewable energy generation firms have not been eligible for the same tax relief.

Coons described the legislation as "a straightforward, powerful tweak to the federal tax code that could unleash significant private capital into the energy market," noting that, "The legislation, which is just over 600 words long, would level the playing field between traditional and new energy businesses by helping energy-generation and transmission companies form master limited partnerships, which combine the funding advantages of corporations and the tax advantages of partnerships."

Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA), stated that the bill would accord solar project developers with the same tax advantages enjoyed by "long-entrenched energy sources in America." He noted, "SEIA applauds [Senator Coons] for putting forward an idea that has the potential to attract private sector investment for critically-important solar projects. This bill represents smart public policy."

Following news of the legislation, SolarCity shares lifted 5.6% on April 24; SunPower’s rose 10.5%; and China's JinkoSolar climbed15.3%.

Votes of confidence

The solar sector also received several votes of confidence that increased market momentum during the month, including:

  • ABB’s acquisition of Power-One;
  • Bloomberg New Energy Finance’s (BNEF’s) elevation of Japan to the number-one market for installations; and
  • R.W. Baird’s upgrade of SunPower to Outperform from Neutral.

On April 22, the Zurich-based power and automation technology group, ABB, announced it was in the process of acquiring Power-One, Inc., a Camarillo, California-based provider of solar inverters, in a transaction ballparked at US$1 billion (€763 million) equity value, or $6.35 (€4.85) a share. The deal – already approved by the companies’ boards of directors – is expected to close during the second half of this year, at which time, Power-One will be integrated into ABB's Discrete Automation and Motion division.

The transaction would position ABB as a leading global supplier of solar inverters to a market forecasted by the International Energy Agency to grow by more than 10% per year until 2021. Solar inverter industry revenues reached $7 billion (€5.3 billion) last year, according to England-based IMS Research.

But the move also challenged current industry wisdom: ABB’s closest competitors – Germany's Siemens and Bosch – both recently curtailed solar ventures after a module oversupply and a weak economy resulted in a ripple of insolvencies in the sector. ABB’s show of confidence may help stimulate investor interest in solar portfolios.

Pavel Molchanov, senior vice president and equity research analyst for Houston, Texas-based Raymond James & Associates, told pv magazine in a recent interview, "This was a good acquisition. I think very highly of Power-One. I actually had a Strong Buy on it. It was my only Strong Buy in the solar sector. ABB got a very good deal."

In another show of industry "chutzpah," earlier in the month, BNEF became the first and only analyst group to identify Japan as the number-one market for solar installations this year. In a research note on April 4, it remarked, "Japan will probably become the largest solar market in the world after China this year, boosted by an incentive program that offers above-market rates for energy from renewable sources."

Earlier forecasts from sources such as Solarbuzz and Deutsche Bank placed Japan at number four,behind China, the U.S., and Germany. Maxim Group and Lux Research saw Japan squeaking into third place. Then, late in March IMS Research stuck its neck out, and ranked Japan at number two.

BNEF now explains that, "The upward revision was done because of the rapid increase in shipments seen last quarter, as well as the fact that the pipeline of projects is even stronger than previously expected."

The forecast reflects the push by Japan to find alternative sources of energy following the Fukushima earthquake and tsunami in March 2011, after which all but two of the nation’s nuclear reactors were shuttered. Japan on July 1 began offering incentives through feed-in tariffs to encourage investments in renewable energy sources such as solar and wind.

That uptick in Japanese shipments, as well as anew respect for and recognition of the island nation as an emerging power in the solar industry, helped to catapult SunPower shares up on April 26.

In fact, analyst Ben Kallo of Robert W. Baird & Co., a private equity and asset management firm cited the solar panel manufacturer’s business interests in Japan as one of the factors behind his decision to upgrade SunPower’s rating to Outperform from Neutral. Kallo also alluded to SunPower’s blockbuster parent company, Paris-based oil and gas conglomerate, Total S.A., as a reason for the solar producer’s financial stability and stronger rating.

Shares of SunPower immediately soared 14% on the Outperform rating and other solar firms bounced as well during the last week in the month.

Revisionist history?

Meanwhile, at its 2013 Analysts Meeting on April 9, First Solar revealed its decision to recognize revenue sooner rather than later, thus boosting its income outlook and the company’s guidance for the rest of the year. The company noted that revenue recognition for the 550 MW Desert Sunlight project in California will now begin in the second half of 2013 and conclude by late 2014. This assumption is reflected in the First Solar’s 2013 guidance and 2014 outlook.

For the current 12-month period, First Solar projected net sales between $3.8 billion (€2.9 billion) and $4 billion (€3 billion), including about $3.6 billion (€2.7 billion) in system sales. Total module shipments have been pegged at between 1.6 GW and 1.8 GW. Diluted earnings per share are expected to yield between $4.00 (€3.05) and $4.50 (€3.44); and in an industry where razor-thin margins have been the rule, the company’s consolidated gross margin is anticipated to be between 20 and 22%. According to industry analysts, this guidance was well above forecasts.

In fact, Gordon Johnson, managing director of Axiom Capital Management in New York City, told pv magazine, "What First Solar has done is extremely misleading. Previously, they stated very clearly that they would not start recognizing revenue on the Desert Sunlight project until the first quarter of 2015. Excluding that project, their EPS [earnings per share] numbers for 2013 and 2014 would have been significantly below the Street [forecast] and their stock would have tanked. We are seeing ‘financial shenanigans,’ this quarter."

The company also revealed a new acquisition that will provide it with a threefold advantage: access to the Japanese market, a new technology to sell, and the opportunity to move into rooftop installations. First Solar divulged that it will purchase San Jose, Calif.-based TetraSun from Tokyo-based JX Nippon Oil and Energy (JX Energy) and other investors. TetraSun is a photovoltaic technology startup that has developed a breakthrough cell architecture capable of conversion efficiencies exceeding 21%, with commercial-scale manufacturing costs comparable to conventional multicrystalline silicon solar cells.

Terms of the transaction, which is expected to close in the second quarter of 2013, were not disclosed. First Solar tentatively plans to begin commercial-scale manufacturing of the new technology in the second half of 2014.

Ben Schuman, senior research analyst at Pacific Crest Securities in Portland, Oregon, advised pv magazine, "This Japanese purchase is an interesting proposition … First Solar also tried to develop a CIGS [copper indium gallium selenide] technology and wasn’t successful doing that. Strategically, it is not a bad move. I don’t think it shows panic [about the prospects for thin film technology] at this point; I think that the company line would be that there are certain parts of the market … where thin film can’t compete. Our view is that there is an element of hedging to this. If the company can’t be cost-competitive with thin film, this gives them an alternate route into the market. It isn’t like they are investing a substantial amount of money."

The next day, on April 10, Bloomberg reported that JX Energy was in talks with First Solar to distribute the U.S. panel manufacturer’s products in Japan. JX Energy is seeking exclusive sales rights for First Solar’s photovoltaic panels using technology developed by TetraSun, the company said in a statement. In final trading that day, First Solar’s share price was still going strong, despite a poor Q4 2012 earnings report from China-based JinkoSolar. First Solar fell by just 7.70% in daily trading, with an end position of $36.72 – leaving the shares 39.2% higher than they had been a week earlier.

A fail-safe policy

Finally, Yingli Green Energy managed to beat the odds again, Suntech was buoyed up – but only briefly – by news of a potential buyer; and LDK lost even more ground, if that were possible.

On April 26, Yingli announced that the company had signed two loan agreements with China Development Bank (CDB) with an aggregate of $165 million (€126 million). Under the terms of the agreements, CDB will provide Yingli China with a one-year loan of $110 million (€84 million) and a three-year loan of $55 million (€42 million) to complement its working capital needs and support the procurement of raw material.  

According to Liansheng Miao, chairman and CEO of Yingli Green Energy, "With the new financing in place, we're confident to continue to solidify and reinforce our leading position globally. At the same time, as our operating cash flow position is on track to gain improvement, we expect to continuously optimize our balance sheet."

Gordon Johnson of Axiom gave a thumbs-down to this maneuver. "The Yingli loan is … horrible news for the solar sector. They are getting money from a state-owned bank. These banks typically fund startups. This money is being used to repay the debts that Yingli has with other banks. The government in China has shown an uncanny willingness to loan to solar companies … China is doing this because you can’t just simply let Yingli default on millions in debt. It’s bad for the economy. They don’t want to report losses on loans. They don’t want Yingli’s workers to be laid off and go out in the street protesting. Instead of letting the business cycle play out, China just keeps funding [a failing company]."

Ben Schumann of Pacific Crest added, "The conventional wisdom is that China still views solar as strategically important. The government is going to do what it can to drive consolidation and a shakeout in the market. Yingli, Trina, and Canadian Solar are those that will emerge as long-term viable players."

Solar scuttlebutt

Two weeks earlier, on April 9, shares of Suntech Power Holdings were up 29.2%, to $0.62 (€0.47), as New York’s equity markets closed. The stock had rallied behind rumors from Asia that MidAmerican Energy Holdings – a unit of U.S. über-investor Warren Buffett's conglomerate Berkshire Hathaway – had shown interest in the cash-strapped company.

A number of other Chinese solar stocks also jumped following the news. LDK was up 23.4%; Yingli, 21.1%; and JA Solar, 19.5%. Trina Solar, which separately had announced that it would return to profitability during the second half of the year, also saw its share price rise 14.6%, to $4.40 (€3.36).

However, several analysts were stumped by MidAmerican’s unanticipated move. Known as a shrewd and skillful investor, Buffet has rarely placed a bet on a company in freefall. 

Pavel Molchanov of Raymond James & Associates told pv magazine, "I think this rumor is absolute nonsense. Berkshire Hathaway absolutely does not need to own a solar power manufacturer in China and, even if they did, I don’t think that Suntech is the way to do it. Suntech had very depressed gross margins even in the best of times; I can understand why potentially some strategic investors might be interested in buying a distressed asset on the cheap. But to think that Berkshire Hathaway would do so is simply the ultimate in wishful thinking. If Suntech is talking it up, that suggests that the deal is not real, because if Suntech were in serious conversations with Warren Buffet, the last thing they would do would be to talk about it."

Gordon Johnson agreed. "Warren Buffet is absolutely not interested in Suntech. When you look at the type of companies that Warren Buffet buys, they represent the exact opposite of what Suntech is today. Buffet has a history of buying stable high-cash-generating companies that pay a low dividend. Suntech is none of those things."

And as the month drew to a close, LDK, which according to Bloomberg is burdened with at least $3 billion (€2.3 billion) in debt, agreed to sell a second 15% stake to Fulai Investments Ltd for $25.8 million (€19.7 million) following their first share sale deal in January. Fulani, incorporated in the British Virgin Islands, is owned by Chinese businessman Cheng Kin Ming.

Molchanov commented, "Similar to Suntech, LDK is a zombie company with a completely broken balance sheet. Yingli and Trina are no healthier, but still have a lot of leverage."

Edited by Becky Beetz.


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