Analysts Signal Solar Risks and Opportunity in Japan

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Out of Japan’s 10 vertically integrated utilities, five serve 26% of the nation’s peak electricity demand. These same companies announced a temporary suspension in grid connection applications for solar projects. These utilities accounted for 50% of total solar feed-in-tariff (FiT) but less than 38% of the projects commissioned. The question is what exactly this will mean for big solar suppliers who sell into Japan.

The understanding is that projects over 50KW must apply to the local utility to receive grid connection. An estimated 69GW of FiT applications have been received across all utility territories, but only 11GW have been commissioned. Merrill Lynch analysts Krish Sankar and Andrew Hughes detailed how Yingli, SunPower, First Solar and Trina Solar have the most exposure in Japan in their report.

SunPower Corp. (NASDAQ: SPWR) shares have a consensus analyst price target of $41.18 and a 52-week trading range of $25.38 to $42.07. SunPower has a market cap of $4 billion, and the stock is rated as Buy at Merrill Lynch.

Trina Solar Ltd. (NYSE: TSL) shares have a consensus analyst price target of $18.49 and a 52-week trading range of $10.15 to $18.77. The market cap is roughly $871 million. Trina Solar has a Buy rating at Merrill Lynch.

First Solar Inc. (NASDAQ: FSLR) shares have a consensus analyst price target of $67.50 and a 52-week trading range of $41.78 to $74.84. It has a market cap of nearly $6 billion. First Solar is rated Underperform at Merrill Lynch.

Yingli Green Energy Holding Co. Ltd. (NYSE: YGE) shares have a consensus analyst price target of $4.38 and a 52-week trading range of $2.68 to $8.33. The market cap is $499 million. Merrill Lynch rates this only as Neutral.

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Sankar and Hughes said:

Including the 4GW we estimate will be installed in the second half of 2014 (8GW for calendar year 2014), we forecast cumulative solar demand of 33GW second half of 2014-2018 for Japan. Given June 2014 backlog of at least 18.5 – 27.5GW, we remain confident in our forecast. Downside would come primarily from obstructions to small-scale solar deployment, or a significant expansion of the current suspension. However, given high retail power prices ($0.24/kWh), we believe that distributed solar remains a key solution to the country’s ongoing energy challenges regardless of the fate of the FiT program. Overall, the impact on US developers like First Solar and SunPower should be minimal. SunPower’s exposure to Japan is mostly through panel supply agreements with Toshiba and Sharp that serve distributed installations, and we maintain our positive outlook. Although Trina’s Japanese exposure (18% 2Q14 shipments) is higher than Yingli’s (12%), we continue to prefer TSL given its stronger balance sheet and access to financing.

We highlighted somewhat of the same topic with some alternative views from Credit Suisse as recently as October 2.

However, the pressure that Japan is putting on solar companies could ultimately drive them away to greener pastures. India seems to be a prime location. Narendra Modi’s recent election may prove useful in jump-starting India’s solar demand. The Hindustan Times reported that the Indian government is currently in the process of securing billions in debt financing to be put toward solar projects. India’s power minister, Piyush Goyal, predicted that the country would exceed its goal of 20GW by 2022.

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