by Travis Johnson, Stock Gumshoe | January 31, 2018 2:58 pm
Time once again for an overheated pitch from our friend Louis Navellier[1]… he’s been circulating ads for his Emerging Growth[2] newsletter ($695/yr) that promote several of his favorite ideas for the year ahead, including a rehash of his lithium[3] pick from a few months ago as well as this newer (to me, at least) “World’s First Solar Monopoly” pitch.
So let’s dig in, shall we? The basic spiel is that this is the raw material supplier that the solar[4] companies depend on, and therefore as solar demand rises the demand for those raw materials (polysilicon for the solar panels, in this case) should go up.
Ready? Here’s a taste:
“China[5]’s rapid expansion of renewable energy[6] facilities is not only making headlines around the world but also minting millionaires. It’s no wonder. China is on pace for record solar installations in 2017.
“According to the International Energy Agency (IEA), China may end 2017 with year 123 gigawatts (GW) of capacity. That’s enough to power 20.2 Million U.S. homes!
“The pace of installations won’t end any time soon. China has made renewable energy a priority, not only offering subsidies but also low-cost loans as well.
“As a result, our no. 1 recommendation is well on its way to becoming the world’s first solar monopoly.”
Why a monopoly? Does no one else make this stuff? Here’s what Navellier says:
“It’s the lowest-cost producer of polysilicon for photovoltaic product manufacturers in the world who further process it into ingots, wafers, cells, and modules for solar power solutions.
“So, it’s no surprise their client list reads like a who’s who of China solar giants, including Jinko Solar, Meike Silicon Energy, Jinneng Energy, and JA Solar.
“This is why the company’s quarterly sales and earnings are skyrocketing, up 64% and 115% respectively.”
And he says there’s big growth ahead, with analysts forecasting 371% earnings growth in the fourth quarter of 2017… so that’s a good clue for our Thinkolator. And he says the stock is already up 127% year to date, by which he presumably means since the beginning of 2017, not 2018 (I got the ad this week, but it’s possible it’s been running for a while).
So who is it? This is, sez the Thinkolator, the Chinese materials comapny Daqo New Energy (DQ), which I confess to never having heard of before. They are, indeed, a manufacturer of polysilicon, with their customers being the big photovoltaic cell manufacturers.
I’ve owned polysilicon names in the past, though it’s been a long time since I looked at the industry — the last time I was excited about it was when solar panel manufacturing was just taking off, before the financial crisis, and there was a shortage of high-grade polysilicon because demand from both semiconductors[7] and solar panels was growing at the same time. To illustrate the problem with getting the timing right in these industries, however, there was a pretty brief window of success before that company went into bankruptcy (it was MEMC Electronic Materials[8], which later became the foundation of SunEdison, which went whole hog on leveraged growth and eventually collapsed).
So what’s going on in that industry today? Well, if you like the long-term prospects then you may be in luck, because the new tariffs announced in Washington last week really brought a cloud across the face of the Chinese solar companies, including DQ, and the stock is down roughly 10%.
Those tariffs are pretty punitive, they’re calling them “safeguard tariffs,” and they essentially do what the US has been trying to do since 2011 (the Commerce dept. has already found Chinese solar panel exporters guilty of dumping in the US market, but the duties imposed were sidestepped by Chinese manufacturers moving their production out of mainland China). This ends up being really a benefit to First Solar alone, since no other major US solar manufacturers exist that I’m aware of, but the hope, I imagine, is that this convinces the solar multinationals to move some of their manufacturing to the US (as some Chinese firms have moved production to Germany, Korea[9], Taiwan and other countries in the past).
Will it have a major detrimental impact on the volume of solar cell manufacturing, and therefore on the demand for Daqo’s polysilicon? That I don’t know. The analysts from Goldman Sachs are quoted here[10] as saying that the tariff’s will imply “a 3-7% cost increase for utility-scale and residential solar, respectively,” which could certainly impact the market but might not put the brakes on fully — clearly the huge demand for solar installation in the US has been driven both by government incentives and by sharply dropping costs for imported Chinese solar panels, and the solar installers are loudly predicting a huge collapse of this industry (which is, as you’ve probably seen, one of the faster-growing industries and a good source of employment growth)… so who knows, we may end up seeing some changes, the WTO may have something to say about it, and the policy could change. It also already has a pretty quick “ease-down” built in, with the tariffs dropping each year until they reach 15% in year four.
My preliminary assumption is that a blended price increase of 5% in one market, the US, is not going to be enough to destroy the sector, which continues to see high demand in many countries, spurred by government mandates and incentives (including in China, which is being more aggressive than most major countries in trying to cut back on pollution), though these are tight-margin manufacturing businesses and I don’t really know where the inflection point hits and the whole industry starts to be in trouble.
Right now, the solar panel manufacturers are doing just fine and most of them have margins that could presumably absorb some tariffs, though prices would also likely rise (the tariffs hit all importers to the US, presumably, not just the Chinese manufacturers)… and some have already announced new US manufacturing plans, like JinkoSolar (JKS)[11]. And while JKS has gross margins of about 12%, Daqo, which supplies one of Jinko’s major raw materials, has much higher gross margins above 40%.
Daqo, according to their quarterly presentation back in November[12] is in the middle of a multi-year capacity expansion plan, which has they producing about 18,000MT of polysilicon now and boosting that by about 50% by the end of next year. The production cost is about $9/kg and their selling price was over $16/kg in the third quarter last year, so that’s why they had a big surge in earnings last quarter, and the combination of continued strong polysilicon prices and their capacity increases should keep their revenue and income rising pretty sharply — analysts do indeed expect 371% earnings growth in the fourth quarter of 2017 (though expectations for earnings growth beyond last quarter are much more muted at this point, presumably because of uncertainty over future pricing).
They aren’t alone in the industry, of course, there are lots of other major producers — including the much larger company GCL-Poly Energy Holdings (trades in Hong Kong at ticker 3800, OTC at GCPEF in the US, also valued in the neighborhood of 10X earnings), and several large multinational chemical companies are also polysilicon manufacturers (like Dow Corning with its Hemlock Semiconductor subsidiary, for example, and OCI and Hankook in South Korea).
So with what seems like a boom in new polysilicon capacity across many of the providers, the risk is probably just what the risk is with most basic materials companies: That capacity could get ahead of demand, bringing lower prices and hurting profitability of the raw material producers. I can’t claim that I have any idea where that inflection point might hit in the polysilicon market these days, but the underlying demand for polysilicon seems still to be rising… assuming that the global market doesn’t get seriously upended by this new US tariff.
My first reaction to all of this was that the US manufacturers of polysilicon might benefit from increased investment in solar here, though I don’t know if they’re competitive on price or if the tariffs will impact US raw material pricing (perhaps new US manufacturing capacity would use imported polysilicon, I don’t know), and that might lead me to the somewhat beaten down REC Silicon, which is a Norwegian firm but has its manufacturing plants in the US (trades in Oslo at REC, OTC RNWEY in the US), but it looks like they’re probably being hurt by their lack of access to the Chinese market and I don’t know anything specific about their prospects (they’re not profitable now, though market cap and revenue are very similar to Daqo). Hemlock is also a big US producer, apparently, though it’s hiding out in the huge skirts of Dow Corning. That’s not a recommendation, of course, I don’t own any of these stocks, it was just my first impulse when I started researching the sector.
If you just go by the published financials, Daqo is a pretty easy buy — analysts estimate $8.30 in earnings for 2017 (they probably won’t report final 2017 numbers for at least another month), $6.48 in 2018 and $7.21 in 2019, so there seems to be an expectation that the boom pricing of last year won’t be repeated (makes sense, if capacity is increasing at all the polysilicon companies, though perhaps that could be conservative if Chinese solar demand continues to be pushed by the government), and if you average that out to be $7ish in annual earnings for a few years that means you’re paying a forward PE of about 8. You’re not getting much certainty of growth, and there are clearly risks in a heated market, particularly for folks like me who don’t really have a handle on whether or not polysilicon is going to jump from a premium product at premium pricing to a glut market where they have to slash prices, but at that valuation you’re at least not paying for accelerated growth — you’re just assuming that the bottom won’t fall out of the market.
So, in case it’s not obvious from my comments above, you can get that “monopoly” bit out of your head now — it’s almost the opposite of a monopoly, it’s a manufacturer of raw materials for a growing sector, but it’s one of a great many manufacturers who have the capability of making similar wafers for the solar industry, and I don’t see any indication that it’s the strongest or the most advanced market participant (though it’s certainly not the weakest, at least, and may well be above average, I don’t know).
You can see Navellier’s snapshot here on Daqo[13] from his public Portfolio Grader service, where the stock is unsurprisingly given an “A” grade, and then you can go forth, researchify, and think for yourself: Like the prospects for polysilicon suppliers in China? Think demand and pricing will remain robust? Worried about the downside risks? Let us know with a comment below.
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Why has the solar panel industry been unable, or willing, to provide a residential system that’s financially viable without significant taxpayer subsidies?
The short answer is, because costs come down every year but aren’t low enough yet… and, on the other side, US electricity is pretty cheap thanks to low natural gas prices. Subsidies are intended to prime the pump until the system can sustain itself, which it already does for utility-scale solar so presumably we’re getting close. My understanding is that it’s pretty tough for one little household power plant to match the efficiency of a gigantic power plant, regardless of how the electricity is generated.
Also because there are other “soft costs” that are harder to bring down, such as installation, labor, middleman distributors, permits, etc., and that is hard to change especially for roof top solar- even for Elon Musk
Travis, Correct again! I have a patent on turbine. (Tension Turbine). This is the most efficient in the world. Still, because of a thing called Betz law (a square meter of air has only so much HP)! It will take at least a 15 foot diameter turbine to make enough electricity to be worth while. Not too many houses can have one.
When I got involved in solar industry, there was no way the average home owner would ever see a ROI. Today after China dumped solar panels on market at below cost, it still is not worth it for average home owner. Without energy credits and tax breaks, it is even more impossible to justify solar for home owners. We are a solar panel coatings company which enhances solar panel efficiency by 13% and extend life by up to ten years, and still most home owners will not see a ROI. Sure, in an optimum installation you will save on energy costs, but panels would have to drop by half, and now with 30% tariff, forget about it. Battery technology has come a long way as well, but just like panels do not last forever, nor do batteries and no one in solar sales will mention this, so when you add in replacement costs, it is a money loser.
how can I find out more about your solar panel coatings company
Commercial only right now, consumer do it yourself will be available next month as it can now be applied by hand. ENVIROPURELIGHT.com is introduction to technology site, product will be added hear next month.
probably voids warranty
Every market place is different, in Australia the retail price of energy is high and it’s sunny, so payback can be as low as 2 years for commercial and 2-5 years for residential with no subsidies. It’s going to reshape to energy market in Australia over the next 10 years at the current price point and will only get cheaper.
Does that include batteries or are you only subsidizing the power company?
Anybody considering buying or adding here? Personally, I think this sector is too cloudy, both propped up and beat down on government whims, but I’d be interested in hearing from the other side of the fence.
I really admire your logic in the analysis of any of the stocks you dig into Travis. It’s reasoning with the seasoning of total comprehensiveness and due diligence behind it! In this case, like all the others before it, you use what clues the shills of these stocks toss out, and dial it in for us. And then after that, it’s a complete dissection of the fundamentals, and then you go further, in this case, specifically, after showing us that Daqo is currently producing 18,000 MT’s of polysilicon, with current expansion plans underway to bump that to 27,000 MT’s!
Right there, the alarm bells went off in my head, regarding the obvious oversupply capability, and then you beat us to the back door question of how much OTHER co’s in other countries are producing.
Then the comprehensiveness factor really comes into play, when you factor in Trump’s protective anti-dumping tariffs on anything from China, specifically this! And you’ve got all those numbers too!
But what turns this into a paradox is when you admit that even you and the mighty Thinkolator can’t possibly know what the stoichiometric capacity vs. demand is going to shake out to down the road! The paradox being, that even with all this info overload, we’re still left scratching our heads with the big question of should we dip our toes in the water or not?
Since in the last paragraph, you admitted that it’s an easy buy, methinks I’m going to have to put a token chip down on it, and see what happens. And thanks for all your very comprehensive and exhaustive digging! I really don’t know where you find the time in a given day to do it all. But it is appreciated. Your business name is well earned. You ARE a gumshoe! Thanks for the effort!
You should join us as a Gumshoe Irregular!!! Worth every penny & will save you $$ at the same time.
It’s not solar panels. The Installers have enjoyed rising profits and high labor rates due to subsidies, and as $ per watt of panels went down installation $ rose, but viability is based on monthly power bill vs. monthly loan payment. Installers have to stop looking to rake in the difference. The low hanging fruit of upper middle class rooftoppers is gone, now they gotta get down to brass tacks. Modular installation strategies are beginning to bring that down too. Indeed you said “system”, which is the real game.
DQ stock price has had a pretty fabulous run since May 2017 but been in retracement mode for about a month. Its not finished falling yet if you believe your medium term CCI or your MACD.
Fundamentals are actually quite good for the company. Ohlson O-score sits around 8+ % ( 10% is strong, 50% is Poor) , Piotroski score sits at 8+ % (7 is strong , 3 is poor) and so on.
I’d wait till the price stabilizes and turns upwards in the medium term. Its just about ready now judging by volume activity which is starting to drop back to normal volumes.
you have thrown in a couple of theories I haven’t heard of before.
Have you determined the effectiveness of these measures?
Travis has often mentioned that in this particular climate he likes to keep more cash on hand, presumably for buying opportunities that may occur. I was wondering, as a rule of thumb, what is a good percentage of your portfolio to hold in cash, both during this climate and also in more “normal” times?
anyone had experience with Andrew Keene, Alpha Shark Letter?
yes. happy to have a private conversation .. letoilematin at yahoo dot com.
The solar company I wish I had stuck with is Solar Edge (SEDG), which makes inverters to convert the DC solar power to AC. I bought below $30 back in 2016, and it proceeded to drop steadily until I gave up on it over a year later. Now it’s bounced back to the mid-30’s, with good prospects.
Check out WNDW Solar Windows Technology. Retrofitting glass office towers in the USA could save $75 Billion of electricity costs.
That one’s been teased for years — last time I looked the actual technology was far, far short of the promise — have the made progress in the past couple years?
Yes, Travis, the company has completed manufacturing feasibility studies and tests in exceedingly hot coating application and real life use conditions on windows, all of which were a “go.” Also, it’s signed a production facility in CA for its west coast manufacturing, which was due to start already or soon. There’s been a lot of other good, recent developmental news, too, so the stock has just started to move from sub $4 range to nearly $10, where it pulled back to $7-8 now.
That seems to me a good entry point for a company with a tiny market cap and size, a disruptive and replacement technology of interest to every commercial office building with private home follow on (Everyone has windows, so everyone can convert some of them to be electricity generators and still see through them with WNDW’s product without a huge, disfiguring installation job, and the company has an upcoming product line of nicely colored roof tiles which look like ordinary roofing material, so people can put them on top of historic styled homes and show no solar panels – the tiles themselves will generate the electricity – so that might be a huge plus for anyone who doesn’t like seeing enormous glass/metal panels all over one’s roof…), it’s an American company benefiting from the happy coincidence of being about to start selling an American made product a year after Pres. Trump took office (Even if WNDW is based in the very socialist State of Maryland, formerly known as the “Free State,” where the state and local governments and judges don’t follow the rule of law, but it is still officially a U.S. state on paper…), and it targets an enormous market which includes every commercial and residential building in the U.S. and then the world.
I don’t know about it being “teased for years,” but its generating efficiency makes it supposedly pay for itself in less than 10 years, if memory serves, with that time point shortening as the product improves, and it supposedly cuts commercial buildings’ electric bills significantly and immediately.
I started buying shares half a year ago and have added to my position as the good news mounted and the stock started to climb, since it appears to me to be the start of long term, exponential growth. We’ll see… I would be interested in your updated thoughts, of course, and those of your insightful, motivated readers.
$WNDW has no revenues. This is not a venture capital forum.
A keen Austrian environmentalist buddy, Max Deml, put me and my readers into a company which runs large solar electricity generating sites in India, called Azure, AZRE. It benefits from the increasingly cheap Chinese panels and of course Indian labor on the ground is nowhere as dear as American labor on a scary rooftop. It is actually incorporated in the tax haven (for Indians) of Mauritius despite being mostly paid by the Indian state and provinces, giving us an extra edge.
What about the “new” materials that are 60% efficient, not 29%? What about flexable solar panels?
Love your thoughts and analysis as always Travis! Thanks!
Tesla is a growing U.S. producer of solar panels, as well as solar batteries and installations of solar.
As a follow up to my response to Travis above, anyone interested in the technical progress of WNDW can find it summarized here:
https://solarwindow.com/2017/12/solarwindow-year-end-2017-update/
Having completed its feasibility and technical production studies, the company is preparing for the production start, and, according to its Sep 2017 production update, should have everything in place to start by the 4th Q of 2018.
Its models (WNDW claims they are independently confirmed.) show commercial buildings can cut their electric bill 30-50% and expect to pay for installation of the WNDW solar coatings within a year. If true, that would appear to be an industry and environmental “game changer.”
I don’t see a specific published date for west coast production to start via its contract with Triview Glass Industriess, LLC, and for first sales to occur, but the company implies it could be as early as 4th Q 2018 and promises production updates throughout this year. Presumably an east coast facility will then be developed once there is revenue from the big CA market to fund it, since the company just raised private capital to fund its initial CA production start (see above link).
I thought with tariffs, FSLR would be a big winner, but it’s down 34% for no reason I can discern. DQ made some impressive gains for a bit but since the State of the Union speech, I’m concerned we could easily have a trade war with China.
FSLR is not down 34% since the tariffs, it’s still pretty close to recent highs.
But yes, trade wars are generally bad for everyone. Many folks are holding their breath a bit to see what the retaliation might be.
Travis….I have long wondered why Dow Corning has not moved into west Texas
in Ward and Winkler counties to take advantage of the white sand dunes for pure
polysylicon. There is also an overabundance of natural gas here to fire and refine the sand into pure and poly silicon ingots. We have the resources in place and the
willing workforce to blow the doors off all the rest of the world’s poly silicon providers, saturate the market with cheap, PURE and poly silicon for ALL applications. Dow Corning need only make the investment in west Texas sandhills
to take a major share of the world market.
Maybe they are too busy producing their Gorilla Glass:
https://www.google.com/search?q=gorilla+glass&oq=gorilla+glass&aqs=chrome..69i57j0l5.5759j0j8&sourceid=chrome&ie=UTF-8
westtexaslawrence, the reason is because polysilicon is produced from raw metallic silicon using electricity and hydrochloric acid, and because raw metallic silicon is reduced from high purity quartz rock (not sand) using electricity and a lot of carbon from coal, charcoal, wood chips, and petroleum coke. A profitable _metallic silicon_ plant would need tens of thousands of tons of materials each year, so would ideally be located geographically near a high-purity quartz mine (for silica), a lot of forest land (for wood chips), a coal mine (with minimal impurities), a large oil refinery (for petroleum coke), and a hydroelectric dam (for cheap electricity). A profitable _polysilicon_ plant also needs low-cost electricity, thousands of tons of hydrochloric acid, and both plants need either customers for, or a way to dispose to dispose of tens of thousands of tons of extremely hazardous by-products of the processes. I’m sorry I have to be the one to tell you that your West Texas economy is going to continue to be powered by tumbleweeds, or whatever it is you have there now.
have switched from the poorly performing TAN ETF with its mixed bag of companies distorted by govt subsidies, to specific companies most likely to outperform. – notably DQ.
did you see DQ was upgraded to buv by zacks analysts last night and on 24/01 Navellier associates purchased 29,400 shares they posted that 2018 order book is 90% full and Results being posted for FY2017 today . 1 downgrade to hold by Tudor Pickering. Even if they have new capacity with an order book full Isnt the value it already in the price/ market cap.
Travis, you are wise to be skeptical. There is no fundamental need for solar power in any economy. At its core, the entire “renewable energy” industry is driven by misplaced environmental concerns, capricious political directives, and rampant financial speculation on the so-called “market” for this energy. Even with
government-sponsored incentives, end users still have no assurance of ROI. The CAPEX for polysilicon production facilities is so high that only the largest producers have much chance of survival long-term, and even their profitability is not guaranteed. Growing Chinese solar manufacturers are already siting a lot of their new polysilicon production capacity in “4th world” countries outside of China where environmental oversight will be minimal.