Solar Power. Finance and Investment Club Energy Sector. Fall 2016

Transcription

1 Solar Power Finance and Investment Club Energy Sector S.A: Max Reich J.As: Palak Warakiwoo, Cristianne Sanchez Jimenez, Reo Osawa, Niharika Pendharkar, James Mai Fall

2 Agenda Industry Summary Revenue Generation Model & Downstream Markets Trends Risks Valuation & Conclusion 2

3 Solar Power Industry Definition Companies in this industry own and operate vertically integrated solar-power-generating facilities across the U.S. These facilities generate electricity through Photovoltaic (PV) or Concentrating solar power (CSP) panels and then sell the generated power to residential, commercial, and industrial customers. Photovoltaic panels (PV): converts any form of light into electricity through the use of photovoltaic cells Concentrating solar power (CSP): involves directing heat from sunlight with large curved dishes onto a solar cell or pane Panels are installed for individual customers or in operating facilities called solar farms First Solar Inc. NASDAQ: FSLR Mkt Cap: $4.34 Bn NextEra Energy Partners NYSE: NEP Mkt Cap: $1.23 Bn Trina Solar NSYE: TSL Mkt Cap: $ Mn NRG Yield Inc. NYSE: NYLD-A Mkt Cap: $ Mn Canadian Solar Inc. NASDAQ: CSIQ Mkt Cap: $ Mn JinkoSolar Holdings. NYSE: JKS Mkt Cap: $ Mn 3

4 Solar Power Recommendation Summary Renewable Electricity Production Industry Rating: Overweight Wind Power Solar Panel Manufacturers External drivers Solar Power Solar Operators Hydro electric Power Solar Panel Installation Increasing adoption of Renewable portfolio standards (RPS) Extension of 30% Investment tax credits (ITC) until 2020 Falling semiconductor prices are driving the input costs for this industry down Industry Statistics Revenue: $3.2 bn EBITDA margin: 21.6% Annual Revenue growth: (11-16) 75.9% (16-21) 6.5% Industry Characteristics 1. Lifecycle stage: Growth 2. Capital Intensity: High 3. Barriers to Entry: High 4. Industry Assistance: High Source: FY2017 Budget Request, February 2016 US Dpt. Of Energy, Solar Power IBISWorld Industry reports, Company 10ks 4

5 Agenda Industry Summary Revenue Generation Model & Downstream Markets Trends Risks Valuation & Conclusion 5

6 Value Chain / Revenue Generation Model Agreement is made to sell electricity at a fixed rate $0 to low down payment, rate grows 2-5% annually Effective Date Commercial Operation Panels are made available for electricity consumption Company ensures they are functional PPA buyers billed by consumption at per-kwhr $ Lease buyers billed a fixed rate Invoice Payments (monthly) Termination date PPA expires and buyer seeks to renew contractual terms Lease expires and option to buy panel Key Take-aways PPA s and Solar leases, due to their fixed-pricing model, offer electricity rates 10% lower than utilities Due to long term and pricing nature of PPA s and Leases, companies are unable to react to price changes Sources: Company 10k s, Third-Party Solar Financing SEIA 6

7 Product Segmentation and Major Downstream Markets Solar Power Industry Product Segmentation 2016 Photovoltaic Solar Power 87.4% Solar Power Industry Major Downstream Markets 2016 Industrial sector 17.1% Commercial sector 37.0% Concentrating Solar power 12.6% Transportation sector 0.2% Residential sector 45.7% Photovoltaic power (87.4%) Relies on solar cells to generate electricity from the sun's energy. o Input prices are falling driving its prices down Industry growth has been driven by PV panels Concentrating Solar Power (12.6%) Uses direct sunlight and stores it solar cells or panels o o More common in large scale production Unlike PV panels, it has the ability to store energy produced Major Markets Utilities buy most of the power generated by this industry o Redistribute to Residential users through a PPA or leases Commercial and Industrial users usually produce on site, or purchase power from Utilities Sources: Company 10k s, and IBISWorld Industry Report 7

8 Agenda Industry Summary Revenue Generation Model & Downstream Markets Trends Risks Conclusion 8

9 Industry Trend Summary Trend 1:ITCs facilitate investment spending on PV panel installation Trend 2: Falling input costs and Levelized Cost of Electricity (LCOE) Trend 3: Increased substitution at wholesale level 9

10 New Installed Capacity (in MW) ITC Rate (%) New Installed Capacity (in MW) Trend 1: ITCs facilitate investment spending on PV panel installation Annual Solar PV Installations in U.S Projected effect of ITC rates on New PV Installed Capacity in US % 30% 25% 20% 15% 10% 5% 0% ITCs rates have driven the fast-paced growth of installations of PV panels by 60.0% CAGR over last 9 years o Government finances 30% of the investment spending associated with installing & operating the solar panels o This portion is reduced of income tax liabilities for businesses developing project or homeowners ITCS will decline after 2019 as the industry matures as operating conditions become more favorable o Increased technological efficiency o o Lower operational costs Increasing tendency towards renewable energy ITCs have contributed to cutting costs of CAPEX investments associated with installation of new facilities New PV module Installed Capacity ITC Rates Sources: Impacts of Federal Tax Credits.. National Renewable Laboratory, Annual Energy Outlook Energy Information Association 10

11 Trend 1: ITCs facilitate investment spending on PV panel installation Trend 2: Falling input costs and Levelized Cost of Electricity (LCOE) Trend 3: Increased substitution at wholesale level 11

12 Total levelized cost of plant ($/MWhr) Annual PV Module Shipments Average value of modules (5 per peak watt) Trend 2: Falling input and operating costs of Solar generating facilities 12,000,000 10,000,000 PV Annual Module Shipments to U.S vs. Average value per module ($/peak watt) 8,000,000 6,000,000 4,000,000 2,000,000 0 Average LCOE ($/MWhr) for 100 MW Solar PV Farm Modules Average value ($ per peak watt) $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 As a result of falling poly silicon prices, modules have become oversupplied o Shipments into US have grown at 42.3% CAGR in last 10 years o Cost of operating a single module has also fallen at 14.0% CAGR o Drives down the acquisition costs of PPE and improves operating margins Overall owning and operating a solar power facility according to LCOE has become o Less expensive and consequently more price competitive o Over the last five years, breakeven point of assets has fallen at a CAGR of -20.6% The costs of acquiring and operating PV modules over their lifetime is falling. Sources: Annual Energy Outlook 2016, Solar PV Module Shipment Report Energy Information Association 12

13 Trend 1: ITCs facilitate investment spending on PV panel installation Trend 2: Falling input costs and Levelized Cost of Electricity (LCOE) Trend 3: Increased substitution at wholesale level 13

14 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Energy consumed by Electric Power sector (Tn Btu) Trend 3: Increased substitution of renewables at wholesale level Solar/PV Energy Consumed by the Electric Power Sector Energy Consumption Index of US Electrical Power Sector Total Energy Consumption Index Renewable Consumption Index Fossil Fuel Consumption Index Over 30 states currently must consume 20-30% of their electricity from renewable energies according to RPS PV power consumption has had the fastest growth within the renewable industry o Since 2009 PV consumption by Utilities has grown by a CAGR of 74.6% o Utilities act as wholesalers to Residential & Commercial users Power produced by renewable energies has driven the growth of energy consumption o Fossil fuel electricity has moved closely to general index o Renewables have outpaced the index Renewables are gaining market share from traditional fossil fuels at Utility wholesale level RPS and falling LCOE have contributed to an increase in substitution in favor of renewable energy Sources: Annual Energy Outlook 2016 Energy Information Association, Beyond Renewable Portfolio Standards National Renewable Energy Laboratory 14

15 Agenda Industry Summary Revenue Generation Model & Downstream Markets Trends Risks Valuation & Conclusion 15

16 Industry Risks Decreased industry assistance in upcoming presidential term Clean Power Plan is less likely to be passed with a conservative majority Potential tax cuts on fossil fuel firms might increase competition ITCs could decline earlier than 2020 if conservatives repeal 2015 Clean Power plan Increased price competition if oil & gas prices don't rise PPA s and Solar leases do not have the ability to adjust to changes in prices of substitutes: prices are somewhat fixed in long run. Electricity produced from traditional sources is less expensive than renewable energies At current oil and gas prices, renewable energy is less price competitive New tariffs would increase the price of Solar modules President-elect ensures an increase in tariffs during his administration This would raise the price of importing solar modules Rise in the federal funds rate would increase the cost of borrowing The solar industry is highly capital intensive and consequently firms frequently borrow money to make capital investments This would increase the cost of borrowing for capital intensive solar power industry Sources: Capital IQ Net Advantage Company Reports, Clover US Election: solar PV Magazine 16

17 Agenda Industry Summary Revenue Generation Model & Downstream Markets Trends Risks Valuation & Conclusion 17

18 Comparable Companies Company Share Enterprise Trailing Forward EV/EBIT Net Debt/ D-to-E EBIT EBITDA Asset Sales EBITDA Ticker Name Price Market Cap value P/E P/E EV/EBIT DA EBITDA Ratio Margin Margin ROA ROE Turnover CAGR CAGR NextEra Energy NEP Partners , , x 16.88x 16.55x 10.26x 7.48x 2.40x 44.6% 71.8% 0.60% 3.8% % 55.6% NYLD. NRG A Yield Inc , x 17.68x 18.90x 10.65x 9.11x 2.44x 37.1% 65.9% 1.91% 4.5% % 43.0% Canadian CSIQ Solar , x 5.51x 10.52x 7.44x 5.72x 4.31x 6.9% 9.8% 3.15% 17.7% % 22.9% FSLR First Solar , , x 64.81x 4.27x 2.87x -1.75x 0.36x 14.2% 21.1% 14.5% 8.7% % 1.4% Trina TSL Solar , x 27.00x 9.17x 5.86x 3.50x 3.53x 7.4% 11.5% 1.7% 8.0% % 73.7% JinkoSolar JKS Holding , x 4.18x 11.73x 6.60x 4.90x 3.86x 14.2% 13.0% 3.49% 19.8% % 38.5% In USD millions except per share data High 22.79x 64.81x 18.90x 10.65x 9.11x 4.31x 44.6% 71.8% 14.5% 19.8% % 73.7% Mean 10.59x 14.25x 11.86x 7.28x 4.83x 2.82x 10.7% 13.9% 2.2% 10.4% % 39.2% Median 8.51x 16.88x 11.12x 7.02x 5.31x 2.99x 10.8% 12.3% 1.9% 8.3% % 40.8% Low 0.37x 4.18x 4.27x 2.87x -1.75x 0.36x 6.9% 9.8% 0.6% 3.8% % 1.4% Sources: Company 10k s, Net Advantage Capital IQ Company Reports, Nasdaq Company Earnings Estimates 18

19 Conclusion Industry Rating: Overweight Trends 1. Government support through ITCs drives PV installations 2. Decreasing Levelized Cost of Electricty & Input Costs 3. Increasing subsitution in favor of Renewables at wholesale level Risks 1. Decrease in industry assistance 2. Reduced price competition to traditional fossil fuels with current prices 3. Rise in taxes and federal funds rate Potential Target: JinkoSolar Holdings. NYSE: JKS Mkt Cap: $ Mn Characteristics 1. High asset turnover rate 2. Superior Dupoint ROE & ROA 3. Strong sales & EBITDA CAGR growth 4. Normal leverage multiples 5. Undervalued P/E and EV multiples Source: FY2017 Budget Request, February 2016 US Dpt. Of Energy, Solar Power IBISWorld Industry reports, Company 10ks 19

20 Q&A 20

21 Links

22 APPENDIX 22

23 Sub-industry Porter s 5 Forces High level of initial investments to join industry Operating solar farms per MW is more expensive than traditional fossil fuels Human capital is generally highly trained, new entrants must have the know-how Remoteness of operating facilities to demand centers Barriers to Entry High Market share concentration is low as the four largest players account for less than 15% of market share CSP panels tend to be more commercially effective in larger scales, while PV panels tend to have higher levels of R&D Growing international markets with favorable government regulation will provide growth for this industry Supplier Power Low Competitive Rivalry Medium Buyer Power Medium Oversupply of panels due to falling input costs have facilitated the ease of finding efficient suppliers Increasing vertical integration in industry has lowered power Growing number of players in panel manufacturing industry. Threat of Substitution Medium Fixed pricing and 0 down payment aspects of PPA depend on level of financial assistance by fiscal entities. Passing CPP would shift consumption towards renewable energy sources Increasing demand from commercial and residential sectors puts less stress on finding new customers RPS ensure 20-30% utility sales across 30 states in US Increased price competition with fossil generated electricity with oil downturn. PV panels cannot store energy, which decreases the operators ability to react to price changes of similar goods Source: Company 10ks, Beyond Renewable Portfolio Standards National Renewable Energy Laboratory, Solar Power IBISWorld Industry reports 23