Dienstag, 3. März 2009

Q-Cells: Another bubble has popped?

Q-Cells, self-proclaimed "world's largest solar cell manufacturer" has had a rough year on the stock-exchange: Down 86 % compared to its high in May 2008.

So is this a bubble that has popped? Has the hot air gone out of solar cell manufacturing, and brought valuations back down to a reasonable level?

From a rough glance, it looks as if the pendulum might have swung too far in the other direction:
- P/E (2008) is down to 7
- The stock trades at a discount compared to 12/07 book equity (0.75 x book), in spite of a reasonable RoE of 10 %
- Revenue growth of roughly 50 % is projected for 2008

A closer look reveals that not all is rosy, though:
- There is no 2008 balance-sheet yet, so we don't know what their NAV is. That's important, because they apparently made a big acquisition (REC) which seems to have reduced NAV quite substantially: There was a "currency effect" of -210 m € arising from "translating the REC accounts into €", which doesn't sound good. The year-end book-value of REC is quoted to be 949 m € ("no impairment is necessary"). Sounds like they bought themselves a big chunk of (possibly quite expensive) goodwill.
- Net income without the acquisition effect is up a mere 10 % compared to 2007, even though sales went up 46 %.
- In other words, margins are down sharply (EBIT-margin was 23 % in 2007 and 16 % in 2008). Q4 2008 was particularly nasty, with an EBIT-margin of just 9 %.
- While they did provide 2009 production and sales targets, Q-Cells wisely refrained from naming a profit target.

I'm no expert on solar cells, but AFAIK, silicium used to be in short supply, which helped big producers with long-term contracts to prop up their margin (that's also why Q-Cells bought REC, a silicon producer). This bottleneck is easing, though, which means much stiffer competition and lower sales prices going forward. Good for sales volumes, but not good for the bottom line. Q-Cells is building a new facility in Malaysia to increase production capacity by a massive 65 %. Let's hope they can find enough customers. The big wild card is the Chinese competition: Many new competitors with low production costs, cheap funding (?), and eager to reach critical mass. Sounds like a recipe for a messy shake-up of the whole industry.

Oh, and if I understand correctly, solar cell production is somehow similar to microchip production. That's not a good industry to be compared to earnings-wise: Infineon, Qimonda, AMD, Spansion, Hynix, etc. - has any of them ever managed to make money? (ok, I suppose Intel has, but that's kind of a special case...)

In any case: While things might not be too bright for Q-Cells shareholders, this is good news for the fans of solar energy: Prices are bound to tumble. And with interest-rates coming down, it will become easier to finance new solar installations (which provide a steady cash-flow, so banks won't be too reticent about lending, I suppose). Sounds like solar capacity will keep growing, and quite possibly solar energy will start supplying non-negligible amounts of energy quite soon. That most of this new capacity is still being installed in oh-so-sunny Germany is another matter

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