42856960 Nomura Asian Solar

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15 November 2010Nomura

N O M U R A S I N G A P O R E L I M I T E D

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Nomura Anchor Reports examine the key themes and value drivers that underpin oursector views and stock recommendations for the next 6 to 12 months.

Any authors named on this report are research analysts unless otherwise indicated.See the important disclosures and analyst certifications on pages 102 to 104.

Solar| A S I A ASIA POWER, UTILITIES AND RENEWABLE ENERGY

Nitin Kumar +65 6433 6967 [email protected]

Ivan Lee, CFA +852 2252 6213 [email protected]

Too much of a good thing

We are Neutral on the Asian solar sector, where some players are at risk of beingburned by a shift from excess demand in 2010 to oversupply in 2011. Looking at

expansion plans across the industry, we forecast circa 50% y-y capacity expansion by

end-2011. Predicting demand is less straightforward, particularly amid heightened policy

risk, but even our best-case scenario has demand growing by a more modest 30%. The

likely result: more pressure on ASPs and greater impetus for consolidation. Nomuras

own sun screen highlights stocks that we see as best placed to ride these changing

market dynamics. We like companies with a tight grip on costs, typically those that are

vertically integrated, and those concentrating R&D on cell efficiency improvements. We

also favour companies well covered by geographically diverse sales, taking in new

growth markets that should give ample protection if demand from Europe dries up. Our

three BUYs Trina, Yingli and Suntech fit the bill. We are NEUTRAL on CanadianSolar, JA Solar (from Buy), Motech (from Reduce), LDK and GCL Holdings, since these

are stepping up vertical integration and diversifying sales but arent yet fully covered, in

our view. Our REDUCEs E-Ton and Solargiga still seem narrowly focused and

thus over-exposed. Also, we include notes on six solar stocks not rated by Nomura.

From excess demand to oversupplyMarket share consolidation in 2011?Nomuras sun screen: choosing the right companies

NEUTRAL

Stocks for action

Stock TickerCurrent

ratingCurrent

pricePrice

targetUp/

down (%)

Trina Solar TSL US BUY 27.74 36.0 29.8

Yingli Green YGE US BUY 11.87 15.0 26.4

Suntech Power STP US BUY 9.05 11.0 21.5

Canadian Solar CSIQ US NEUTRAL 15.22 17.0 11.7

JA Solar JASO US NEUTRAL 9.04 10.0 10.6

Motech Ind. 6244 TT NEUTRAL 121.0 119.0 (1.7)

E-Ton Solar 3452 TT R EDUCE 39.55 37.0 (6.4)

LDK Solar LDK US NEUTRAL 13.23 14.0 5.8

GCL Holdings 3800 HK NEUTRAL 2.58 2.45 (5.0)

Solargiga 757 HK REDUCE 1.94 1.1 (43.3)

Pricing as of 10 Nov closing;

Upgrading from Reduce Downgrading from Buy

Analysts

Nitin Kumar

Regional solar analyst, Asia Power,

Utilities, and Renewable Energy team

+65 6433 6967

[email protected]

Ivan Lee, CFA

Head of Asia Power, Utilities, and

Renewable Energy

+852 2252 6213

[email protected]

Raghvendra Divekar (Associate)


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15 November 2010Nomura 1

Solar| A S I A ASIA POWER, UTILITIES AND RENEWABLE ENERGY

Nitin Kumar +65 6433 6967 [email protected]

Ivan Lee, CFA +852 2252 6213 ivan.lee@nomura .com

ActionAs the solar industry moves from excess demand in 2010 to oversupply in 2011F,

we expect companies with better cost control to outperform with relatively sustainedmargins and market-share gains. Among Asia-based solar names, we like Trina,

Yingli and Suntech for their vertical integration and brand presence.

CatalystsContinued policy support and faster-than-expected utility adoption of solar are

potential key catalysts for demand, which could soak up the excess supply,

although we caution competition could change with new stronger players.

Anchor themes

Vertically integrated companies have better cost control management and we see

them capable of sustaining margins and expanding market share. Pure-play

makers unable to increase integration are likely to underperform.

Too much of a good thing

From excess demand to oversupplyLooking at the expansion plans across the industry, we see mean available

capacity across the chain at 23-24GW (+50% y-y) by end-2011F. While demand

prediction has become harder with increased policy risks, we see oversupply in

2011F under our best-case scenario, with demand at 19.3GW (+29% y-y). In our

base-case scenario, we expect demand of 16.5GW, suggesting oversupply at

40-45% of demand in 2011F.

Market share consolidation in 2011?Deteriorating demand-supply dynamics are likely to raise ASP pressure and we

see module ASPs falling 12-18% y-y to US$1.4-1.5/W in 2011F from US$1.7-1.8/W

currently. This will have a ripple effect across the solar value chain and we expect

companies with better cost management to drive market-share gains, resulting in

consolidation. Here, we see vertically integrated companies better placed with

evidence coming from rising vertical integration capabilities across pure-play

makers.

Nomuras sun screen: choosing the right companiesWe believe companies best positioned to ride the market dynamics in 2011F

require key characteristics of: 1) better cost management, which favours

companies with vertical integration; 2) R&D in cell-efficiency improvements key to

continued cost reductions in the segment, in our view; and 3) geographical sales

diversification to capture demand from new growth markets as demand growth

from Europe comes to a halt.

Among our coverage, we have three BUYs (Trina, Yingli and Suntech, which meet

our above-mentioned criteria), five NEUTRALs (Canadian Solar, JA Solar, Motech,

LDK and GCL Holdings, which are increasing vertical integration and sales

diversification), and two REDUCEs (Solargiga and E-Ton, which continue to remain

narrowly focussed).

N O M U R A S I N G A P O R E L I M I T E D

Stocks for action

Within our coverage we prefer

vertically integrated companies overpure play manufacturers due to

better cost structures. We maintain

our BUY on Trina Solar, Yingli Green

Energy and Suntech Power.

Stock TickerCurrent

ratingCurrent

pricePrice

targetUp/

down (%)

Trina Solar TSL US BUY 27.74 36.0 29.8

Yingli Green YGE US BUY 11.87 15.0 26.4

Suntech Power STP US BUY 9.05 11.0 21.5

Canadian Solar C SIQ US NEUTRAL 15.22 17.0 11.7

JA Solar JASO US NEUTRAL 9.04 10.0 10.6

Motech Ind. 6244 TT NEUTRAL 121.00 119.0 (1.7)

E-Ton Solar 3452 TT REDUCE 39.55 37.0 (6.4)

LDK Solar LDK US NEUTRAL 13.23 14.0 5.8

GCL Holdings 3800 HK NEUTRAL 2.58 2.45 (5.0)

Solargiga 757 HK REDUCE 1.94 1.1 (43.3)

Pricing as of 10 Nov closing; Upgrading; Downgrading

NEUTRAL

Analysts

Nitin Kumar

Regional solar analyst,

Asia Power, Utilities, and Renewable

Energy team

+65 6433 6967

[email protected]

Ivan Lee, CFA

Head of Asia Power, Utilities, andRenewable Energy

+852 2252 6213

[email protected]

Raghvendra Divekar (Associate)


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Solar| Asia Nitin Kumar / Ivan Lee, CFA


Contents

Investment summary 3

Down to choosing the right companies 8Margin pressure to become acute in 2011F 9Vertically integrated player to outperform pure-play makers 9Balance sheets to remain in focus 10Valuation methodology 11

Oversupply across segments in 2011 13Polysilicon makers market to remain in oversupply in 2011F-13F 13Easing the bottleneck of wafer supply in 2011 15Perpetual oversupply in cell manufacturing? 15

Demand growth to slow over 2011-13F 16Demand growth ahead a function of policy changes 16European demand growth to slow as risks increase 18US the next key market ahead 19

Market share consolidation ahead? 22ASP pressure to increase 22Module ASPs of US$1.4-1.5/W in 2011F enable equivalent IRRs 23Vertically integrated companies have better cost structure 23Pure-play companies likely to suffer the most 24

Fundamental shift in competition ahead 26Entry of well-funded leaders from technology industry 26Thin-film looks set to make a comeback 27Project financing setting up the complete plant 28

Utility adoption the next lever of growth 29More countries to offer subsidies to solar as costs reduce 30Analysing the global addressable market for renewables 31Solar to account for at least 50% of the renewable TAM 31

Latest company views

Trina Solar 33

Yingli Green Energy 38Suntech Power 43

Canadian Solar 48

JA Solar 53

Motech Industries 58

E-Ton Solar Tech 63

LDK Solar 68

GCL Poly Energy 73

Solargiga Energy 79

Solarfun 84

DelSolar 87

Gintech 90Comtec 93

Apollo Solar 96

Trony Solar 99


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Summary

Investment summaryOver FY10, pure-play cell makers and wafer makers have benefitted from a surge in

demand and thus ASP improvements, which are reflected in their relative

outperformance within the solar sector. We believe pure-play cell and wafer makers

are likely to see their earnings margins peak in 3Q10F, with continued bullish

comments, as impacts from the changed industry dynamics are only starting to

manifest, in our opinion. We expect 2011F to see three changes:

Undersupply to oversupply. Looking at the expansion plans of companies in the

different segments of the value chain, we see mean available capacity across the

chain at 23-24GW (+50% y-y) by end-2011F. In contrast, even under our best-case

scenario, we see demand growth of merely 29% y-y to 19.3GW in 2011F,

suggesting oversupply. Under our base-case scenario, we assume demand growth

of 10% y-y to 16.5GW, also suggesting oversupply at 40-45% of demand.

ASPs to see pressure across supply chain. With Germany likely to see an

additional 12-14% cut in feed-in-tariffs from January, we believe ASP pressure will

increase across the supply chain. We estimate a 12-18% y-y decline in moduleASPs in 2011F.

Polysilicon industry enters oligopoly. With the exit of GCL Polysilicon from the

pure polysilicon market, only three key suppliers remain Hemlock, Wacker and

OCI in the market. Note that GCL has forward integrated into wafers and is

unlikely to be a key supplier of poly in future. As such, we expect pricing wars to be

minimal and spot prices to revert to long-term pricing contracts. Based on our

checks with companies, we understand polysilicon ASPs under long-term contracts

will fall to US$45-50/kg by 2H11F from US$55-60/kg currently. Thus, ASP pressure

is unlikely to be offset by sharp declines in poly ASPs.

Market share consolidation likely in 2011FDeteriorating demand-supply dynamics are likely to raise ASP pressure and we see

module ASPs falling 12-18% y-y to US$1.4-1.5/W in 2011F from US$1.7-1.8/W

currently. This will have a ripple effect across the solar value chain and we expect

companies with better cost management to drive market-share gains, resulting in

consolidation.

We believe companies best positioned to ride the market dynamics in 2011F require

key characteristics of: 1) better cost management, which favours companies with

vertical integration; 2) R&D in cell-efficiency improvements key to continued cost

reductions in the segment, in our view; and 3) geographical sales diversification to

capture demand from new growth markets as demand growth from Europe comes to a

halt.

Vertically integrated model the winning strategy

Within the solar industry, we believe vertically integrated players are best placed to

stabilise margins, given: 1) streamlined cost structure; 2) better access to diversified

end-markets; and 3) strong supplier relations. We reaffirm our BUY ratings on Trina

and Yingli, as we see their margins defensive due to the following:

Leaders in vertical integration. Both companies have vertically integrated since

the start of their businesses. As such, they have the best cost structure among

China-based peers we estimate their 2010F gross margins will come in at 32-

33%, 10-15pp higher than at peers;

2011F to see R&D efforts bearing fruit. Both companies will start mass

production of high-efficiency cells (which are able to improve efficiency by 1-1.5pp

over the current generation, according to management) in 2011F. We estimate

2011F to see steady shift change

as industry moves to oversupply,

given demand growth from

Europe looks set to slow

Pure-play makers likely to see

peaking margins in 3Q10F

Switch to companies with:

1) vertical integration; 2) strong

R&D roadmap; and 3) sales

diversification outside Europe

Trina and Yingli look best placed

to outperform the industry;

reiterate BUY


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these cells will have about 6-7pp higher gross margins than those of the current

generation cells in 2011F.

Investments into improving brand name. Both companies have heavily invested

in marketing in 2010 to create brand awareness, which we believe is the first step

to faster and better geographical sales diversification. Yingli has already witnessed

improved results, noting that its 2011 demand is at 4x end-2010 capacity.

Valuations look attractive for both Trina and Yingli FY11F P/E at 8.0x and 8.1x,

respectively, and FY11F ROE at 20.4% and 17.1%, respectively, at the higher end of

the ROE range across China-based peers.

In our view, Suntech has the best brand name among China-based peers and a well-

documented R&D programme, although its progress in 2010 has been disappointing

due to balance sheet restructuring and execution delays in the launch of its high-

efficiency Pluto cells. We see potential positive catalysts in 2011F from: 1) expected

upstream integration into wafers; and 2) a wider Pluto cell launch looks to be on track

in 2011F. While the company trades at a higher FY11F PE multiple of 8.9x versus

Trinas 8.0x and Yinglis 8.1x, it trades at an FY11 PEG of 0.3x versus 0.5x for both

Trina and Yingli. Its balance sheet woes also look to have been appropriately

discounted with Suntech trading at FY11F P/BV of 1x versus Trinas 1.5x and Yinglis

1.3x. We reaffirm BUY on Suntech.

We reaffirm NEUTRAL on Canadian Solar, which has successfully moved away from

being a module maker with 50% of its cell supply coming from pure-play cell makers at

the start of 2010 to ~80% of cells coming from in-house by end-2010F. With further

expansion of in-house wafer capacity likely in future, we see Canadian Solar ahead of

other peers in vertical integration. However, this looks to be priced in.

Pure-play makers transitioning to vertically integrated model

We see companies with a pure-play business model as most vulnerable to ASP

pressure, given they have lesser avenues for cost reductions and are exposed to

market share shifts at their customers. Here, among the pure-play makers, we see a

business model shifting towards increased vertical integration, which we believe is the

right step forward.

Among our coverage, we see cell makers JA Solar and Motech expanding capacity in

both modules and ingot/wafers. Wafer maker LDK, which has previously integrated

upstream into Polysilicon, recently announced aggressive expansion of cell and

module capacity. Lastly, polysilicon maker GCL Holdings has expanded its in-house

wafer capacity to 3.5GW at end-2010 and looks set to exit from the polysilicon market

to focus only on wafer sales. Given that these integrations remain a work-in-progress

in the near term, we see benefits from integration largely offset by the worsening

industry dynamics.We downgrade JA Solar to NEUTRAL, as we believe market optimism from strong

2010F flowing into 2011F has been fully priced in. We upgrade Motech to NEUTRAL

to factor in better-than-expected cost reductions in 3Q10, which brought its cost

structure on par with China-based peers. We reaffirm our NEUTRAL ratings on LDK

and GCL Holdings, as we believe potential upsides have been priced in.

Solargiga and E-Ton have lagged in their vertical strategies. In our view, the slower

business transformation will manifest in declining margins and we expect the stocks to

underperform unless there are new investments to change their profiles.

Increased upstream integration to

enable Suntech to narrow cost

gap with leaders; reiterate BUY

Reiterate NEUTRAL on Canadian

Solar as benefits from its vertical

integration strategy look priced in

Pure-play makers evaluating

vertical integration strategies

Benefits from increased vertical

integration to be offset by change

in industry dynamics at JA Solar,

Motech, LDK and GCL Holdings

NEUTRAL on JASolar, Motech,LDK and GCL Holdings as weexpect performance in 2011 to bein line with broader industry

Reiterate REDUCE on Solargiga

and E-Ton given slower business

transformations


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Exhibit 1. Valuation summary

Trina Yingli Suntech Canadian GCL

Solar Green Power Solar JA Solar Motech E-Ton* LDK Solargiga Holdings

Bloomberg code TSL US YGE US STP US CSIQ US JASO US 6244 TT 3452 TT LDK US 757 HK 3800 HK

Price 27.74 11.87 9.05 15.22 9.04 121 39.55 13.23 1.94 2.58

Issued shared (mn) 79 148 180 43 168 380 249 131 1,807 15,473

Market cap (US$mn) 2,190 1,762 1,630 650 1,519 1,529 328 1,739 452 5,150

Primary business model Vertically Vertical ly PV Cells PV Cells PV Cells PV Cells PV Cells Poly and Wafer Poly and

Integrated Integrated Module Module Wafer Wafer

Rating BUY BUY BUY NEUTRAL NEUTRAL NEUTRAL REDUCE NEUTRAL REDUCE NEUTRAL

Price target 36.0 15.0 11.0 17.0 10.0 119.0 37.0 14 1.1 2.45

Upside / downside (%) 29.8 26.4 21.5 11.7 10.6 (1.7) (6.4) 5.8 (43.3) (5.0)

Target 2011 P/E (x) 10.4 10.4 10.4 10.4 7.2 9.0 17.5 8.3 6.0 30.6

Implied Target P/BV (x) 1.9 1.6 1.2 1.2 1.4 1.6 0.85 1.4 0.9 2.2

P/E (x)

2009 15.5 na 18.9 26.9 na 1,120.6 na na 33.9 na

2010F 9.2 10.4 na 15.4 6.9 10.2 na 9.0 na 26.5

2011F 8.0 8.1 8.9 9.1 6.5 9.4 19.2 7.7 9.7 25.8

2012F 6.9 7.6 6.4 7.5 6.7 9.1 14.0 8.1 8.2 45.0P/BV (x)

2009 2.2 1.7 1.0 1.4 1.5 2.9 0.9 1.9 2.2 0.0

2010F 1.8 1.5 1.1 1.2 1.6 2.0 1.0 1.6 1.9 2.5

2011F 1.5 1.3 1.0 1.1 1.3 1.7 0.9 1.3 1.6 1.9

2012F 1.2 1.1 0.8 1.0 1.1 1.4 0.9 1.1 1.3 1.7

Gross margin (%)

2009 28.1 23.6 20.0 12.4 12.7 5.5 1.3 (10.3) 15.1 30.2

2010F 31.8 33.3 17.8 14.1 23.0 21.1 7.3 19.3 (0.9) 27.9

2011F 28.8 27.9 18.7 13.6 20.0 18.4 5.2 18.8 21.3 23.5

2012F 27.3 26.6 19.7 13.5 17.3 15.6 5.7 18.2 20.3 15.2

EBIT margin (%)

2009 18.4 6.6 10.3 3.7 2.4 0.6 (2.0) (19.8) 7.8 21.4

2010F 21.2 20.9 9.5 6.1 17.3 14.8 4.0 13.8 (17.7) 23.7

2011F 18.2 17.4 10.1 5.5 14.0 11.8 2.5 12.4 16.4 20.9

2012F 16.7 16.1 11.1 5.4 11.3 9.1 3.1 11.8 15.3 13.1

Net margin (%)

2009 11.5 (6.3) 5.1 3.7 (2.4) 0.2 (17.9) (20.2) 5.36 (4.0)

2010F 14.0 9.8 (3.3) 3.0 13.0 12.0 (12.9) 8.7 (14.9) 22.2

2011F 14.2 9.8 6.4 3.8 11.0 10.2 1.9 7.9 12.3 20.8

2012F 13.2 8.4 7.7 3.7 8.9 8.0 2.4 7.1 11.1 12.1

Net profit

2009 98 (459) 86 23 (13) 33 (2,340) (222) 203 (176)

2010F 211 1,173 (88) 41 213 4,569 (2,311) 192 (98) 3,319

2011F 242 1,467 183 69 225 4,968 433 224 278 3,358

2012F 282 1,564 252 84 220 5,094 596 215 315 1,940

Net profit growth (%)

2009 59.1 na (3.0) na na (98.6) na na (40.9) (109.1)

2010F 115.8 na na 74.7 na N/M na na (147.3) na

2011F 14.8 25.0 na 68.5 5.7 8.7 na 16.7 Na 0.3

2012F 16.7 6.6 38.0 22.1 (2.4) 2.5 37.7 (4.1) 18.5 (42.7)

ROE (%)

2009 17.6 (8.0) 6.1 5.9 (1.9) 0.2 (29.8) (26.6) 8.8 na

2010F 24.2 16.1 (5.6) 8.4 26.7 25.2 (26.6) 19.5 (7.4) na

2011F 20.4 17.1 11.4 12.7 22.2 19.3 5.0 18.8 18.2 na

2012F 19.4 15.5 13.8 13.6 17.7 16.7 6.4 15.2 17.3 na

Share price performance (% y-y)

2008 (82.7) (84.2) (85.8) (77.1) (81.2) (64.4) (55.4) (72.1) (32.9) (83.7)2009 480.9 159.2 42.1 346.1 30.4 135.6 18.8 (46.6) 3.1 280.3

YTD2010 2.8 (24.9) (45.6) (47.2) 58.6 (50.1) (16.9) 88.7 (2.0) 13.3

Note: Pricing as of 10 Nov, 2010

Source: Bloomberg, Nomura research


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Exhibit 2. Catalysts summary module makers

Trina Solar Yingli Green

Bloomberg code TSL US YGE US

Growth drivers

New subsidies in emerging markets New subsidies in emerging markets

Further capacity expansion Further capacity expansion

Entering system integration System integration project wins

Positive share price catalysts

Continued cost reductions PANDA ramp

Stronger than expected ASPs Expanding market share

Expanding margins In-house poly production

Expanding market share

Supply agreements for poly/wafers

Wafer/ingot capacity expansion

Negative share price catalysts

New entrants New entrants

Price competition Price competition

Rise in inventories Rise in inventories

Key risk factors

Subsidy reduction in key markets Subsidy reduction in key marketsOversupply Oversupply

Double-ordering Double-ordering

Slower demand growth outside Europe Slower demand growth outside Europe


Exhibit 3. Catalysts summary module makers (contd)

Suntech Power Canadian Solar

Bloomberg code STP US CSIQ US

Growth drivers

New subsidies in emerging markets New subsidies in emerging markets

Further capacity expansion Further capacity expansion

System integration project wins Entering system integration


Pluto ramp Vertically integrated model

Continued cost reductions Reduced use of spot market

Stronger than expected ASPs Stronger than expected ASPs

Expanding market share Cost reduction roadmap

Supply agreements Wafer/cell supply agreements

Vertically integrated model


New entrants New entrants



Further write-downs of investments Increased use of spot marketKey risk factors

Subsidy reduction in key markets Subsidy reduction in key markets

Oversupply Oversupply


Slower demand growth outside Europe Slower demand growth outside Europe



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Exhibit 4. Catalysts summary cell makers

JA Solar Motech Industries E-Ton Solar

Bloomberg code JASO US 6244 TT 3452 TT

Growth drivers

New subsidies in emerging markets New subsidies in emerging markets New subsidies in emerging markets

Further capacity expansion Downstream integration into modules Strategic partnerships

System integration project wins Expansion of BOS product line

Downstream integration into systems

Partnership with TSMC


Increased vertical integration Launch of high efficiency cells Strategic investment into the company

Module supply agreements Strengthening of module brand Faster module sales at GloriaSolar

Expanding market share

Stronger than expected margins

AE Polysilicon ramp up


Price competition New entrants New entrants

Rise in inventories Price competition Price competition


Delays in AE Polysilicon ramp-up Equity dilution through FPO

Key risk factors

Subsidy reduction in key markets Subsidy reduction in key markets Subsidy reduction in key markets

Oversupply Oversupply Oversupply

Double-ordering Double-ordering Double-ordering

Contract renegotiations Contract renegotiations Contract renegotiations


Exhibit 5. Catalysts Summary wafer makers

LDK Solar GCL Holdings Solargiga

Bloomberg code LDK US 3800 HK 757 HK

Growth drivers

New subsidies in emerging markets New subsidies in emerging markets New subsidies in emerging markets

Polysilicon plant ramp up Ingot/Wafer ramp up

Downstream integration


Polysilicon ramp Ingot/wafer margins

Stake sale in poly business Stronger than expected poly ASPs

Stronger than expected poly ASPs




Execution issues in poly ramp up Execution issues in wafer ramp up

Key risk factors

Subsidy reduction in key markets Subsidy reduction in key markets

Oversupply Oversupply


Contract renegotiations Contract renegotiations



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Valuations

Down to choosing the right companiesYear to date, solar stocks across the industry have fallen 8% as the strong demand

environment remains tempered with rising policy risks. Thus far, the best performers

have been pure-play cell makers followed by wafer makers with module makers

(mostly vertically integrated) being the worst performers. On a geographical basis,

China-based companies saw a 6% rise in market capitalization whereas Europe-based

solar companies saw a 40% drop in capitalization, reflecting a shift in market share.

For the rest of 2011, we expect China-based companies to continue to fare better than

US and European peers. We expect vertically integrated module makers to perform

better than cell makers and wafer makers. We believe three things have changed:

Over-demand to oversupply. Looking at the expansion plans of companies in

different segments of the value chain, we see mean available capacity across the

chain at 23-24GW (+50% y-y) by end-2011F. In contrast, even under our best-case

scenario, we see demand growth at merely 29% y-y to 19.5GW in 2011F. In our

base-case scenario, under which we assume demand of 16.5GW in 2011F, we see

oversupply at 40-45% of 2011F demand.

ASPs to see pressure across supply chain. With Germany likely to see an

additional 12-14% cut in feed-in-tariffs from January, we believe ASP pressure will

rise across the supply chain. We estimate a 12-18% y-y decline in module ASPs.

As such, we estimate cell ASPs for China-based peers to fall to US$1.1-1.15/W

from current US$1.3-1.4/W levels.

Polysilicon industry enters oligopoly. With the exit of GCL from the pure

polysilicon market, only three key suppliers remain Hemlock, Wacker and OCI.

As such, we expect pricing wars to be minimal and spot prices to revert to long-

term pricing contracts. We understand polysilicon ASPs under long-term contracts

will fall to US$45-50/kg by 2H11 from US$55-60/kg currently. Thus, ASP pressure

is unlikely to be offset by sharp declines in poly ASPs. Note that GCL joins the list

of poly+wafer competitors such as MEMC, REC, LDK and M.Setek.

Exhibit 6. Segment performance in 2010

60

70

80

90

100

110

120

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

Wafer Cell

Module Industry

(Relative market cap)

+2%

(1)%

(8)%

(14)%


Exhibit 7. Regional performance in 2010

40

50

60

70

80

90

100

110

120

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

USA Greater China

Europe Industry+6%

(3)%

(8)%

(40)%

(Relative market cap)


Within our coverage universe, we see margins most sustainable at Yingli and Trina

Solar. Trina also has the lowest cost structure. In addition, we believe Suntech is likely

to see marked improvement in its cost structure with increased vertical integration. Webelieve E-Ton will remain capital constrained and thus continue to lag cost reductions

at peers. We believe Canadian Solar, JA Solar and Motech will perform in-line with the

Supply shortages in 2010 have

enabled pure-play makers to see

better ASPs and performance

Performance by segment in 2010:Cell makers > wafer makers >

module makers

2011 to see steady shift change

as industry moves to oversupply

since demand growth from

Europe looks set to slow

3Q10 to see peak in margins at

pure-play makers as ASPs to

come under pressure

Drop in poly ASPs unlikely to bail

industry in 2011F


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industry. Among wafer makers, we see LDK and GCL performing in-line with the

industry as they integrate in-house poly and wafer capabilities.

Margin pressure to become acute in 2011F

Given concerns of a considerable supply-demand mismatch in FY11F, we see margins

across the solar value chain coming under pressure. While margins have expanded

YTD, we note that this is primarily due to: Strong demand primarily emanating out of Europe where subsidy cuts in

Germany, Italy and other markets have resulted in an order pull-in through 2010.

Capacity constraints primarily in cell and wafer segments, which has led to a

strong ASP environment through the solar supply chain.

We believe these factors will be absent in FY11F, suggesting a risk of margin

compression. With most of the large module manufacturers continuing to vertically

integrate, we see the use of outsourced wafers and cells decreasing in FY11F. With

pure play cell and wafer makers competing for an ever shrinking market, we expect

their margins to be the worst hit. Within our coverage, we expect margins of cell and

wafer companies to come under pressure in FY11-12F.

Vertically integrated player to outperform pure-play makers

We believe companies best positioned to ride the changes in 2011 and raise market

share will have key characteristics of: 1) better cost management, which favours

companies with vertical integration; 2) R&D in cell-efficiency improvements key to

continued cost reductions in the segment; and 3) geographical sales diversification to

capture demand from new growth markets as demand growth from Europe comes to a

halt.

Exhibit 8. Value chain exposure of companies under coverage

Silicon Cell Module Inverters Installation

System ASP breakdown (%) 10~12% 8~10% 15~18% 8~10% 35~45%

Typical Cost (US$/W) 0.12~0.20 0.20~0.25 0.30~0.35 0.25~0.35 N/A

Gross margins* (%) 40~60% 15~25% 5~10% 35~40% N/A

Partial fulfilment

JA Solar White-brandMotech Own Brand

E-Ton via subsidiary

Ramping

GCL Holdings

2011 performance expectations

- Pure play NEUTRAL UNDERPERFORM UNDERPERFORM

- Vertically Integrated

Expansion in 2011

Future expansion

Yingli Green

Suntech Power

Canadian Solar

Future expansion

Ingot/Wafer

Solar panel (45~55% of system ASP) Balance of System (45~55% of system ASP)

0.30~0.35

15~25%

12~15%

OUTPERFORM

NEUTRAL

OUTPERFORM

Trina Solar

Future expansion

LDK Solar Ramping capabilties

3.5GW capacity by end-10

Solargiga

UNDERPERFORM


As shown in the table above, we expect companies that have integrated across four to

five value chain segments to outperform, while companies with two to three value-

chain segments to largely perform in-line with the broader industry. Companies which

narrowly focussed on only one value-chain segment are likely to see both their ASP

and cost coming under pressures and thus underperform the broader industry.

Switch to companies with:

1) vertical integration; 2) strong

R&D roadmap; and 3) sales

diversification outside Europe

Missing 2010 margin catalysts in

2011F margins to compress

across value chains


11/106



Trina and Yingli are integrated across four value-chain segments. This enables them

to have control over 35-40% of system costs or 70-80% of module costs. We expect

their 2010 gross margins to come in at 32-33%, 10-15pp higher than other peers.

Suntech Power and Canadian Solar are integrated across two segments, enabling

them to control over 50% of module costs (about 25% of system costs). They are

looking to integrate into more segments. However, with Suntechs upstream integration

into ingots/wafer further, we expect Suntech to derive better cost managementcompared to Canadian Solar.

JA Solar, Motech and E-Ton have the least control over the value-chain, although JA

Solar and Motech look well positioned to integrate both downstream and upstream,

which should enable them to control up to 70-80% of the supply chain, in our view.

E-Ton was integrated via its subsidiary Gloria International Holdings; however, it was

unable to manage costs or execute meaningfully given a lack of available capital.

E-Ton is now only left with module capability, and one that lacks a meaningful scale,

after writing off its integration (Adema).

Meanwhile, LDK Solars integration is more impressive given that it has integrated

across the entire module value chains from poly to module. While this could improve

its cost management, we remain wary of execution risks in the near term, given that it

needs to manage new sales channels and customer backlash as it enters their domain.

In the longer term, we believe LDK could be a producer with the lowest cost.

As the poly market stabilizes, we see GCL Holdings forward integration into

ingots/wafers as positive. This should enable it to capture 40-50% of module costs (20-

25% of system costs), on our estimates. Moreover, GCLs strategy to build just-in-time

wafer plants at proximity to its key customers should enable it to make demand captive.

Balance sheets to remain in focus

While solar companies continue to expand capacity in anticipation of a strong demand

environment in FY11, we see cashflows remaining under pressure. Moreover, the highcapacity and oversupply situation will result in utilizations coming down sharply, in our

view. Motech, Trina, JA Solar, Canadian Solar and Yingli have relatively good balance

sheets, with Trina and Motech having a net cash position. That said, we continue to

monitor the high gearing condition at LDK, E-Ton and Suntech, which could limit cost

reduction and expansion capabilities.

Exhibit 9. Net debt to equity (recent quarter)

4

30 36

52

94

135

(6) (6)

(20)

0

20

40

60

80

100

120

140

160

Trina

Solar

Motech JA Solar Canadian

Solar

Yingli Suntech E-Ton LDK

Note: For E-Ton, Motech, JA Solar and LDK we use 3Q10 data. For the rest of the companies we use 2Q10 data

Source: Company reports, Nomura research

Trina and Yingli ahead in vertical

integration

Suntechs upstream integration

provides upside catalysts

Vertical integration at JA Solar

and Motech a work-in-progress;

E-ton constrained by capital

availability

LDK is most aggressive among

peers, although risks remain

GCL to enter wafer business

While debt in general is easily

available for companies based in

China, we remain wary of

excessive levels


12/106



Within our coverage universe, LDK, with its net debt-to-equity of 134.8% at end-3Q10,

has the most stretched balance sheet. It recently secured a strategic financing

agreement of RMB60bn (US$8.9bn) from China Development Bank (CDB), helping to

ease its near-term capital constraints. We see LDK aggressively ramping up its internal

polysilicon plant, which has the potential to lower its input costs and thus offset margin

pressure.

However, we are concerned about E-Tons net debt-to-equity of 94.2% at end-3Q10F.We expect high net gearing to restrict E-Tons ability to add capacity and lower cell

processing costs meaningfully. We expect the company to address its FY11F capacity

requirements and continue to work on cost reductions. We also expect it to raise

capital through a public offering and / or debt.

Suntechs balance sheet woes largely came in 2Q10 when it wrote-off most of its

underperforming investments and assets. We believe that these write-offs have now

removed a major overhang from its balance sheet. While some risky assets including

Glory Silicon and Xian Longi still remain on the companys balance sheet, we believe

Suntech is now better placed to continue expanding capacity and reduce costs.

Valuation methodologyIn 2009, sharp changes in demand resulted in sudden shifts in market dynamics and

increased earnings volatility, due to shipment and ASP uncertainties. In 2010, earnings

continue to witness high volatility, a result of excess demand this time. That said, while

demand visibility into 2011 remains relatively poor, we believe the supply dynamics will

enable us to better forecast earnings growth. Thus, we believe our earlier method of

valuing the company on a P/BV basis to weed out uncertainty is no longer appropriate.

As such, we revert to a PER based valuation methodology.

To create a reasonable and fair valuation methodology for companies, we: 1) evaluate

three peer groups module makers, cell makers and wafer makers based on the

primary sales segment; 2) create a sub-segment index group to evaluate performance

across the sector in a similar business model; and 3) use 2010 YTD average forwardPER of the sub-segment index group.

We derive our price targets by pegging our FY11F PER to a multiple of the YTD

average forward PER of the corresponding segment. We believe this keeps our

comparable peer group relevant to the business model of the company while removing

the impact of volatility from our target multiples.

Module companies. We apply a 10% discount to the 2010 YTD average forward PER

to reflect our concerns over margin pressure amidst slowing market demand. Despite

this, we see Trina, Yingli and Suntech as undervalued and expect potential upside

catalysts. Canadian Solar, however, looks fairly valued, in our view.

Cell companies. We do not give any discount to the 2010 YTD average forward PERof the cell peer group. Despite this, we see JA Solar as fairly valued. For Motech, we

apply a 20% premium for its stronger balance sheet and the 20% stake held by TSMC.

We see Motech as fairly valued. For E-Ton, our weak earnings outlook has skewed the

PER-based valuation to unrealistic valuations. As such, we revert to 2010 YTD

average forward PBV and apply a 20% discount to reflect its weak balance sheet. As

such, we see further potential downside from current levels.

Wafer companies. We apply a 10% discount to the 2010 YTD average forward PER

to reflect market concerns about slowing growth. We see LDK as fairly valued.

As earnings variability improves,

we revert our valuation

methodology from PBV-based to

PER-based


13/106



Exhibit 10. Peer valuation comparison

P/E (x) P/BV (x) ROE (%)

Company FY10F FY11F FY12F FY10F FY11F FY12F FY10F FY11F FY12F

Wafer peer group

LDK Solar 9.0 7.7 8.1 1.6 1.3 1.1 19.5 18.8 15.2

REC 625.3 13.6 na 0.9 0.8 na 0.1 6.2 na

Renesola 28.8 20.7 15.0 2.2 1.8 1.5 7.6 8.7 9.7PV Crystalox 9.0 7.7 6.7 0.9 0.8 na 9.5 10.3 na

Green Energy Technology 13.0 8.7 10.1 1.6 1.4 na 15.5 14.1 12.2

Solargiga 23.4 23.4 12.9 2.1 1.8 1.7 9.2 7.8 13.5

Sino American Solar 12.0 9.5 9.2 2.2 2.0 1.6 14.6 18.3 na

MEMC 29.2 12.4 9.6 1.3 1.2 na 4.3 9.3 na

Cell peer group

JA Solar 6.9 6.5 6.7 1.6 1.3 1.1 26.7 22.2 17.7

E-Ton Solar (20.0) 18.7 13.6 0.9 0.9 0.8 (26.6) 5.0 6.4

Motech 10.0 9.2 8.9 1.9 1.6 1.4 25.2 19.3 16.7

China Sunergy 5.9 8.6 6.3 0.9 0.8 na 15.4 9.4 na

Q-Cells 22.5 15.4 12.2 0.6 0.6 0.5 2.6 3.6 4.4

Gintech 6.8 7.3 5.9 1.6 1.4 1.2 24.4 19.0 21.0

Neo Solar 7.7 7.1 6.2 1.6 1.3 na 21.2 17.9 na

Solartech Energy 11.4 5.7 NA 3.0 1.8 na 38.1 44.4 na

Module peer group

Suntech (18.5) 8.9 6.4 1.1 1.0 0.8 (5.6) 11.4 13.8

Trina 9.2 8.0 6.9 1.8 1.5 1.2 24.2 20.4 19.4

Yingli 10.0 8.0 7.5 1.5 1.3 1.1 16.1 17.1 15.5

Canadian Solar 15.4 9.1 7.5 1.2 1.1 1.0 8.4 12.7 13.6

Solarworld 17.8 14.1 14.3 1.2 1.1 1.0 6.5 7.6 na

First Solar 18.3 16.5 13.6 3.6 2.9 na 21.9 19.6 na

Solarfun 5.5 5.7 4.4 1.1 1.0 na 20.0 17.9 na

SunPower 9.7 7.8 8.4 0.9 0.9 na 9.4 11.1 naEvergreen Solar (2.3) (3.5) (8.6) 0.6 0.7 na (25.8) (19.9) na

Note: Pricing as of 10 Nov, 2010

Source: Bloomberg (for not rated stocks), Nomura research

Exhibit 11. Valuation methodology summary

Forward PER Discount / Target P/E (x) Upside /

Company 2010 YTD avg (Premium) (%) FY11F Price target Rating (Downside) (%)

Trina Solar 11.5 10 10.4 US$36.0 BUY 29.8

Yingli Green 11.5 10 10.4 US$15.0 BUY 26.4

Suntech Power 11.5 10 10.4 US$11.0 BUY 21.5

Canadian Solar 11.5 10 10.4 US$17.0 NEUTRAL 11.7

JA Solar 7.2 0 7.2 US$10.0 NEUTRAL 10.6

Motech 7.2 (25) 9.0 NT$199.0 NEUTRAL (1.7)

E-Ton* 1.1 20 0.9 NT$37.0 REDUCE (6.4)

LDK 9.2 10 8.3 US$14.0 NEUTRAL 5.8

Note: For E-Ton Forward PER 2010YTD average and Target PER (x) reflect PBV based metrics



14/106


15/106



That said, we do not see poly ASPs tumbling to cash costs, as with the exit of GCL

from the poly supply market, we see only three main suppliers to the solar industry

Hemlock, Wacker and OCI. As such, we expect spot poly pricing to revert to mean

long-term contract pricing. We understand contract ASPs will drop to US$45-50/kg by

2H11F from US$55-60/kg currently.

Exhibit 13. Polysilicon capacity to rise 22% y-y in FY11FPolysilicon capacity (MT) 2009 2010F 2011F 2012F

Hemlock 27,500 36,000 46,000 50,000

% growth 31 28 9

Wacker 15,650 25,650 25,650 35,650

% growth 64 0 39

REC 14,825 16,413 18,000 18,000

% growth 11 10 0

Tokuyama 8,200 8,200 8,200 11,200

% growth 0 0 37

Mitsubishi Materials 3,300 4,300 4,300 4,300

% growth 30 0 0

MEMC 10,000 12,500 12,500 12,500

% growth 25 0 0

Sumitomo Titanium 1,400 1,400 3,600 3,600

% growth 0 157 0

Tier-1 Capacity (Incumbents) 80,875 104,463 118,250 135,250

% growth 29 13 14

Tier-2 Capacity (Strong execution) 56,600 69,100 93,000 93,000

% growth 22 35 0

Tier-3 Capacity (Unproven players) 34,960 58,960 86,260 87,260

% growth 69 46 1

Total polysilicon capacity (MT) 172,435 232,523 297,510 315,510

% growth 35 28 6

Realistic Tier-1 72,788 94,016 106,425 121,725

Realistic Tier-1+2 120,898 152,751 185,475 200,775

Realistic Tier-1+2+3 143,622 191,075 241,544 257,494Realistic average polysilicon capacity (MT) 112,436 145,948 177,815 193,331

% growth 30 22 9

Polysilicon demand (MT)

Semiconductor demand 29,364 33,768 37,145 40,117

% growth 15 10 8

Solar demand 37,175 69,891 78,534 84,269

% growth 88 12 7

Total polysilicon demand (MT) 66,539 103,659 115,679 124,386

% growth 56 12 8Source: Company reports, Nomura research

Oligopolistic nature of industry to

keep pricing relatively stable


16/106



Easing the bottleneck of wafer supply in 2011

Wafer capacity shortages have resulted in wafer spot ASPs rising 20% to US$0.90-

1.0/W in 2H10 from US$0.80/w at the start of 2010. Our checks with wafer makers

suggest they do not expect supply to reach a balance in the near term. Nevertheless,

from announced / expected capacity expansion plans of various wafer manufacturers,

we see a sharp increase in wafer capacity to 25.6GW by end-2011F. (Note: We

understand most of capacity expansion is 1H11F loaded). We see the immediate riskcoming from GCLs wafer supply, which we believe is on target for supply from 1Q11.

Exhibit 14. Wafer capacity to grow 8GW in FY11F

Year-end capacity (MW) 2010F 2011F y-y % chg

Taiwan 2,480 4,615 86

Green Energy 1,000 1,500 50

Motech 180 360 100

SAS 800 1,100 38

Wafer Works 500 655 31

SAS / Solartech JV 0 1,000 N/M

China-based companies 11,470 14,950 30

Canadian Solar 350 450 29

Comtech 1,000 1,500 50

GCL Holdings 3,500 3,500 0

JA Solar 300 500 67

LDK Solar 2,800 3,600 29

Renesola 1,200 1,800 50

Solarfun 400 500 25

Solargiga 420 500 19

Suntech 0 1,000 N/M

Trina Solar 700 1,000 43

Yingli Solar 1000 1,200 20

US/European companies 3,350 5,400 61

TOTAL 17,500 25,565 46Source: Company data, Nomura research

Perpetual oversupply in cell manufacturing?

Global cell/module manufacturing capacity has been known to be in oversupply for

long. This looks to continue in 2011F with productive cell capacity likely to rise a

massive 10GW-30GW by end-2011F (1H11F loaded). We believe Chinese makers are

the most aggressive with Suntech, Yingli, Trina and JA Solar all targeting at least a

10% market share each in 2011. We believe with a better cost structure than other

global peers, China-based companies could be more aggressive in terms of production,

resulting in faster ASP declines.

Exhibit 15. Cell capacity to grow 10GW in FY11F

2010F capacity - 20.8GW

Europe

11%

Japan

19%

Taiwan

21%

China

38%

USA

11%

2011F capacity - 31.0GW

Taiwan

22%

Japan

18%

China

40%

Europe

8%

USA

12%

Source: Company data, Nomura estimates

Acute shortages in wafer supply

in 2010 have prompted multiple

companies to expand in-house

capacity

Cell supply growth continues to

remain ahead of other segments,

driven by expansions at China-

based peers


17/106



Demand dynamics

Demand growth to slow over 2011-13FOver the past six months, practically all major demand centres for the solar industry

have announced some sort of subsidy adjustments. Subsidy cuts were most acute in

Germany, Czech Republic and Italy, comprising 65% of 2010 demand. The worst was

Czech Republic (~1.5GW, ~10% of demand in 2010), which has practically eliminated

all subsidies for the solar market after it faced a similar problem as Spain burgeoning

subsidy burden with little domestic industry growth.

Exhibit 16. A number of countries have reduced subsidies over the last 6 months

Shipments (MW)

Country 2010F 2011F Subsidy action taken

Czech Republic 1,200 0 FITs cut 50%; tax holidays removedNew bill proposes complete subsidy end

France 432 796 12% FIT cut from Sep 2010Further cuts and subsidy cap in FY11 likely

Germany 6,896 5,228 FITs lowered by 12-16% from July, 2010FITs to drop 12-15% in FY11FCurrently evaluating an installation cap

Italy 1,481 2,442 FY11F FITs to be cut 9.3% for first 4 months14.2% cut for >5MW projects. Additional cuts thereafter

Spain 400 500 Proposal to cut FY11F FITs by 45%

Canada na na FITs cut 25% for


18/106



Exhibit 17. Base case: Share of Europe to reduce to 41% by FY13F

Market size (MW) y-y chg (%) Breakdown (%)

2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F

Germany 3,502 6,896 5,228 4,182 3,346 88 97 (24) (20) (20) 47 46 32 22 16

Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 3 3

Italy 690 1,481 2,442 2,973 1,669 187 115 65 22 (44) 9 10 15 16 8

France 103 432 796 1,034 1,241 211 321 84 30 20 1 3 5 5 6

Greece 76 196 235 235 282 154 157 20 0 20 1 1 1 1 1

Rest of Europe 281 1,451 870 1,036 1,222 14 415 (40) 19 18 4 10 5 6 6

Japan 482 1,005 1,407 1,689 1,942 110 108 40 20 15 7 7 9 9 9

USA 485 1,182 1,867 2,558 3,633 35 144 58 37 42 7 8 11 14 18

Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 2

China 95 323 458 623 798 229 238 42 36 28 1 2 3 3 4

India 54 125 175 526 789 75 131 40 200 50 1 1 1 3 4

Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 6 8 9

Total Grid installations 6,430 14,059 15,155 17,086 17,742 8 119 8 13 4 87 93 92 91 86

Off-grid installat ions 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 8 9 14

Total demand 7,378 15,050 16,542 18,821 20,518 8 104 10 14 9 100 100 100 100 100

Source: Solarbuzz, Nomura estimates

Best case (Policies remain intact and/or are expanded). In our best-case

scenario, we forecast a solar demand CAGR of 23.8% over FY10-13F. Here, we

expect Europe to witness a CAGR of 13.0% during the same period, down from the

74.3% CAGR over FY06-10F, assuming that these countries would continue to

support higher subsidies and solar installations. We also assume nationwide FITs

being implemented in the US and China, resulting in fast solar growth in these

regions.

Exhibit 18. Best case: Global solar market to grow to 29GW in FY13F


2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013FGermany 3,502 6,896 6,309 6,694 5,355 88 97 (9) 6 (20) 47 46 33 27 19

Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 2 2

Italy 690 1,481 3,327 5,280 6,271 187 115 125 59 19 9 10 17 21 22

France 103 432 908 1,180 1,416 211 321 110 30 20 1 3 5 5 5

Greece 76 196 235 235 282 154 157 20 0 20 1 1 1 1 1

Rest of Europe 281 1,451 1,160 1,393 1,671 14 415 (20) 20 20 4 10 6 6 6

Japan 482 1,005 1,407 1,689 1,942 110 108 40 20 15 7 7 7 7 7

USA 485 1,182 2,175 2,979 4,231 35 144 84 37 42 7 8 11 12 15

Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 1

China 95 323 587 799 1,022 229 238 82 36 28 1 2 3 3 4

India 54 125 175 526 789 75 131 40 200 50 1 1 1 2 3

Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 5 6 6

Total Grid instal lat ions 6,430 14,059 17,960 23,005 25,800 8 119 28 28 12 87 93 93 93 90Off-grid installations 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 7 7 10

Total demand 7,378 15,050 19,347 24,739 28,575 8 104 29 28 16 100 100 100 100 100


Worst case (Proactive sharp corrections in policy). In our worst-case scenario,

we forecast a solar demand CAGR of only 3.9% over FY10-13F. Here, we expect

demand from Europe to drop to a 13.4% CAGR during the same period, from a

74.3% CAGR over FY06-10F, given our assumption of aggressive policy

adjustments at Germany, Italy and France, which are directed towards lowering

subsidy burdens. In addition, we expect the US will witness a 17.2% demand

CAGR over FY10-13F to 1.91GW by 2013 from 1.18GW in 2010, assuming

constrained financial availability.

Assuming policy support despite

possible over-installations, we

see a demand CAGR of 24% over

2010-13F

Assuming proactive policy

changes in Europe, we see a

slower demand CAGR of 3.9%

over 2010-13F


19/106



Exhibit 19. Bear case: Global solar market to remain stagnant over 2010-13F


2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F 2009 2010F 2011F 2012F 2013F

Germany 3,502 6,896 4,277 3,422 2,738 88 97 (38) (20) (20) 47 46 29 21 16

Spain 98 400 500 600 660 (96) 307 25 20 10 1 3 3 4 4

Italy 690 1,481 2,061 2,502 1,400 187 115 39 21 (44) 9 10 14 15 8

France 103 432 778 934 747 211 321 80 20 (20) 1 3 5 6 4

Greece 76 196 235 235 282 154 157 20 0 20 1 1 2 1 2

Rest of Europe 281 1,451 870 1,036 1,222 14 415 (40) 19 18 4 10 6 6 7

Japan 482 1,005 1,206 1,327 1,393 110 108 20 10 5 7 7 8 8 8

USA 485 1,182 1,454 1,701 1,905 35 144 23 17 12 7 8 10 10 11

Korea 98 145 159 207 311 (65) 48 10 30 50 1 1 1 1 2

China 95 323 458 623 798 229 238 42 36 28 1 2 3 4 5

India 54 125 175 526 789 75 131 40 200 50 1 1 1 3 5

Rest of World 563 423 1,016 1,423 1,849 276 (25) 140 40 30 8 3 7 9 11

Total Grid installations 6,430 14,059 13,191 14,535 14,094 8 119 (6) 10 (3) 87 93 90 89 84

Off-grid installations 948 991 1,388 1,734 2,775 5 5 40 25 60 13 7 10 11 16

Total demand 7,378 15,050 14,578 16,269 16,869 8 104 (3) 12 4 100 100 100 100 100


European demand growth to slow as risks increase

A common theme in all the three scenarios above is that demand from Europe is

growing at a slower pace than the rest of the world. Here, we believe two functions are

at play:

The feed-in-tariff subsidy model has reached its useful life. The global solar

panel manufacturing capacity has reached a point where the risks of the feed-in-

tariff subsidy model are being exposed. Note that the key risk of the FIT subsidy

model is runaway growth in installations in locations with attractive financial returns.

As such, with memory of the policy debacle at Spain (2008) and the Czech

Republic (2010) fresh in minds, we believe policymakers in Europe will keep a

sharp eye on installation growth and make unscheduled adjustments. We see Italy,France and Germany still exposed to such a risk and thus we expect policy

adjustments in these countries.

Risk of unbalancing the electricity infrastructure in the country. Stephan

Kohler, Head of DENA (German Energy Agency) on 17 th October noted that

installed capacity of solar could reach -30GW by end-2011 (equal to Germanys

weekend power consumption). Such capacity installations creates a risk of

unintended blackouts as the remaining electricity production infrastructure will be

unable to adjust to sharp variability in power output at the renewable energy

sources. (Note: this is not including wind installations which also have high

variability for electricity production) We believe other regions in Europe, which

have been at the forefront of renewable installations to face the same dilemma.

Italy to face a boom market in 2011 further FIT cuts likely

In 2011, we expect Italy to become the second-largest market after Germany, given its

very attractive IRRs of 15-17%. Up to now, Italy has been in the shadow of Germany,

and we think that its attractive solar characteristics and returns can lead to it

compensating any decline from Germany. Italy, in the third Conto Energia adopted in

September 2010, has also signalled continued support for solar installations beyond

2011 and set forth targets of: 1) 8GW of nominal PV installed capacity by 2020;

2) 3.5GW of installations over 2011-13F with a grace period of 14 months once the

target is reached; and 3) post the 27% subsidy adjustments over 2011, only a 2% y-y

decline in FITs for 2012 and 2013.While these are very attractive terms for the industry, we believe Italy has set itself up

for significant demand growth similar to that seen in Spain and thus, further FIT cuts

are necessary, in our view. From our channel checks, Italy is absorbing increased

Policy adjustments in Europe a

question of when not if, given:

1) risk of uncontrolled demand

has increased; and

2) Pace of installations could

leave grid infrastructure unstable

Italy likely to become the next

growth market in 2011F risk of

uncontrolled growth


20/106



amounts of panels. In the exhibit below, we conduct a sensitivity analysis of the

subsidy burden that the Italian government has planned for in the third Conto Energia

and the likely subsidy burdens it will face under a base-case scenario and a best-case

scenario. As shown, we believe the likely subsidy burden is potentially 4.2x the

planned budget in our best-case scenario for demand and, thus it is not optimal for

continuation.

Exhibit 20. Italy: comparison of subsidy burdens accumulated over 2011-13F

Installations (2011-13) Subsidy burden Compared to budget

(GW) (mn) (x)

Third Conto Energia 3,500 978.1 1.0

Base Case Scenario 7,085 2,015.6 2.1

Best Case Scenario 14,878 4,091.3 4.2

Source: Nomura estimates

This could imply faster-than-currently-planned reductions but to what extent they would

hit demand is an uncertainty, given the very high levels of current returns. We believe

huge reductions and/or a hard cap without a grace period are needed to materially

slow the market. However, we would not be surprised if there are effects showing in

2012 or beyond. That said, if Italy continues its policy until the end of 2013, the country

could be at the forefront of global solar demand with a CAGR of 61.8% over FY10-13F

under our best-case scenario.

Germany risks of subsidy revision ahead when will it slow themarket?

Germany has seen the frothiest market in 2010, despite the unscheduled feed-in tariff

reduction in July. With another 12-14% cut in Germany expected in 2011 per the

current policy, it theoretically sets a stage for demand to deflate. However, it is worth

noting that abundant financing makes for attractive returns, and that there could be

further run-up in demand. At this stage, we assume demand from Germany would fallto 5.2GW in 2011 (base case) and continue to decline further in 2012-13F.

That said, the key risk to growth in Germany installations comes from a potential cap

introduced to limit the impact on grid infrastructure. This risk could get compounded if

installations continue to materially surpass the governments targets, but we think it

might take into 2012 for stronger action. Stephan Kohler, Head of DENA (as

referenced above) has suggested a cap (we understand 1GW) being implemented on

solar installations at the earliest. While we agree with the concern of grid instability as

solar installations rise, we believe a more likely scenario is a higher cap on

installations with lower guaranteed feed-in-tariffs. We envisage this will be

accompanied with higher subsidies to installations with a certain proportion of battery

systems installed. Note that the use of batteries has enabled load balancing andhelped smooth outputs sharp variability. There is an intense discussion under way

over the future of renewable subsidies and the countrys energy policy, and we think

that the possibility of another solar tariff revision at mid-year is very strong.

US the next key market ahead

We believe the US will see fastest solar demand growth driven by its subsidy policy,

which is budgeted in its fiscal policy and auto-adjusted for system ASP reductions. The

main US subsidy policy is based on a federal Investment Tax Credit (ITC) whereby

30% of installations costs for the solar plant are tax deductible. The US government

has earmarked US$17bn over 2009-16F, of which we estimate only US$2bn has been

utilized till date. Current ASP installation cost in the US is about US$4/W. Theremaining US$15bn implies 12-13GW of further potential support.

A devils advocate will suggest that the ITC alone is insufficient, given that the ITC only

offsets tax and thus a complete installation cost is needed upfront, and further

Subsidy burdens could be up to

4x planned burdens in our best-

case scenario

Germany looks set to see another

round of unscheduled subsidy

changes

The US to become the secular

market driven by policies better

suited for oversupply conditions


21/106



subsidies via state incentives or FIT are needed to make solar attractive. We agree

that the ITC subsidy structure does require a higher rate of return given that the

subsidy becomes available only at the end of a year. That said, we believe the ITC

alone is capable of enabling meaningful IRRs at multiple locations. Moreover, the

structure is particularly attractive for companies/corporate functions which can offset

tax credits with tax liabilities in other operations.

Module ASPs in the US stand at around US$1.6/W currently. Assuming a solarelectricity vendor needs a 20-year payback period (a typical depreciation period for PV

system) and a 7% discount rate, we examine the operating conditions needed for ITC

to be viable. The table below shows a sensitivity analysis between utility grid prices

and annual sun hours to module ASPs. The conclusion is that 2011F module ASPs of

US$1.4-1.5/W with the ITC alone would have already enabled meaningful IRRs in

multiple regions (shaded in grey).

Our channel checks suggest that strong growth momentum is emerging from Florida,

Texas, Nevada, Rhode Island, Arizona. We expect further ASP reductions to take

place in regions like Massachusetts, New York, Colorado, Maine, New Mexico, etc.

With further state incentives, the demand from the US looks set to witness strong

growth ahead.

Exhibit 21. Breakeven module ASPs for different locations in US

Annual Sun Hours (hrs)

(US$/W) 1,200 1,400 1,600 1,800 2,000 2,200 2,400

0.06 0.7 0.8 0.9 1.0 1.1 1.2 1.3

0.08 0.9 1.0 1.2 1.3 1.5 1.6 1.8

0.10 1.1 1.3 1.5 1.6 1.8 2.0 2.2

0.12 1.3 1.5 1.8 2.0 2.2 2.4 2.6

0.14 1.5 1.8 2.1 2.3 2.6 2.8 3.1

0.16 1.8 2.1 2.3 2.6 2.9 3.2 3.5

0.18 2.0 2.3 2.6 3.0 3.3 3.6 4.0

0.20 2.2 2.6 2.9 3.3 3.7 4.0 4.4

0.22 2.4 2.8 3.2 3.6 4.0 4.4 4.8

Local Gridprice(US$/kW-hr)

0.24 2.6 3.1 3.5 4.0 4.4 4.8 5.3

Source: Nomura research

Exhibit 22. Select conditions include California, Nevada

Annual Sun Hours (hrs)

1,200 1,400 1,600 1,800 2,000 2,200 2,4000

0.06 West Virginia Washington Idaho

0.08 Illinois Oregon Alabama,Arkansas,Indiana,Minneosta,Missouri,Tenessee,Virgina

Georgia,Kansas,Kentucky,Montana,North Dakota,Nebraska

SouthDakota, Utah,Oklahoma

Wyoming

0.10 Michigan,Ohio,Pennsylvania

DistrictColumbia,Iowa,Maryland,Mississippi,Wisconsin

Louisiana,NorthCarolina,SouthCarolina

Colorado New Mexico,Arizona

0.12 New Jersey Florida,Texas,

Nevada

0.14 Alaska Maine California

0.16 Massachusetts,New York

Rhode Island

0.18

0.20

0.22

LocalGridprice(US$/kW-hr)

0.24 Hawaii


Shaded area highlights regions

where federal subsidies are

enough for positive project IRRs


22/106



Exhibit 23. Financial incentives from states to provide push

C alifo rnia 3GW by 2016 US$ 3bn in incentiv es

Installatio ns < 50kW: US$2.5-3.25/W subsidy

Installations > 50kW: US$0.39-50/kW-hr FIT for 5 years

Net M etering available upto an individual system size of 1M W

Florida Property tax exemptions of up to the installation value

Net M etering available upto 2M W

Rebate of $4/W

Texas State-wide net metering available upto 50kW

N ev ada 1.5% by 2025 2.4-2.45x grid pric e c redit f or P V

Selective rebate programs ($2.30-$4.60)

Pro perty tax exemptions o f up to the installation value

Net M etering available up to an individual system size of 1M W

Rebate o f $2.10 - $4.20/W

Arizona 4.5% distributed provisions by 2025

Net M etering available up to 125% of custo mer's to tal connected electric load

Rebate of $2-$3/W

25% stat e tax credit for resident ial and 10% stat e tax credit for no n-residential

New Mexico 4% by 2020 0.6% dis tr ibuted generat ion by 2020

Net M etering available for certain utility types up to an individual system size of 80M W

C olo rado 0.8% by 2020 0.8% s olar elec tric by 2020

Net M etering available up to an individual system size of 2MW

Rebate of


23/106



Margin discussion

Market share consolidation ahead?We understand low-cost producers are aiming to increase their market share

meaningfully. Suntech, Trina, Yingli and JA Solar have all noted their target of more

than a 10% cell market share each. We believe Motech and Gintech are also likely to

target similar market share numbers. In addition to their China peers, Sharp and First

Solar also have meaningful thin-film capacity with First Solar having the right cost

structure, in our view. This suggests that the companies are willing to drive ASPs lower

in order to gain meaningful market shares. We believe the success will be a function of

cost management.

Exhibit 24. 7 companies can have a market share of over 10% each in FY11F

0

500

1,000

1,500

2,000

2,500

3,000

E-Ton

SunPower

Delsolar

NeoSolar

Q-Cells

LDKSolar

Canadian

Trina

Gintech

Yingli

Motech

Sharp

FirstSolar

Suntech

JASolar

10% of FY11F

base case demand

Source: Company data, Nomura estimates

ASP pressure to increaseIn our opinion, the operating environment looks to worsen sharply with oversupply

conditions amidst slowing demand growth (as discussed elsewhere) and calls for a

strong reduction in ASPs. We forecast blended ASPs to fall from current US$1.7-1.8/W

to US$1.4-1.5/W in 2011F and further fall to US$1.3/W in 2012F and US$1.2/W in

2013F.

Exhibit 25. Module ASPs to fall to US$1.2/W in FY13F

0

5,000

10,000

15,000

20,000

25,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

2011F

2012F

2013F

0

1

2

3

4

5

6Annual Production (LHS)

Price per Watt (RHS)

(US$ / W)(MW)

Source: Nomura estimates

Under such ASP pressure, we believe companies need two key characteristics to ride

the downturn: 1) optimal cost structure enabling faster cost reductions, which are keys

Market share targets suggest

companies willing to drive ASPs

lower


24/106



for margins and profitability; and 2) geographical diversification away from core

markets of Germany and Italy, which could help lend better support to shipments.

Module ASPs of US$1.4-1.5/W in 2011F enable equivalent IRRs

While oversupply conditions suggest faster ASP declines in the marginal cost of higher

cost producers, we believe 2011F ASPs are relatively buffered. As shown in the table

below, module ASPs of US$1.4-1.5/W enable meaningful IRRs (unlevered) inGermany and Italy, offsetting the impact from subsidy reductions. This should help

stop further ASP declines in 2011F although runaway installations conditions could

occur resulting in faster subsidy changes.

Exhibit 26. IRRs remain attractive if ASPs fall to US$1.4-1.5/W

Country 2010 IRRs (%) 2011 IRRs (%)

Assumption Module ASP (US$/W) 1.75 1.45 1.75

Germany (ground) 13 13 11

Germany (rooftop) 12 - 16 12 - 16 10 - 14

France 15 - 18 15 - 18 15 - 18

Italy 23 20 18

Greece 31 - 48 35 - 53 31 - 48

Spain 20 11 10

Czech Republic 21 10 9

USA

California 23 - 36 28 - 42 23 - 36

Hawaii 22 24 22

Nevada 14 16 14

New Mexico 8 9 8

New York 8 9 8

Rhode Island 9 10 9

Texas 10 12 10

Japan 36 42 36

Canada 16 13 11

China 2 - 23 3 - 26 2 - 23


1Q11F pricing strength a transitory phase

We acknowledge that our checks with solar companies suggest that pricing for 1Q11F

is relatively firm at US$1.5-1.6/W with strong demand seen from Italy and the US;

however, we believe this is a transitory phase and price declines to US$1.4-1.5 will

resume from 2Q11F. We think there are two contributing factors:

Pull-in of demand from Italy before the next 9% FIT cut scheduled at the end of

April 2011. Our checks suggest Italy could be a more-than-1GW market in 1H11F.However, a faster market growth rate in Italy could result in another round of

unscheduled subsidy reductions later in the year;

Oversupply conditions not yet apparent. Given the contrasting signs from spot

markets, we believe distributors and developers are willing to support a higher

pricing level in 1Q11F. However, as more capacity additions done in 2H10 become

productive, we see pricing strength dissipating.

Vertically integrated companies have better cost structure

As shown in the exhibit below, we estimate that among the Greater China companies,

those with a vertically integrated model (wafer to module) have the lowest cost

structure for the same polysilicon cost. This is also borne out by the 30%+ gross

margins seen at Trina and Yingli in contrast to 15~25% at other peers.

We see module 2011F ASP floor

at US$1.4~1.5/W levels

Supposed 1Q11F pricing strength

looks a transitory phase; unlikely

to continue through the year

Vertically integrated model

enables better cost reduction


25/106



Exhibit 27. Typical ASPs and processing costs at China-based peers

Likely ASPs (US$/W) 2010F 2011F 2012F 2013F

Polysilicon (US$/Kg) 55 45 40 38

Wafer 0.9 0.7 0.6 0.5

Cell 1.3 1.1 0.9 0.8

Module 1.8 1.5 1.3 1.2

Typical processing costs (US$/W)

Ingot/Wafer 0.33 0.28 0.25 0.23

Cell 0.23 0.20 0.19 0.18

Module 0.33 0.30 0.28 0.26

Note: These are indicative costs and ASPs by our estimates and not reflective of any particular company


Solar companies move to vertical integration to lower costs

As shown in the table below, we foresee more companies increasing their vertical

integration capabilities to improve their cost structures. That said, we believe Trina and

Yingli, with a well-established vertically integrated model, are likely to maintain their

cost advantage over peers.

Exhibit 28. Companies increasing vertical integration to improve costs

FY10F capacity (MW) FY11F capacity (MW)

Company Wafer Cell Module Wafer Cell Module

LDK 2,800 180 1,500 3,600 1,260 2,500

Suntech 0 1,800 1,800 1,000 2,400 2,400

Canadian Solar 350 900 1,300 450 1,300 1,800

Yingli 1,000 1,000 1,000 1,700 1,700 1,700

Trina Solar 700 950 950 1,000 1,500 1,500

Solarworld 1,250 750 1,250 1,500 750 1,250

Solarfun 400 550 900 500 820 900

Renesola 1,200 240 375 1,800 600 600

JA Solar 300 1,800 500 500 2,400 500

Source: Company data, Nomura research

Pure-play companies likely to suffer the most

In contrast to the vertically integrated companies, the pure-play companies are likely to

see pressure from both suppliers and customers. Here, we believe the worst

positioned are pure-play wafer makers followed by pure-play cell makers.

Wafer makers most exposed to acute margin pressure

So far in 2010, wafer makers have been among the best performing stocks in the solar

space, with sharp improvements in margins and profitability. We believe this was

largely driven by wafer capacity shortages resulting in stronger ASPs. As such, wafer

spot ASPs have risen by 20% YTD. Driven by such strong profitability, we have seen a

lot of wafer capacity expansion which we expect to start ramping in 2011. We believe

supply-demand balance will be reached in 1H11 and as such see ASPs coming under

pressure.

The entry of GCL which is ramping 3.5GW of wafer capacity by end-2010 is likely the

biggest negative catalyst. While some pure-play wafer makers remain dismissive of

GCL, our supply chain checks suggest that ramp remains on target and initial wafers

are of optimal quality. In addition, despite our expectations of poly ASPs to resume

their ASP decline, we believe incremental cost benefits do not materially offset the

ASP pressure on wafer makers.

Changing dynamics prompt

companies to adopt vertical

integration


26/106



Cell makers to see pressure from both ends

Despite our expectations of supply-demand balance being reached in 1H11, we note

wafer makers are unwilling to drop quotes yet citing: 1) capacity ramps at new players

are likely to take time; and 2) demand expectations remain high, particularly from

Germany and Italy. In contrast, cell makers are already seeing their ASP outlook

deteriorate. Spot ASPs for cells remained flat m-m at US$1.35~1.4/W with forward

spot quotes for December showing a 10% m-m decline. We see further declines toUS$1.1~1.2/W levels likely by end-1Q11F as the market adjusts to the new reality.


27/106



Risks

Fundamental shift in competition aheadOver 2005-2010, companies based in China and Taiwan backed by lower costs gained

significant share from European incumbents. However, despite these companies

continuing to outperform on costs over the next one to two years, we see the potential

risk of a fundamental shift in competition which could potentially result in another

market shakeup.

New competition seems to be emerging from: 1) well-established leaders in technology

manufacturing sector; 2) new-technologies which aim to lower costs while enabling

equivalent efficiencies to current solar technologies; and 3) new business models

which could meaningfully change the demand environment. As such, we await the

success of these incoming changes to evaluate the impact on incumbents.

Entry of well-funded leaders from technology industry

As shown in the exhibit below, many leading technology manufacturing companies

have announced entry into the solar industry. A devils advocate would suggest that

these companies have no experience in solar and thus are unlikely to outperform theincumbent China-based companies. However, the large abundance of listed and

unlisted solar companies in China suggests that entry-barriers are low and learning

curves short. As such, we see the availability of capital as the only meaningful entry

barrier in the solar industry, though this is not a concern for the new entrants as seen

by their capacity ramp targets.

Exhibit 29. Entry of new strong companies

Company Polysilicon Wafers Cells Module s Thin-filmProject

development

Project

installationInverters Solar Thermal

SamsungConducting CIGS

R&D

Agreement with

Satcon

LGLG Chem

5000MT by '11

LG SiltronLGE - Pilot

productionHanhwa

Hyundai

TSMCInvest in Stion

CIGSS in '11

BYDInverters,

batteries

AUOJV with

Sunpower

Outsource to

Flextronics

Building pilot

lineFinancing

GEAcquired

Astropower

Acquired

PrimeStar

Intel Venture fundingTrony Solar,

Sulfur CellFinancing

GoogleSolar thermal

reflector

50% stake in Solarfun

internal: 1GW by 2015

7 year contract with LDK

JV with KCC (3,000MT)

Partnership with Raser Tech

240MW plant with Matinee & LG1GW by 2012

Targetting

Owns stake in Fotowatio

130MW by 2011

To invest KRW6tn over '10-20

LG CNS / LG Solar EnergyLGE

240MW

JV with Enco Utility Services

130MW (US), 500MW (Canada)

Building a vertically integrated plant in Shaanxi - 5GW target capacity

UMG-Si based technology; RMB5bn target sales in 2011

Acquired M.SETEK

20% stake in Motech

China focussed

Been given utility rights in the US


Leveraging current strengths to accelerate cost reduction

In addition to having capital to enable fast project ramps, we see synergistic benefits

from existing operations:

Process technologies enabling cell efficiency improvements. Process control

is a key determinant of yields which in turn enables incremental improvements in

average cell efficiency output. Here, semi and LCD companies have significant

know-how which could potentially be transferred to a solar process. Case in point is

TSMC which in December 2009 took a 20% stake in Motech, and we understand it

is now doing joint R&D to accelerate cell efficiency improvements.

Complimentary products enabling better market access. Case in point is DeltaElectronics which is aiming to become a leading player in the solar inverter market

with 3GW of capacity coming onstream in 2011. Here, its subsidiary DelSolar has

Risks are rising as new set of

competitors emerge

Tech companies could potentially

outspend solar incumbents to

muscle them out


28/106


29/106



Exhibit 31. CIGS can enable narrowing of pricing gap versus crystalline

Typical crystalline modules

First Solar CIGS Mono Multi SunPower

Size (m) 0.72 1.1 1.3 - 1.4 1.5 - 2.1 1.2 - 1.6

Power (W) 70 - 80 120 - 130 175 - 190 210 - 280 210 - 315

Module efficiency (%) 11.2 10.0 - 11.8 14.5 - 14.9 14.1 - 14.4 16.9 - 19.3

ASP (US$/W) 1.5 1.5 1.8 2.3- discount to STP (18.8) (18.1)

Indicative 2012

Module efficiency (%) 12 14 16.6 - 16.8 15.4 - 15.6

ASP (US$/W) 1.0 1.2 1.3

- discount to STP (25.0) (18.8)

Note: We have used TSMC's projected efficiency as base case for CIGS


Project financing setting up the complete plant

Unlike traditional coal-based thermal plants where plant costs are low followed by a

regular operating cost (ie, fuel), solar plants are investment heavy. We estimate that

once solar has reached cost parity with wind, a typical solar plant of 1GW would costan upfront ~US$2bn necessitating financing. Here we see companies with finance

arms as well placed to both provide the system and the associated financing for the

complete solar system. This concept is already gaining momentum with multiple

incumbent solar companies setting up funds/subsidiaries to provide equity capital for

solar projects and system integration teams to take, build and operate projects with

IPPs as shown in Exhibit below.

Exhibit 32. Solar players expanding into downstream

Company Downstream expansion

MEMC Acquired project developer SunEdison in FY09; to interconnect 150MW of solar in FY10F

First Solar Has a contract PPA pipeline of 2.2GWSuntech Has agreements to develop 1.8GW of solar projects in China

SunPower Constructing small power systems in the US

Sharp Acquired US Solar developer Recurrent Energy

Yingli Has a 20% stake in Chinese project developer Green Islands Power

Canadian Solar Implementing solar projects in Korea and China

Q-Cells 150~200MW of project business in FY10F

LDK JV with Q-Cells to build solar power projects

Conergy Develops turnkey large scale projects in Europe and the US

Solon Constructing small solar power projects in the US including a pilot project for PG&E

Renesola Building utility scale power projects in China


However, new entrants could change this landscape via: 1) financing not just the

equity portion but also helping secure debt; and 2) a significantly larger asset base

which would be able to handle the size of projects these companies can take. In the

Exhibit below, we compare the asset base, annual capex and net debt-to-equity ratio

with the key players in solar industry. We see financing availability as a key threat to

incumbents for the large projects.

Case in point being GE, which recently announced its intent to address the solar space

with CdTe (Cadmium Tellurium) based thin-film (similar technology is used by current

market leader First Solar). GE has used the financing model with great effectiveness in

the aerospace industry where it manufactures and finances the engines used in planes.

Backed by such financing availability GE Energy (a subsidiary of GE) is the second-largest supplier of wind-energy systems globally, ie, a repeat could be possible in the

solar industry.

Project financing could enable

select companies to control the

next lever of demand from

utilities


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Long-term catalysts remain

Utility adoption the next lever of

growthWe believe the single biggest lever for demand growth for Solar will come from wider

utility adoption beyond 2012. To date, utility adoption of solar has been very low we

understand less than 15% of solar installations to date are utility-scale. We see twoconcerns this holding back 1) most IRR calculations do not include the transmission

losses and distribution costs. Including these costs makes these projects unattractive

despite government subsidies in most cases; and 2) better investment opportunities

are available in wind where lower generation costs are able to offset the distribution

and transmission costs, thus allowing government subsidies to accrue as excess

returns. Note: the cost of electricity generation for wind is US4-10/KW-hr, in contrast

to US18-34/KW-hr for Solar (2Q09 base) according to the US government.

Market consensus is that wind will be the primary source of renewable energies over

2010-20F. That said, we believe we are at the cusp of a change when the momentum

will shift from wind to solar over the next two years. We anticipate solar to account for

at least 50% of total renewable electricity capacity installed over 2011-20F as cost ofgeneration from solar reaches parity with wind by 2012.

Exhibit 33. Forecasts for RE addressable market

Company Wind (GW) Solar (GW)

EIA 200

ENEL 800 210

McKinsey 820 206

Global Wind Energy Council 350-1000

Frost and Sullivan 491

Note: RE Renewable electricity

Source: Industry data, Nomura research

Exhibit 34. Wind accounted for 72% of RE pipeline

FY09

Wind

72%

Solar PV

14%

Solar

Thermal

14%

FY10

Solar PV

28%

Wind

26%

Solar

Thermal

46%

Note: RE Renewable electricity

Source: Industry data, Nomura research

Solar: Accelerated cost reductions over FY10-12

We see cost of generation in solar falling 35-45% over 2010-11F (compared to 3Q09),

followed by an additional 25

42856960 Nomura Asian Solar

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