Taiwan Solar Energy Sector

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 28 June 2010 Asia Pacific/Taiwan Equity Research Solar Energy Taiwan Solar Energy Sector SECTOR REVIEW Incrementally positive into 2H10 Figure 1: Taiwanese solar cell makers are gaining market share 2. 85.97.412.80.40.81. 32. 815131822036912152007200820092010E0510152025G lobal solar (GW p)TW top-6 cell makersShare (%) Source: Company data, Credit Suisse estimates ■ 2H10 demand outlook better than feared: We are incrementally positive on the Taiwan solar energy sector into 2H10 due to the overall positive feedback from Intersolar. The German market does not seem as weak as expected into 2H10 despite its mid-year feed-in-tariff (FiT) cuts. Also, most top-tier Asian solar cell and panel-makers have claimed that their 2H10 capacities have been sold out, partly helped by a pick-up in other markets. Taiwanese solar cell makers have been running at full utilisation rate since 1Q10 and have stepped up capacity expansion to gain more market share. We expect potential upside to our 2H10 shipment forecasts. ■ Clouds still on the horizon: In the longer term, we still believe that the vertically-integrated solar energy companies are more cost competitive than standalone players who focus on a single production process within the value chain. We estimate that vertically-integrated companies can already offer solar panels at US$1.5/Wp levels, whereas solar panels made by standalone companies have to be priced at about US$1.7/Wp levels for each company in the value chain to generate decent margins. The near-term risk that could affect investor sentiment is that despite the better 2H10 shipment outlook, 3Q10 could slow temporarily, depending on end-consumers’ reaction to the German mid-year FiT cuts (while it should be followed by a stronger 4Q10 if there is a softening in 3Q10). ■ Raise earnings ahead of street and upgrade ratings: We upgrade our ratings on Motech and Gintech from Neutral to OUTPERFORM, on the back of likely stronger 2H10 shipments. We believe most of the near-term negatives are priced in (the German mid-year FiT cuts and a weak euro), and the companies’ current valuations are close to the lower end of their post-crisis trading range. We believe it is time to revisit the sector. Research Analysts Darryl Cheng 8862 2715 6333 darryl.cheng@credit-suisse.com Asia Technology Research Analyst Team Manish Nigam (Head of Technology Research, Strategy) Randy Abrams (Regional Foundries, Testing & Packaging) Pauline Chen (Taiwan Components) Darryl Cheng (Tech LED, Solar, Networking) Robert Cheng (Regional Hardware) Robin Cheng (Taiwan Display) MS Hwang (Korea Technology, Taiwan Memory) Felix Rusli (Regional Handsets) Bhuvnesh Singh (IT Services) John Sung (Korea Technology) 28 June 2010 Taiwan Solar Energy Sector 2 Focus charts Figure 2: German market likely better than expectations Figure 3: Top-six TW cell makers’ revenues are growing 0.94. 70.45.50246GermanySpainItalyFranceUSJapanGreeceSouth KoreaCh in aIndiaBelgiumCzechOthersDec 09 forecastMar 10Jun 10 & 23 0.02.55.07.510 .0Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-1001234Top six Taiwan solar cell makers' monthly sales (NT$ bn)Solar cell ASP (US$/Wp) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: TW cell makers’ stepping up for expansion Figure 5: Motech trading at a premium on P/B 2.14.11.32.8469168115012345200520062007200820092010E050100150200250Capacity (GWp)ShipmentC a pa cit y grow th (%)Shipment growth 0246Jan-08Jul-08Jan-09Jul-09Jan-10Motech forward P/B (x)Gintech forward P/B (x) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Vertically integrated players more cost competitive Figure 7: Motech’s vertical integration Polysilicon costPolysilicon costWafer COGSWafer COGSWafer GP, 12.5%Cell COGSCell COGSCell GP, 10%Panel COGSPanel COGSPanel GP, 5%Total GP, 19.5%0.00.51.01.52.0St an da lon eVe rti call y i nte g rat ed AE Polysilicon(USA, 33%)Motech(180 MWp)Motech(850 MWp)Motech(China, 40 M Wp)MotechMotech(USA, 25 M Wp)Itogum i Motech(Japan, 27 MWp)PolysiliconIngot/WaferCellModulePV systemTSMC20%AE Polysilicon(USA, 33%)Motech(180 MWp)Motech(850 MWp)Motech(China, 40 M Wp)MotechMotech(USA, 25 M Wp)Itogum i Motech(Japan, 27 MWp)PolysiliconIngot/WaferCellModulePV systemTSMC20% Source: