SunEdison Financial Result Evaluation: Increase in Power Plant Projects by the End of the Year May Result in financial improvement

published: 2013-09-26 6:00 | editor: | category: Analysis

MEMC officially changed its company name to SunEdison in the second quarter and released the 2Q13 financial resultsport recently. According to the financial reportresults, the company’s GAAP earnings were US$401.3 million. Net revenue generated from solar energy segment was US$162.3 million, representing 40% of the total net revenue, which was a 72% drop compared to US$575.7 million in 2Q12. The gross margin remained at the same level, reaching 12.3%. The reduction in European system installations made the company more difficult to generate profit. Meanwhile, the company’s net loss increased from US$77.2 million in 2Q12 to US$102.9 million.

ASPCost for overall PV supply chain has improved in the 1H13 first half year, however, due to weak market demand in 2012, SunEdison didn’t put much effort in the field of solar energy. Net sales generated from solar energy segment have declined for the previous quarters. The amount of system installations for power plants also grew much slower in contrast to other competitors. In addition, since fewer systems were sold in 2Q, earnings performance was worse than last quarter or 2Q12. SunEdison mentioned in the conference call that the number of power plants to be built will gradually increase and will significantly increase by the end of this year. Therefore, the company is optimistic about future market demand and it’s expected that the company’s earnings performance will greatly improve in 2014. 

Although SunEdison’s management team is optimistic about future business conditionsmarket demand, the increased debt-to-asset ratio seems to be the most serious issues according to the financial resulports. The debt-to-asset ratio beforehand was already higher than that for European and US companies and it rose from 0.85 in 2Q12 to 0.91 in 2Q13. For power plant construction, it particularly requires a large amount of investment in the initial stage. Although there’s an upturn in market conditions this year, the company is still dealing with financial loss thus they need to pay special attention to capital turnover. Even though the company’s current ratio has become the lowest among recent years, it can be maintained above one, hence there won’t be financial crisis in the short run.

Unlike how Chinese PV manufacturers position themselves as vertically-integrated suppliers, the top three US PV manufacturers, First Solar, SunPower, and SunEdison have already established solid downstream power plant businesses. Looking into the three companies’ operational strategies, First Solar’s net sales generated from solar systems represent 84% of the total sales revenue while most of the revenue came from large-scale power plants. Yet, there are seven more power plants above 100MW that are under construction and will be continuously finished from 2013 to 2015. Recently, First Solar has announced to use stock shares in exchange for full acquisition of GE’s Cadmium Telluride (CdTe) PV intellectual property  portfoliorights, which can raise module efficiency rate from 18.7% to 19.6%. The acquisition will allow First Solar’s thin-film modules to stay competitive in the efficiency war. As for SunPower, the net sales in the US account for 64% of the total sales revenue while net sales generated from the two major power plants, CVSR and Solar Star, represent more than 30% of this quarter’s total sales revenue. In addition, due to SunPower’s high-efficiency cell technology, it’s more suitable for the company to work towards the development of distributed roof-top systems. With SunPower branching out into solar leasing business in 2011, it’s expected to become another stable revenue source for SunPower as leasing market matures in the future. As for SunEdison, apart from its solar power plant operations, most of the company’s solar material sales have been transferred to semiconductor material sales. Solar products are mainly used on their own projects. Within SunEdison’s projects that are yet to be built, projects above 10MW exceed 80%, among which 60% of the projects are located in North America. Other projects are in India, Chile, and South Africa. Furthermore, module suppliers can also be very flexible. For example, SunEdison and FoxConn have signed a module supply agreement in the second quarter so SunEdison can have more stable module quality and supply source. The strategy of global manufacturing and local service provided by FoxConn will allow SunEdison and its clients to achieve lower power generation cost for solar systems (LCOE) and increase profit. 

We can see from the table above that the gross margin and net profit for First Solar and SunPower have been outstanding because they have entered large-scale power plant market in the relatively early stage. Usually, if utility-scale projects are the major income source, net sales will fluctuate significantly. Hence, the earnings performance for First Solar was worse than expected in the second quarter because of the unfinished power plant construction and less revenue recognition from projects unrecognized revenue in the second quarter. To look into the future, SunEdison will put partial focus on distributed PV systems. Due to the gradually maturedaccelerated development in European and US distributed PV market and stable funding for small-scale system projects, SunEdison can improve its cash flow. Moreover, the company’s diverse marketing strategy can diversify regional risks. Once the amount of solar systems starts to increase by the end of the year, SunEdison’s earnings performance is likely to improve significantly with additional support from semiconductor material revenue.

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