| | | | | Sell (Price target US$25.00) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | | | Q: Can the systems business still dominate earnings? The bulk of gross margin remains attributable to the Systems business even in 2017, seeing risk that this too could continue to erode as above-market projects continue to roll off. While the company may indeed ramp back up into higher volumes in 2019, we see the limited backdrop of projects as among the more concerning points following the weak guidance print from SPWR mgmt. earlier. We continue to attribute healthy margins in our model, reflecting ~20-30% margins throughout the forecast period, backwardated. Further, given the roll off of the 30% ITC in 2019, we suspect this should increasingly be viewed as a 'peak' year, rather than as the return to 'normal' deployment. more→ Q: How will declining module ASPs affect FSLR? Focusing on the 'core' modules business, we emphasize prices remain clearly at risk following guidance from CSIQ among other Tier 1 Silicon-based manufacturers with cost trends heading below $0.30/W presently. We worry that prices could well continue to trend down materially as we initially outlined in our SPI note from September, Coming Back Next Year. While mgmt. admits it can bring down costs by 40% from Series 4 to Series 6, the risk remains that its achieved margins don’t materially improve as prices by FY Series 6 implementation in 2019 could well prove in the mid-to-low $0.20's/W. more→ Q: Can Competitive Demand Dynamics Offset Expectations Decline? The bright spot remains the potential for accelerated deployments as the competitive forces push solar ever closer to being broadly competitive against a wide range of alternative energies. We see the data points in Emerging Markets such as Chile as intriguing with prices below delivered LNG. Further, we note data points of accelerated efforts to find cites in West Texas among other geographies given the increasingly economic price of solar in a merchant context; we see many Commercial & Industrial offtakes, as cited on FSLR's 3Q call, as clearly the brightest spot. The question remains even if these ramp up as we reflect, can they achieve the historical margins? Probably Not. more→ | | Shifting FSLR story largely revolves around the interplay between systems and modules business; we see backwardation in both businesses for separate and distinct reasons. | | We remain concerned by Street expectations for a recovery off 2017 lows and see the latest guidance as affirming our growing concerns the recovery may prove more protracted than many had thought. | | We see a full multiple through the cycle, at the higher end of its historical trading range, alongside full estimates reflecting continued Systems execution. | | 
more→ | | First Solar is a vertically integrated global solar energy solution provider that manufactures photovoltaic solar equipment and modules. On the module side FSLR uses thin-film... more → |
Why are we downgrading now?With shares down the principal pushback into the 2017 update from investors has been when do they buy shares? The story appears to have just inflected more negatively with the latest updates laying to bare the substantial backwardation in the Systems business (as contracted margins decline), continued competitive pressures on the core module business, and the clear worries initially articulated at the SPI conference of substantial price degradation. To be clear, 2019 could prove to be yet another 'peak year' following the two year transition period to switch to series 6 module production, and a substantial portion of the company's future is resting on the successful implementation of a technology 2 generations ahead of where they are today. Given that both series 4 and 5 are uncompetitive today, we see substantial execution risk to series 6 deployment. The next step in the solar wave Many investors have focused on simply flexing cost and ASP assumptions, whereas the next wave in the solar cycle downwards will include a pullback in supply and reductions in utilization of existing supply. In the current instance, mgmt is both pulling back capacity and reinvesting its coveted cash to ensure its manufacturing capacity remains fundamentally competitive vs. Chinese solar peers. Among the most promising aspect of the Series 6 opportunity is the low incremental capex cost, offering some ability to leverage up the platform in future years, but suspect further pressures from Chinese could make the attractive economics of the new technology limited by deployment in 2019 and 2020. Meanwhile, risk to US demand as CPP and Southeast at risk A rollback in the clean power plan could disproportionately affect the Southeast, where FSLR technology has a competitive advantage. We see few demand data points in the US as warranting significant improvement versus pre-election expectations. Although we still expect a demand recovery versus 2017 trough brought on by ITC extension dynamics, 2019+ US solar deployment expectations are somewhat at risk depending on magnitude of policy changes. While we don’t expect the ITC tax credits to go away under the new administration, we equally see the rolling back of the Clean Power Plan (CPP) as eating into the prospects of a major recovery in US deployments. Rather, with much of FSLR's efforts having been focused on the Southeastern US given its performance advantages in more humid climates, the lack of CPP has a disproportionate impact with these states having few Renewable Portfolio Standards (RPS) mandates for solar. Broadly, the Southern tier of the US remains the core focus for the company amidst an effort to focus on Systems development in its core US geography. Mgmt reiterated yet again the competitive pressures across many international geographies, limiting prospects for Systems deployment abroad (likely EPC or Module-Plus opportunities with only incremental value). We see street EPS estimates as being too high We are lowering our 2017 EPS estimate to near the midpoint of management's new range, largely consistent with our revised gross margin and cost structure in line with mgmt's new forecast. The question is just how much recovery will there be into 2018? We see broader downside into 2018 and beyond already given continued pressure to margins, and suspect there could still be further rounds of cuts to forward estimates in future periods. Specifically, we see risk that Series 4 products could become particularly uncompetitive in the ~2018 period given warnings already today that the product is challenged. To this end, we suspect production of Series 4 could decelerate faster than anticipated (and/or lead to to further acceleration fo eployment timeframe and under-utilized capacity in the ~2018 period). We see upside into 2019 should Series 6 prove as competitive as described once fully deployed (~$0.20/W) cost structure, with prospects for module margins to expan beyond 20%. We highlight the decline in in the 2020 period due to the fall off once more of the US ITC from the 30% level. We expect this to have a significant step down in deployment prospects, impacting both residential and utility-scale opportunities. We would expect much of the 2020 sales to shift abroad at this point, potentially triggering a step-change down in margins as Opex to scale to these higher deployment levels continues. Figure 1: Updated EPS Estimates | 
| Source: FactSet, UBS estimate, Company Filings |
Reconciling 2017 EPS GuidanceWe include the following tables below to attempt to reconcile 2017 in a simplified mini-model. We note this is different than our model provided later, and is presented merely as a simplified view of the business. How do we think about Systems sales prices? We include implied revenues and Systems gross margin guidance for FirstSolar. Further, we breakdown the gross margin disclosed into the Systems piece as well as the implied piece for both the two key projects and other smaller projects in the 600-700 MWs systems figured disclosed. Key assumptions and points • 5% gross margins for the two solar projects at $1.05 Bn still has a reasonable gross margin composition despite being substantially below average on a % basis. • We estimate the Modules business has a 20% margin in 2017 off $0.35/W of costs to derive a sale price in 2017 of $0.42/W. This would appear anecdotally near recent price quotes for early 2017, albeit could prove a bit weak on a FY17 basis. • We note our Implied ASP price for Systems of $1.23/W, with a build cost of $0.93/W suggests clear ability to trend towards $0.70-0.80/W all-in build costs by 2019, as we had initially pointed out as possible earlier this year at the Analyst day. Admittedly the guidance does not appear consistent with the strategy articulated by mgmt. Figure 2: Reconciling the Systems Disclosures | 
| Source: Company reports and UBS estimates |
Reconciling beyond 2017: How do the data points flow forward into 2018 and 2019?Among the immediate questions raised on the call was just how much of a trough was 2017. We note this is precisely where we are becoming more bearish on the company's prospects. We emphasize the combination of higher opex, D&A, and backwardation in Systems gross margins implied offset the substantial shift in profitability of the core modules business. We show the key assumptions below in terms of increment and decrements in the core business into 2018 and 2019, off the new 2017 base. The core assumption we employ is a focus on improving Systems deployments, to well above its ~1GW guidance in the peak year of 2019, normalizing back in 2020. Broadly, we expect future EPS expectations to normalize back to breakeven up to ~$2, with substantial negative revisions expected across all years in coming days. Figure 3: How much does the 2018 shift toward Series 6 Produce? | 
| Source: UBS estimates and Company reports |
Putting together the walk to 2018… still a depressed year We note our estimates could be still be a bit high even on 2018, but emphasize our view that there is still meaningful downside to Street expectations. We think 2018 is likely to see further normalization in margins as newer projects have become more competitive. However, we note that continued declines in costs could enable California projects signed in recent years to see reasonable margins again. Figure 4: Comparing the Improvement in 2018 vs. 2017 EPS Trough: Still tough | 
| Source: UBS estimates and Company reports |
What about the 2019 math? We include the further YoY drivers to 2019, suggesting ~$2 EPS is a reasonable expectation as Series 6 fully ramps back and we have a further Systems development bump. We emphasize these are likely still peak deployment years for Systems in the US again given the ITC expiration. While we could be a bit low here given prospects for accelerated demand, we see our 2020 falloff as reasonable meanwhile. Figure 5: EPS Walk to 2019 from 2018 (in contrast to our fundamental est.) | 
| Source: UBS estimates and Company estimates |
Putting this all together: Cash Flow We estimate the following cash flow for 2017 and then roll forward to 2018 and 2019 based on the improvement modelled in our EPS. We emphasize that EBITDA net of 'ongoing' capex appears to be negative in 2017, with limited FCF in 2018. Meanwhile, even our 'peak' year in 2019 produces only modestly over ~$100 Mn. We see much of the improvement in the Operating Cash for 2017 driven by a return of working capital associated with the completion of larger projects. Figure 6: Operating Cash Flows | 
| Source: Company reports and UBS estimates |
What does this mean for the cash pile? We include a projected cash balance reflecting mgmt's guidance of Net Cash largely unchanged for YE 2017, and beyond. We note $500 Mn of further capex in 2018 relative to limited cash generation from the core business could well reduce the $14/sh materially and destabilize confidence in a flat cash balance. The question further remains to what extent mgmt. will need to continue to innovate and install yet further improved technologies in future years to continue to compete with improving Chinese products. We note while R&D has come off versus its historical highs, the ~$100 Mn/yr pace of spend is likely to be paired with continued baseline of capex to ensure assets remain competitive. We argue that growth capex is part of 'technology maintenance' We argue that should mgmt. decide not to invest in Series 6 to effectively keep its product competitive, it would largely have liquidated the company amidst its recognition that its core product would not compete vs. other Silicon-based technologies. We argue that the constant reinvestment cycle to improve its tooling on its existing Series panels as well as R&D is part of the core business and should not be overlooked. We note the company has persistently failed to generate a return to shareholders via dividend or repurchase in recent periods despite the uplift in cash from the legacy PPAs coming to fruition.
Refreshing the Model and Valuation: Series 6 leaves a two year gapBottom line, significant degredation on the shipments front (as the company shifts to series 6 and brings series 4 offline ahead of schedule) drives significant changes to our valuation. While the company will presumably get benefits from operating leverage at some point when Series 6 is fully online, the interim period will be significantly challenging and would make it very difficult to achieve earnings recovery in this timeframe. Further, even assuming the company is able to achieve a seamless rollout of Series 6 and drive higher margins, we find little comfort in ASP trends and more specifically, gross margin dollars. Figure 7: Comparing Old Vs New Estimates | 
| Source: UBS estimates |
We include our updated SOP below, illustrating our key assumptions. Our valuation remains predicated off 2018, slightly higher than the low point of 2017, partially reflecting the uplift from Series 6 implementation. We show our expectations for solar margins in the tables below, illustrating the sharp step-down in all-in ASPs for projects in 2018. While some could push back on our low ASPs, we emphasize our estimated margins are equally constructive suggesting downside. Simplifying our model assumptions as wellWe have consolidated our Systems Business assumptions (previously broken out between EPC and self developed) to simplify the story. We also effectively raise our margin assumptions on the systems business (from ~13-18% previously) to ~30% to give the company benefit of the doubt based on company guidance, but this is more than offset by ASP declines. • Revenues: we have decreased our 2018 revenues from $3.7B to $1.5B to account for the sigifnicant drop in capacity sold (shown above) as well as a declining ASP environment. • Module sales decline from $1.5B to $830M, with the balance in both new and old primarily accounted for by system sales. We note the bookings outlook looks increasingly bleak near term for FSLR's • Gross Margin: All in, our gross margin declines from $559Mn to $413Mn. This accounts for a substantial portion of our estimate revisions as opex actually decreases. • Opex: Our previous opex assumption was slightly higher at $315M, which we have reduced to $300M assuming the company is able to implement cost savings initiatives. • Depreciation: We have removed the depreciation addback which was previously included in EBITDA, given potential shifts after another round of asset impairments. The company does not break out depreciation separately but we suspect most of the assets are mostly depreciated at this stage, so only Series 6 tool rollout would change this substantially and would presumably pick up in 2019. Figure 8: FSLR - SOTP Valuation | 
| Source: FactSet, UBS estimates, Company Filings |
What was the market assuming for Devco?We emphasize with this limited cash flow profile, we see a substantially depressed structural FCF as implying a still rich implied valuation on the $29/sh seen in the after-market price following the guidance call. We calculate the CAFD and cash balance as presently being worth $16/sh ($3/sh and $13/sh respectively). We emphasize the remaining $13/sh implied for the business implies ~13x on improved 2018 EPS, and ~6x off the peak 2019 earnings. What are other considerations?We include what we see as other risks to the story. • The election: With the administration focused on eliminating the Clean Power Plan as a key aspect of its First 100 days, we see a clear risk to 2019 order book and prospects for a recovery thereafter without ITC support. We maintain our expectations for the ITC to remain in effect and for residential deployments to be ~unchanged given the bulk of compensation from state level net metering policies. • Interest rates: While many are focused on more infrastructure oriented sectors to be negatively impacted by prospects of rising rates, we see margins as likely pressured on both projects under development by FSLR as well as lower margins for PPAs. The Background on the Series 6 DecisionDuring the guidance call, mgmt. announced that it would accelerate Series 6 module production to 2018, meaning that Series 5 will be bypassed altogether. The transition will involve revamping FSLR's existing facilities from 2017-2018 to allow for Series 6 production capabilities; Series 4 production will begin to be phased out. Why cancel Series 5 and go straight to Series 6? Mgmt. indicated that difficult market conditions led to the decision to cancel the 365-390W/panel Series 5 product and move straight to Series 6 product (with specs greater than 400W/panel). The current environment includes significant decreases in module prices, caused by factors such as declining demand in China and excess supply (citing 20GW new capacity for modules). In this challenging environment of declining ASPs and PPAs, mgmt. believes the Series 6 product will provide cost advantages vs. crystalline silicon, as well as compared to its own Series 4 product. The decision indicates that Series 5, with a similar cost structure to Series 4, would not have been competitive in the future, illustrating the need for the accelerated deployment of the Series 6 product. Broadly, the technology landscape has evolved such that mgmt. was forced to accelerate capex and sacrifice near-term capacity in order to remain competitive. Pricing advantage: How much will it be able to keepMgmt. expects Series 6 to command a higher ASP of $0.06/W compared to Series 4 and $0.04/W vs. crystalline silicon. The company attributes the 6 cent improvement to a higher form factor that eliminates incremental balance-of-system cost found in Series 4 with its smaller form factor (which resulted in a 6 cent drag for Series 4 vs. crystalline silicon). We note, however, that Series 5 was also expected to have a $0.06/W advantage over Series 4. Favorable cost structure provides real advantage Mgmt. asserted that the significant cost savings of Series 6 will be the driving factor to make the product competitive in future years. Series 4 has struggled of late vs. crystalline silicon from a module manufacturing cost perspective, which mgmt. attributed to supply cost tightening by its competitors. Significantly, Series 5 would have had the same module manufacturing cost as Series 4. With Series 6, however, mgmt. suggested a 40% cost per watt decrease relative to Series 4 (and even more vs. Series 5 given the incremental cost of rail additions). This major cost advantage is attributed to being able to achieve scale through Series 6's higher form factor and lower capex per watt. However, major module capacity cuts vs. prior guidance The clear drawback of the Series 6 acceleration is the significant production drop-off in 2017-2019 production vs. prior guidance caused by the phase-out of Series 4. Mgmt indicated 2.2GW of Series 4 production for 2017 vs. over 3GW in prior guidance. 2018 represents the most significant decrease at just over 2GW (1GW of Series 6) expected vs. ~3.5GW in prior guidance. Finally, 2019 is also slightly lower, with the company guiding to ~3.5GW of production vs. ~4GW in prior guidance, albeit 2019 now represents all Series 6 product (vs. an expectation of ~1GW of Series 6 production in prior guidance for 2019, with Series 4 filling the majority). While mgmt. expects an improvement in operating expenses with scale (decrease from 10% of ASP at 3GW to 7% at 5GW), the opex too is a revision down from the company's guidance at its Analyst Day (where 5% of ASP at 7GW was communicated) due to the lower expected production. Broader restructuring effortsThe transition to Series 6 will involve workforce reductions in the both the company's domestic and international manufacturing facilities. Mgmt. anticipates total asset impairment and restructuring charges of $500-700Mn related to the transition, with a cash impact of $70-100Mn. We expect ongoing capex could begin to re-inflate by 2019 as additional MW capacity is re-opened with Series 6 capacity.
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can the systems business still dominate earnings? UBS VIEW The bulk of gross margin remains attributable to the Systems business even in 2017, seeing risk that this too could continue to erode as above-market projects continue to roll off. While the company may indeed ramp back up into higher volumes in 2019, we see the limited backdrop of projects as among the more concerning points following the weak guidance print from SPWR mgmt. earlier. We continue to attribute healthy margins in our model, reflecting ~20-30% margins throughout the forecast period, backwardated. Further, given the roll off of the 30% ITC in 2019, we suspect this should increasingly be viewed as a 'peak' year, rather than as the return to 'normal' deployment. EVIDENCE Mgmt remains adamant that Systems embed quite robust margins, at least for 2017. We illustrate our margins by year in the table below, illustrating the continued bias towards Systems margins despite the ongoing shift towards modules. While mgmt. had initially articulated promise of a 1GW systems pipeline in 2017 (seemingly the source of higher earlier 2017 expectations) it was only able to drive the 600-700 MW range (excluding the two key, albeit low margin, projects in California: Moapa and CA Flats). Mgmt points to the ability to further scale 2017 off nascent data points for more community solar opportunities (~100MWs+ as well as Japanese FIT projects (~200 MWs). Further commercial projects remain biased towards 2018 and 2019. Mgmt remains biased to avoid projects abroad given the higher risk profile of contracting and executing on projects against local competitors. It does however list 250 MW of Indian projects in its backlog, unexpected in our view. WHAT'S PRICED IN? We perceive many investors as worried about developer margins in the case of SPWR without asking similar questions of FSLR. While FSLR may hold off from entering into too many PPA arrangements in this lower margin environment, this conversely will limit the volumetric growth we assume in our model already. |
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Figure 9: Breakout of Margin Mix (%): Systems vs. Modules | 
| Source: Company Filings, UBS estimates |
| | | PIVOTAL QUESTIONS | return ↑ | Q: How will declining module ASPs affect FSLR? UBS VIEW Focusing on the 'core' modules business, we emphasize prices remain clearly at risk following guidance from CSIQ among other Tier 1 Silicon-based manufacturers with cost trends heading below $0.30/W presently. We worry that prices could well continue to trend down materially as we initially outlined in our SPI note from September. While mgmt. admits it can bring down costs by 40% from Series 4 to Series 6, the risk remains that achieved margins don’t materially improve as market prices by FY Series 6 implementation in 2019 could well prove in the mid-to-low $0.20's/W. EVIDENCE With competitor prices coming down into the low $0.30's and $0.20's/W already, we see it as easy for ASPs to continue to deflate at a -10% clip. The bias in the industry remains for further deflation and technological improvement, not less. Mgmt specifically points to disproportionate pressure in the US given the continued deployment of new 'US-tariff compliant' panels from Chinese companies, manufactured elsewhere in Southeast Asia. WHAT'S PRICED IN? We worry that investors had failed to appreciate FSLR's cautionary language that its Series 4 model was no longer competitive, and now likely underappreciate the continued challenges to keep up with panel margins declining relative to the Series 6 panel. We note a ~9% improvement in the cost of Series 4 in 2017 provides for a ~30% cost decline by 2019. | |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can Competitive Demand Dynamics Offset Expectations Decline? UBS VIEW Clearly, increased competitiveness vs other generation technologies bodes well for Solar more broadly, but the question is can FSLR capitalize on this either domestically or internationally? While we would expect a pickup versus 2017 trough, the level of recovery would seem lacklustre vs previous 2018+ expectations. On the plus side, we see the data points in Emerging Markets such as Chile as intriguing with prices below delivered LNG. Further, we note data points of accelerated efforts to find cites in West Texas among other geographies given the increasingly economic price of solar in a merchant context; we see many Commercial & Industrial offtakes, as cited on FSLR's 3Q call, as clearly the brightest spot. The question remains even if these ramp up as we reflect, can they achieve the historical margins? Probably Not. EVIDENCE We note confirming evidence from FSLR and others that commercial buyers are trending towards solar options as they become increasingly economic, with multiple developers looking at a 2GW market. Ultimately this appears quite modest relative to expectations for a 10GW+ market in 2016 due to meaningful, legacy utility-scale procurement associated with the 2016 expiration of the solar ITC. WHAT'S PRICED IN? We believe expectations for solar demand remain off base, particularly for the US, where large-scale utility projects remain weak given limited near-term demand. Most of the renewable market has moved towards wind in 2017 and 2018. The question is just how much will come back in 2019. Further, without an extension likely, we expect a substantial step-down in 2020+ again to squeeze margins. | |
What Drives Solar Demand?We include the five key factors below for First Solar's utility-scale product, with a focus on US system deployments. We see broaders risks as mgmt. focuses on sales outside of the US, principally on an EPC and module-only basis. Positives: • Commercial demand: This would appear to be a 2GW opportunity through 2019 according to FSLR. The question is just how much of this it can garner, and how much margin it will give up. We note these have historically been slightly higher than utility-scale RFP deals in the wind space thus far, given more risk on shorter contracts, etc. • PURPA: This structure appears the primary demand driver in 2017 as developers are able to force utilities to take on solar projects in non-competitive markets. These remain a small part of the market. Negatives: • Demand growth: With the LCOE of solar now equal to gas, we see an argument to turn to solar. The problem is with net energy efficiency trending lower, we see muted need to build any new resources at all. • CCAs in California: We see risk that the conventional utilities in California will substantially slow on future procurement given the clear risk they could lose a material quantity of their supply to external suppliers. We see FSLR winning some of this CCA load but unlikely to replace the meaningful sized contracts available previously. • Future environmental targets. We note without the Clean Power Plan (CPP) in place, we see the 2019 boom year as likely challenged. Many utilities are likely to remain more cautious, particularly across the South, from doubling down too deep on solar without meaningful solar RPS requirements or CPP mandates from the federal government. The change in administration remains problematic to the thesis of solar turnaround.
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
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We see risk to the current share price as downward biased (1:2.4) Upside (US$38): Our upside scenario assumes margins improve faster than expected, partially through ASP improvements vs our base case and partly through margin expansion at the module level specifically. This scenario reflects 30% self-developed project margins and 25% module margins. This would effectively reflect a scenario where demand is stronger than expected, perhaps where tax credits are more condusive to growth. Further, ASP declines would likely only slow in the event demand is significantly higher than expectations, particularly in the US market. Base (US$25): Our base case assumes margins remain in a reasonable range over the next several years amidst a challenging global supply backdrop. We assume the company can achieve 30% self-developed margins and 20% module margins. This level of margin would be considered relatively good today and is predicated on the company achieving basic execution on their series 6 rollout, which is higher margin. However, declining ASPs leave a lot of ground to cover on the gross margin dollar amount versus prior years. Downside (US$15): Our downside scenario assumes increasingly challenging supply/demand dynamic impacts FSLR margins over the next several years and the company achieves 25% self-developed margins and 15% module margins. This still effectively assumes series 6 rollout happens, though ASP environment could accelerate faster than our base assumptions if supply/demand environment is perpetually out of balance.
| | | COMPANY DESCRIPTION | return ↑ | First Solar is a vertically integrated global solar energy solution provider that manufactures photovoltaic solar equipment and modules. On the module side FSLR uses thin-film Cadmium Tellurium (CdTe) technology and recently acquired crystalline solar technology from Tetrasun. It also provides engineering, procurement, construction (EPC), O&M, and development services to solar plants. Additionally, FSLR has a YieldCo subsidiary (8Point3 Energy), through a partnership with SunPower, which is valuable to FSLR through its equity ownership and Incentive Distribution Rights (IDRs). Industry outlook We remain bullish on the renewable energy sector, and expect solar to continue to gain market share, benefiting from trends in installation cost declines, improvements in energy efficiency, and government subsidies at federal and state levels. However, we expect a challenging supply/demand outlook in the medium term as several high-demand countries work through incentive changes, which could affect margins at the company level. | |
| | | | First Solar Inc (FSLR.O) | | | | | | | | | | | Revenues | 3,309 | 3,392 | 3,579 | 2,886 | -19.4 | 2,912 | 0.9 | 1,522 | 2,559 | 2,266 | Gross profit | 863 | 827 | 919 | 750 | -18.5 | 317 | -57.8 | 413 | 616 | 548 | EBITDA (UBS) | 603 | 670 | 774 | 598 | -22.8 | 150 | -74.9 | 315 | 607 | 648 | Depreciation & amortisation | (234) | (246) | (258) | (229) | -11.1 | (123) | -46.2 | (202) | (342) | (457) | EBIT (UBS) | 369 | 424 | 517 | 368 | -28.7 | 27 | -92.8 | 113 | 265 | 190 | Associates & investment income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other non-operating income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | 12 | 8 | 24 | 173 | NM | 14 | -91.7 | 12 | 12 | 13 | Exceptionals (incl goodwill) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 380 | 432 | 540 | 541 | 0.2 | 41 | -92.4 | 125 | 276 | 203 | Tax | (25) | 30 | 6 | (50) | - | (4) | 92.1 | (21) | (52) | (37) | Profit after tax | 355 | 462 | 546 | 491 | -10.1 | 37 | -92.5 | 104 | 225 | 166 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Extraordinary items | 87 | 0 | 45 | (685) | - | (2) | 99.8 | (2) | (2) | (2) | Net earnings (local GAAP) | 442 | 462 | 591 | (194) | - | 35 | - | 102 | 223 | 164 | Net earnings (UBS) | 355 | 462 | 546 | 491 | -10.1 | 37 | -92.5 | 104 | 225 | 166 | Tax rate (%) | 6.6 | 0.0 | 0.0 | 9.2 | - | 9.6 | 4.0 | 16.9 | 18.7 | 18.2 |
| | | | | | | | | | | EPS (UBS, diluted) | 3.72 | 4.55 | 5.37 | 4.72 | -12.0 | 0.36 | -92.5 | 1.00 | 2.15 | 1.59 | EPS (local GAAP, diluted) | 4.63 | 4.55 | 5.81 | (1.86) | - | 0.34 | - | 0.98 | 2.13 | 1.57 | EPS (UBS, basic) | 3.72 | 4.55 | 5.37 | 4.72 | -12.0 | 0.36 | -92.5 | 1.00 | 2.15 | 1.59 | Net DPS (US$) | 0.00 | 0.00 | 0.00 | 0.00 | - | 0.00 | - | 0.00 | 0.00 | 0.00 | Cash EPS (UBS, diluted) | 6.17 | 6.96 | 7.90 | 6.93 | -12.3 | 1.54 | -77.8 | 2.94 | 5.42 | 5.96 | Book value per share | 45.28 | 49.57 | 54.71 | 52.50 | -4.0 | 53.13 | 1.2 | 54.49 | 57.09 | 59.17 | Average shares (diluted) | 95.47 | 101.64 | 101.82 | 104.01 | 2.2 | 104.17 | 0.2 | 104.32 | 104.46 | 104.59 |
| | | | | | | | | | | Cash and equivalents | 1,764 | 1,991 | 1,830 | 2,343 | 28.0 | 2,001 | -14.6 | 1,505 | 1,082 | 1,316 | Other current assets | 2,029 | 1,199 | 1,515 | 1,439 | -5.0 | 1,403 | -2.5 | 985 | 1,346 | 1,235 | Total current assets | 3,793 | 3,190 | 3,346 | 3,782 | 13.0 | 3,404 | -10.0 | 2,490 | 2,428 | 2,551 | Net tangible fixed assets | 1,385 | 1,402 | 1,284 | 705 | -45.1 | 1,156 | 64.0 | 1,955 | 2,613 | 2,656 | Net intangible fixed assets | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Investments / other assets | 1,706 | 2,132 | 2,687 | 2,707 | 0.8 | 2,728 | 0.8 | 2,749 | 2,770 | 2,791 | Total assets | 6,884 | 6,724 | 7,316 | 7,194 | -1.7 | 7,289 | 1.3 | 7,194 | 7,811 | 7,998 | Trade payables & other ST liabilities | 1,528 | 949 | 923 | 778 | -15.7 | 758 | -2.6 | 480 | 815 | 742 | Short term debt | 61 | 52 | 38 | 59 | 54.22 | 66 | 12.93 | 98 | 66 | 76 | Total current liabilities | 1,588 | 1,001 | 961 | 837 | -12.9 | 824 | -1.5 | 578 | 881 | 819 | Long term debt | 163 | 165 | 251 | 341 | 35.8 | 375 | 9.9 | 377 | 412 | 435 | Other long term liabilities | 630 | 531 | 556 | 555 | -0.1 | 555 | 0.0 | 555 | 555 | 555 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 2,380 | 1,697 | 1,768 | 1,733 | -2.0 | 1,755 | 1.2 | 1,510 | 1,848 | 1,809 | Common s/h equity | 4,503 | 5,027 | 5,548 | 5,461 | -1.6 | 5,534 | 1.3 | 5,684 | 5,963 | 6,189 | Minority interests | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities & equity | 6,884 | 6,724 | 7,316 | 7,194 | -1.7 | 7,289 | 1.3 | 7,194 | 7,811 | 7,998 |
| | | | | | | | | | | Net income (before pref divs) | 442 | 462 | 591 | (194) | - | 35 | - | 102 | 223 | 164 | Depreciation & amortisation | 234 | 246 | 258 | 229 | -11.1 | 123 | -46.2 | 202 | 342 | 457 | Net change in working capital | 187 | (9) | (1,165) | (69) | 94.1 | 16 | - | 140 | (26) | 38 | Other operating | 82 | 47 | 24 | (16) | - | (16) | 0.0 | (16) | (16) | (16) | Operating cash flow | 945 | 746 | (292) | (49) | 83.3 | 159 | - | 429 | 523 | 643 | Tangible capital expenditure | (283) | (258) | (166) | (250) | -50.2 | (490) | -96.0 | (500) | (500) | (500) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | (255) | (254) | (185) | 0 | - | 0 | - | 0 | 0 | 0 | Investing cash flow | (537) | (512) | (351) | (250) | 28.8 | (490) | -96.0 | (500) | (500) | (500) | Equity dividends paid | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Share issues / (buybacks) | 428 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other financing | 8 | 2 | 38 | 3 | -91.48 | 3 | 0.00 | 3 | 3 | 3 | Change in debt & pref shares | (335) | 6 | 99 | 111 | 11.86 | 41 | -62.72 | 34 | 2 | 34 | Financing cash flow | 101 | 7 | 137 | 114 | -16.9 | 45 | -60.9 | 37 | 6 | 38 | Cash flow inc/(dec) in cash | 509 | 242 | (506) | (185) | 63.4 | (287) | -55.1 | (34) | 29 | 181 | FX / non cash items | 251 | (15) | 345 | 697 | 102.0 | (55) | - | (462) | (452) | 53 | Balance sheet inc/(dec) in cash | 760 | 227 | (161) | 512 | - | (342) | - | (496) | (423) | 234 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
First Solar Inc (FSLR.O) | | | | | | | | | P/E (local GAAP, diluted) | 9.3 | 13.2 | 9.0 | NM | NM | 31.8 | 14.6 | 19.8 | P/E (UBS, diluted) | 11.6 | 13.2 | 9.8 | 6.6 | 87.8 | 31.2 | 14.5 | 19.6 | P/CEPS | 7.0 | 8.6 | 6.6 | 4.5 | 20.2 | 10.6 | 5.7 | 5.2 | Equity FCF (UBS) yield % | 16.9 | 8.0 | (8.6) | (9.5) | (10.5) | (2.2) | 0.7 | 4.5 | Net dividend yield (%) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | P/BV x | 1.0 | 1.2 | 1.0 | 0.6 | 0.6 | 0.6 | 0.5 | 0.5 | EV/revenues (core) | 0.9 | 1.2 | 0.9 | 0.4 | 0.4 | 1.0 | 0.6 | 0.7 | EV/EBITDA (core) | 4.8 | 6.0 | 4.3 | 2.0 | 7.8 | 4.9 | 2.5 | 2.4 | EV/EBIT (core) | 7.8 | 9.5 | 6.4 | 3.2 | NM | 13.6 | 5.8 | 8.0 | EV/OpFCF (core) | 5.2 | 6.5 | 4.5 | 2.1 | 22.5 | 7.1 | 3.0 | 2.8 | EV/op. invested capital | 1.0 | 1.5 | 1.0 | 0.3 | 0.3 | 0.4 | 0.3 | 0.3 |
| | | | | | | | | Market cap. | 3,925 | 6,077 | 5,312 | 3,160 | 3,160 | 3,160 | 3,160 | 3,160 | Net debt (cash) | (781) | (1,658) | (1,658) | (1,658) | (1,658) | (1,295) | (1,295) | (1,295) | Buy out of minorities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Pension provisions/other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total enterprise value | 3,143 | 4,419 | 3,655 | 1,503 | 1,503 | 1,865 | 1,865 | 1,865 | Non core assets | (279) | (407) | (334) | (334) | (334) | (334) | (334) | (334) | Core enterprise value | 2,864 | 4,012 | 3,321 | 1,169 | 1,169 | 1,532 | 1,532 | 1,532 |
| | | | | | | | | Revenue | -1.8 | 2.5 | 5.5 | -19.4 | 0.9 | -47.8 | 68.2 | -11.5 | EBITDA (UBS) | -10.7 | 11.1 | 15.6 | -22.8 | -74.9 | 110.3 | 92.4 | 6.7 | EBIT (UBS) | -10.7 | 15.1 | 21.8 | -28.7 | -92.8 | NM | 134.1 | -28.1 | EPS (UBS, diluted) | -24.0 | 22.2 | 18.0 | -12.0 | -92.5 | 181.1 | 115.4 | -26.1 | Net DPS | - | - | - | - | - | - | - | - |
| | | | | | | | | Gross profit margin | 26.1 | 24.4 | 25.7 | 26.0 | 10.9 | 27.1 | 24.1 | 24.2 | EBITDA margin | 18.2 | 19.8 | 21.6 | 20.7 | 5.1 | 20.7 | 23.7 | 28.6 | EBIT margin | 11.1 | 12.5 | 14.4 | 12.8 | 0.9 | 7.4 | 10.3 | 8.4 | Net earnings (UBS) margin | 10.7 | 13.6 | 15.3 | 17.0 | 1.3 | 6.8 | 8.8 | 7.3 | ROIC (EBIT) | 13.3 | 15.3 | 15.8 | 10.7 | 0.8 | 2.8 | 5.7 | 3.8 | ROIC post tax | 12.4 | 15.3 | 15.8 | 9.7 | 0.7 | 2.4 | 4.6 | 3.1 | ROE (UBS) | 8.8 | 9.7 | 10.3 | 8.9 | 0.7 | 1.9 | 3.9 | 2.7 |
| | | | | | | | | Net debt / EBITDA | (2.6) | (2.6) | (2.0) | (3.3) | (10.4) | (3.3) | (1.0) | (1.2) | Net debt / total equity % | (34.2) | (35.3) | (27.8) | (35.6) | (28.2) | (18.1) | (10.1) | (13.0) | Net debt / (net debt + total equity) % | (52.0) | (54.5) | (38.4) | (55.2) | (39.2) | (22.1) | (11.3) | (14.9) | Net debt/EV % | (53.8) | (44.2) | (46.4) | NM | NM | (67.2) | (39.5) | (52.5) | Capex / depreciation % | 120.6 | 104.8 | 64.6 | 109.0 | NM | NM | 146.1 | 109.4 | Capex / revenue % | 8.5 | 7.6 | 4.7 | 8.7 | 16.8 | NM | 19.5 | 22.1 | EBIT / net interest | NM | NM | NM | NM | NM | NM | NM | NM | Dividend cover (UBS) | - | - | - | - | - | - | - | - | Div. payout ratio (UBS) % | - | - | - | - | - | - | - | - |
| | | | | | | | | Others | 3,309 | 3,392 | 3,579 | 2,886 | 2,912 | 1,522 | 2,559 | 2,266 | Total | 3,309 | 3,392 | 3,579 | 2,886 | 2,912 | 1,522 | 2,559 | 2,266 |
| | | | | | | | | Others | 369 | 424 | 517 | 368 | 27 | 113 | 265 | 190 | Total | 369 | 424 | 517 | 368 | 27 | 113 | 265 | 190 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation-19.8% | Forecast dividend yield0.0% | Forecast stock return-19.8% | Market return assumption6.0% | Forecast excess return-25.8% |
| Valuation Method and Risk Statement Risks to First Solar (FSLR) include but are not limited to: inability to raise debt, equity, working capital, and other capital sources to finance development of solar projects; rising interest rates and financing costs; lack of liquidity and failure to meet liabilities and other obligations as due; inability to transact with its jointly-owned YieldCo entities in an accretive fashion; counterparty defaults; inability to transact with third parties and realize gross margins; increasing cost structure and failure of solar technology to achieve 'grid parity'; increased completion for project development opportunities pressuring realized margins; technological defects and obsolescence; loss of and/or infringement on intellectual property rights; losses from cyber-attacks; lack of raw materials and necessary components needed to manufacture solar modules; supply chain delays or interruptions; unfavorable international, federal, state, or local legislation/regulation; unforeseen environmental liabilities for its hazardous materials used in solar manufacturing; natural disasters; labor strikes and other unrest; adverse changes to tax subsidies for solar generation, unfavorable weather (solar resource generation); sustained declines in oil prices; shareholder and class action litigation; insider and/or concentrated shareholder selling and below-average customer demand.
Our price target is based on an EV/EBITDA-derived SotP valuation. Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 18 November 2016 08:26 AM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 45% | 28% | Neutral | FSR is between -6% and 6% of the MRA. | 39% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 17% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 September 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities LLC: Julien Dumoulin-Smith; Jerimiah Booream, CFA. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | First Solar Inc | FSLR.O | Neutral | N/A | US$31.16 | 17 Nov 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 16.UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. First Solar Inc (US$) 
Source: UBS; as of 17 Nov 2016 |
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