When I need to better understand an industry, my first action is to attend a conference in which an "ax" in the space has invited his universe of names.
In this case, to shine some light on solar, I made the quick drive to sunny Laguna Beach, home of the annual Roth Conference. Last year, I christened this conference the "Coachella" of small-cap conferences, in honor of its SoCal roots. (Also, I had already bestowed Woodstock on the excellent LDMicro Conference.)
The first morning, I made a beeline to Phil Shen's solar panel discussion. Phil is both an ax in the Cleantech space, and in particular has stayed on top of the resurgence in solar. He has thus made his clients a ton of money. The panel was composed of representatives from Canadian Solar (CSIQ), Real Goods Solar (RGSE), JA Solar (JASO) and an executive from the Solar Energy Industry Association.
Shen's coverage is broader than any other analyst I can think of, covering the majors such as First Solar (FSLR) or Yingli Green Energy (YGE), and the exciting smaller names that he thinks are about to surge, such as JA Solar and Real Goods Solar.
The up cycle in solar is obvious, based both on the volume and revenue ramps, and on the stock price appreciation. The panel forecast a 15% compound annual growth rate in volume growth for the next five years. This would take the industry to a staggering 100 GW of annual demand. (No one was willing to offer an assessment of how volatile that demand growth will be, but the industry is cyclical so no one should expect a straight line!) Importantly, despite lingering overcapacity in the industry, average selling prices are stable except in Japan, which is seeing ASPs down due to yen devaluation. The various players are seeing 60c per watt type ASPs in China -- the big growth market now due to domestic demand -- and 70c+ in Japan.
Potential barriers to trade occupied much of the panel's time, since the destruction in the last down cycle catalyzed a lot of government action to protect the remaining players. A number of cases that could impact pricing and demand are being postponed, such as the SolarWorld case and the China-U.S. case. The industry trade group is trying to create a "safe harbor" for developers in the U.S. to avoid having project economics affected by these actions after 2016.
For dividend investors such as I am, the most welcome development is the prospect of more "yieldcos" coming to market soon. With the plunge in panel prices, projects can earn decent international rates of return relatively easily, and the project pipelines are bursting. Because the power is sold into long-term contracts at stable prices, the cash flows are stable and perfectly suited for income vehicles.
All of the module vendors are moving downstream into project development. Most say that demand is so high they have little worry about being able to ultimately sell any project they build.
Solar names have historically attracted growth investors, but the space is going to see more value/income investors elbowing in on the action. I still like solar on the long side, even after the run it had last year.