Credit Suisse
Solar stocks have neared the one times enterprise value (EV)/replacement value of capacity we have long argued as downside to the space, and there could well be a bounce trade into PV-SEC conference in Germany next week.
However, in this report we present several charts that highlight the excessive lending by Chinese banks to the solar industry, which is prolonging the necessary correction in fundamentals for the industry.
The longer and larger the Chinese bank-lending bubble for solar inflates, the sharper and more unpredictable will the eventual fundamental correction be due to industry consolidation.
A prolonged bubble could result in a worst-case scenario eventually that involves fire-sale prices driven by widespread inventory liquidation by companies forced to exit the business. We expect the lending spigot will tighten soon, and lead to production cuts for wafers and cells.
We will first observe the symptoms of that in the form of rapidly declining polysilicon prices. A trough in polysilicon prices is a prerequisite to call the bottom for the sector, and if not for the lending bubble, polysilicon prices could be a lot lower already.
How big is the bubble? Net debt for the U.S.-listed solar companies (about 50% of total industry volumes in 2010) has ballooned from $2.0 billion in the fourth quarter of 2010 to $6.2 billion by the end of the second quarter of 2011.
Gross debt has increased from $10.4 billion to $14.8 billion from the fourth quarter of 2010 to the second quarter of 2011 -- an increase of $4.4 billion. (more)
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