Analysis: First Solar raising cash at opportune time


Earlier this week, U.S. thin film producer and project developer First Solar announced that it was offering 8.5 million shares of common stock. The net proceeds to First Solar are expected in the range between $370 million and $430 million depending on the extent to which the over allotment shares will be drawn on. This capital increase marks the largest raising in public funds by a solar company in more than a year.

Goetz Fischbeck, executive director of Equity Research at Bankhaus Lampe, considers the strategy and implications of the move.

What was your initial reaction to the announcement that First Solar was issuing the shares?

The announced capital increase does not come as a total surprise. There had been indications that First Solar was considering to raise new capital and if you look at the share price performance since April, it looks like very good timing in my opinion.

Prior to the announcement, First Solar’s share price was trading at the highest levels since October 2011, so obviously ever since then there has not been a better opportunity to issue new stocks. The company has now reached valuation levels that, from the company’s perspective, make a capital raise an interesting option again.

What is interesting to note is that right now there are still a lot of open questions in the solar industry. The trade dispute regarding Chinese modules is an important factor, the punitive duties have only just been imposed, so it’s unclear how this important trade dispute will evolve and what consequences it will have on module prices around the globe. If the Chinese PV manufacturers put a bigger emphasis on shifting their sales efforts to areas other than Europe, North America and Japan, and also focus more strongly on newly emerging markets, the so-called sustainable markets that First Solar is already very active in, this could lead to a stronger price competition in these markets, for instance.

In light of this, what is the consequence of First Solar bolstering its cash position through this share offering?

The big distinguishing factor of First Solar compared to 95% of its peers is that it has a healthy balance sheet. As its business strategy is to develop utility scale projects, the kind of money that a company needs up front in order to be able to develop projects in the hundreds of megawatts are significant sums.

A lot of Chinese module manufacturers would love to compete with First Solar for similar projects. These companies have the problem that they don’t have the financial strength on their balance sheet and find it more and more difficult to receive the financial backing from Chinese banks in order to develop such large scale projects in markets where there are no guaranteed feed-in tariffs.

With the additional money from the capital increase, First Solar will not require to first seek the financial backing of the banks if it feels that a certain market looks attractive to it. I believe in a number of interesting emerging solar markets, it’s not yet that easy to convince bankers to support solar projects in these countries.

In such a situation First Solar can say, “we have the financial strength, so we can do it (initially) on our own.” The result could be that by the time the competitors realize that this specific market is indeed attractive, First Solar has already gained an important market position and has secured a prominent market share. Taking on such risks can make a lot of sense.

And the project development business is a capital intensive one…

Yes and no. Obviously to secure those large scale projects, which have a time horizon of a couple of years, a company has to spend a couple of millions of dollars. Fortunately the largest part of the capital commitment comes at the project construction phase, at which point in time a developer typically has the financing in place.

However, project development is also about projects that fail. So if a company overall sees good opportunities in a market, it has to be in the position that if two or three of the projects that it has initially invested in don’t come to fruition, it doesn’t want such possible failures to exert a too high strain on the finances.

So raising a significant amount of new capital now by First Solar looks rather smart, in my opinion, with all those question marks around. Who knows if First Solar is going to be as profitable as it is right now, in 12 months time? As prices remain volatile and the relevance of the established PV markets shifts in favor of newly emerging markets, for instance China becoming an increasingly important PV end market, this really could again put First Solar in a less advantageous position than it is at present.

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First Solar has been expanding its project pipeline largely through acquisition of late. What do you make of this strategy?

First Solar has also developed projects from the ground up in the past. So it’s not as if it has only acquired projects. But if you look into the history of the solar industry, there have been quite a number of project developers that have started off with very ambitious plans of developing hundreds of megawatts of projects and quite a number of them have failed.

So the interesting strategy of First Solar was to identify project portfolios that looked promising – where there were PPAs already in place and certain risks like environmental issues had already had been taken care of – and then acquiring them. Often enough for those independent project developers it proved to be an insurmountable hurdle to secure the financing for such large scale projects, which prevented them from starting actual construction of these power plants. For First Solar, this was much easier to accomplish. This is why First Solar is one of the first potential acquirers that the project developers turned to in such cases.

Is acquiring projects a better course with the shifting geography of the solar end market?

Even for a company the size of First Solar, there is always a question as to whether it makes sense to establish an in-house project development team in 30, 40 or 50 countries around the world, especially at this point in time, when many of those emerging markets are really just nascent and there can still be a lot of challenges and delays. At the end of the day it could be a good idea to have somebody else take that initial risk and come in at a certain stage.

Sure, if a company buys a project pipeline, it does have to pay a premium for that, but it does spare all those sunk costs in project development on those projects that for one or another reason never come to realization. It's also the point of time to market, and making sure that a company can capture a relevant market share in a market right at the beginning.

Furthermore, First Solar did have to take care of some issues internally, such as restructuring, the LPM issue, so some of its in-house project development might have suffered in the past two years. Right now with the financial strength that First Solar has, it appears to me that it’s a good idea to ensure that it manages to capture that significant share of available projects. Thus First Solar can ensure that the head start it has, with many competitors struggling, is being maintained.

You mentioned the Chinese market; First Solar was active at the recent SNEC trade show and was confident of its ability to succeed there. Do you think, with the extra cash raised through this offering, First Solar could be in a position to do so?

Addressing the Chinese PV end market is not new on the agenda for First Solar. The Ordos Solar Project was announced back in November 2009. Yet this specific project is significantly behind schedule. I believe a major reason for this is that one of the preconditions for the full project scope of 2 GWp to ever be realized depends on First Solar establishing a manufacturing facility in China.

Given that a key differentiating factor of First Solar is its proprietary manufacturing technology, I think one factor that the company looks into very thoroughly is answering the question of what kind of exposure the company can afford in China. So if the prerequisite of establishing a full manufacturing line in China exists, then the issue of how First Solar protects its IP is very important. It would be a big risk that in order to complete 2 GW of solar projects in China, First Solar would have to open up its technology books and one or two years later there are 10 Chinese competitors that have First Solar’s technology.

This is really still a key issue which will ultimately determine to what extent First Solar is going to address the Chinese market. No doubt China is an important PV end market and by next year it will be the biggest in the world. But even if First Solar should decide to only play a minor role in China in order to avoid any IP risks, there is still enough market opportunity left in all the other countries of the world.

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