GLOBAL_RENEWABLES：SOLAR_AND_WIND_BEYOND_THE_TROUGH-2013-01-25.ppt

,industrials global global renewables solar and wind beyond the trough valuation summary,abc global research we believe sentiment for original equipment manufacturers (oems) of renewables has troughed but expect price volatility to remain high given low earnings and cash flow,company,bbg,ccy rating new tp,old current tp price,visibility. investors should be selective.,gcl poly meyer burger,3800 hk mbtn sw,hkd chf,ow)v) uw(v),2.6 6.6,2.6 6.6,2.05 9.4, in solar, rising volume and china,oci rec sma solar solarworld wacker chemie gamesa,010060 ks rec no s92 gr swv gr wch gr gam sm,krw nok eur eur eur eur,uw(v) 154000 154000 178000 n(v) 1.25 1.25 1.05 ow(v) 25.0 22.0 20.7 uw(v) 1.0 1.0 1.6 n(v) 60.0 50.0 54.8 n(v) 2.0 1.65 1.96,exposure lead us to select sma solar and gcl-poly as key ows. recovery in in wind oems will take longer,nordex,ndx1 gr,eur,uw(v),2.8,2.0,3.9,suzlon energy ltd vestas wind systems,suel in vws dc,inr dkk,uw(v) n(v),9.0 42.0,9.0 35.0,19.4 38.1,repricing to higher growth expectations. policy support in,source: hsbc estimates; price at close of 17 jan. 13 24 january 2013 sean mcloughlin* analyst hsbc bank plc,the top two solar and wind markets, us and china, in early january fuelled a sector rally. we believe higher end-market growth expectations in 2013 and 2014 combined with rising risk appetite among investors should result in stocks stabilising at current levels, with selective upside.,+44 20 7991 3464,,longer-term potential for solar. despite the pace of volume,christian rath*, cfa analyst hsbc trinkaus & burkhardt ag, germany +49 211 9103049 christian.rathhsbc.de charanjit singh* analyst hsbc bank plc,growth slowing in 2013, the shift away from return-driven and subsidy dependent european markets towards emerging markets should refocus investor attention to solars longer- term potential. with supply stresses easing and pricing beginning to stabilise, we see better value upstream. however, the chinese tariff ruling on polysilicon (possible date 20,+91 80 3001 3776 jenny cosgrove* analyst,charanjjit2singhhsbc.co.in,february) is already influencing the supply/demand balance and could pose a risk for western suppliers.,the hongkong and shanghai banking corporation limited,improving wind recovery prospects in 2014. we see,+852 2996 6619,.hk,+20% wind industry growth in 2014 thanks to a strong us,brian sohn* analyst the hongkong and shanghai banking corporation limited, seoul securities branch,market following extension of the production tax credit (ptc) in january. but we expect investor focus to remain short-term on restructuring efforts in a weak 2013. tangible,+822 3706 8765,,benefits of cost cutting in q4 and q1 should help drive the,gloria ho* analyst the hongkong and shanghai banking corporation limited,recovery story for wind oems. valuation and changes. we raise price targets to reflect,+852 2996 6941,.hk,rising volume growth for renewables. in solar we remain,*employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: hsbc bank plc disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,ow(v) on sma solar (target eur25 from eur22) and n(v) on wacker (target eur60 from eur50). in wind we remain n(v) on vestas (dkk42 from dkk35) and gamesa (eur2.00 from eur1.65) and uw(v) on nordex (eur2.80 from eur2.00).,2,industrials,global,24january2013,abc,-,-,-,-,-,-,-,valuation sheet,company,bbg,rating,m.cap,ccy target current _ ev/sales_ _ev/ebitda _,_ pe _,_ p/b _,usdm,price,price 2012e,2013e,2014e,2012e,2013e,2014e,2012e,2013e,2014e,2012e,2013e,2014e,wind oems vestas wind systems gamesa corp nordex suzlon energy ltd* goldwind mingyang,vws dc gam sm ndx1 gr suel in 2208 hk my us,neutral (v) neutral (v) underweight (v) underweight (v) not rated not rated,1,390 663 383 634 2,325 174,dkk eur eur inr hkd usd,42.00 2.00 2.80 9.00,38.13 1.96 3.90 19.40 4.03 1.43,0.3 0.3 0.2 0.6 1.8 0.3,0.3 0.3 0.3 0.5 1.5 0.4,0.3 0.3 0.2 0.5 1.5 n.a.,6.8 5.1 n.m. 17.2 35.4 8.6,3.9 4.0 4.5 10.3 25.2 7.8,2.8 3.1 4.1 5.5 19.9 n.a.,n.m. n.m. n.m. n.m. 42.9 n.m.,n.m. n.m. 24.3 n.m. 25.7 n.m.,9.9 10.1 16.8 37.6 20.9 n.a.,0.4 0.3 0.9 0.8 0.7 0.3,0.4 0.3 0.9 1.4 0.7 0.3,0.4 0.3 0.8 1.3 0.6 n.a.,mean median,0.6 0.3,0.6 0.4,0.6 0.3,14.6 8.6,9.3 6.2,7.1 4.1,42.9 42.9,25.0 25.0,19.1 16.8,0.6 0.6,0.7 0.6,0.7 0.6,solar,gcl-poly energy holdings 3800 hk renewable energy corp rec no,overweight (v) neutral (v),4,092 399,hkd 2.60 nok 1.25,2.05 1.05,2.8 0.5,2.5 0.5,2.1 0.5,15.8 6.1,12.4 5.5,6.9 3.5,n.m. n.m.,67.9 n.m.,13.2 n.m.,1.7 0.1,1.6 0.1,1.3 0.1,pv crystalox meyer burger sma solar solarworld wacker chemie,pvcs ln mbtn sw s92 gr swv gr wch gr,underweight (v) underweight (v) overweight (v) underweight (v) neutral (v),80 480 960 241 3,638,gbp 0.07 chf 6.60 eur 25.00 eur 1.00 eur 60.00,0.12 9.40 20.71 1.61 54.84,-0.5 0.9 0.2 1.4 0.9,-0.3 1.1 0.3 1.8 0.9,0.0 0.9 0.2 1.6 0.9,n.m. n.m. 1.4 n.m. 5.2,n.m. n.m. 13.5 n.m. 5.9,n.m. 16.9 1.9 13.9 5.2,n.m. n.m. 8.6 n.m. 26.4,n.m. n.m. n.m. n.m. 43.7,n.m. n.m. 24.7 n.m. 19.9,0.3 0.8 0.9 0.5 1.1,0.3 1.0 0.9 0.9 1.1,0.3 1.1 0.9 1.4 1.1,oci company ltd,010060 ks,underweight (v),4,016,krw154,000 178,000,1.5,1.3,1.2,5.5,4.2,3.8,29.2,29.2,25.7,1.2,1.2,1.1,trina yingli suntech sunpower firstsolar,tsl us yge us stp us spwr us fslr us,not rated not rated not rated not rated not rated,422 438 337 938 2,657,usd usd usd usd usd,5.19 2.80 1.86 7.88 30.53,0.8 1.6 1.3 0.5 0.7,0.7 1.5 1.2 0.5 0.7,0.6 1.2 1.1 0.5 0.7,n.m. n.m. n.m. 13.0 4.7,n.m. 25.2 n.m. 7.4 3.8,9.0 9.3 22.4 7.0 3.9,n.m. n.m. n.m. 52.2 6.9,n.m. n.m. n.m. 35.3 8.0,9.9 19.0 n.m. 16.4 9.6,0.4 0.8 0.6 0.9 0.8,0.5 1.1 1.3 1.0 0.7,0.5 1.0 1.9 0.9 0.6,mean median,1.0 0.9,1.0 0.9,0.9 0.9,7.4 5.5,9.7 6.7,8.6 7.0,24.7 26.4,36.8 35.3,17.3 17.7,0.8 0.8,0.9 1.0,0.9 0.9,source: hsbc estimates for covered companies, bloomberg estimates for not rated stocks. priced as at close of 17 january 2013. *suzlon multiples have been calendarized .,industrials global 24 january 2013 renewables outlook for 2013 past the trough growing disconnect between climate equity valuations and policy response could drive renewed investor interest in the sector we believe equity valuations may have troughed but structural issues in solar and wind will not be resolved overnight. investors should remain selective. we see greater value in upstream solar and prefer exposure to china domestic growth and rising volumes through gcl-poly and sma solar. in wind we highlight turnaround stories.,abc,investment themes for 2013 in hsbcs december 2012 report global equities in 2013: fishing in choppy seas, five key themes are identified to drive equities in 2013, namely top- line growth, margin power, capacity and consolidation, the regulation game and unlocking value. renewable oems dovetail with the capacity and consolidation and regulation themes, which we wind and solar indices* have rebounded from lows in 2012 120 110 100 90 80 70 60 50,analyse in this report. we believe both themes can be drivers of renewed investor interest in the unfavoured renewables sector through 2013. capacity and consolidation easing the oversupply industries that reduce capacity or consolidate are of particular interest as equity investments in 2013,dec-11,mar-12,may -12,jul-12,sep-12,n ov -12,jan-13,global energy efficiency & energy management,global solar,global wind,global water,msci acwi,*relative performance of hsbc quant research indices against global benchmark index. source: hsbc 3,industrials global 24 january 2013 because they have the potential to deliver positive profit surprises. industries can consolidate if weak players exit an industry, if companies choose to cut back production or through mergers and acquisitions. wind and solar are prime examples of oversupplied industries where removal of excess capacity should favour a return to more normalised supply demand dynamics, stabilisation of prices and sustainable industry roe levels. we currently forecast a return to profitability for the wind oems in 2014 once the industry returns to growth at higher average capacity utilisation. for solar, capacity consolidation among polysilicon manufacturers aligned with supplier discipline should help a pricing recovery. the regulation game policy headwinds abating government policy becomes crucial when growth is stagnating and economic conditions are fragile. for the renewables sector we expect policy headwinds to abate; we believe the austerity wave which has led to subsidy cutbacks in southern europe and restrained the availability of financing for capital intensive renewable energy projects is mostly over. we are encouraged by policy moves ex-europe, in the us and particularly in china, which is emerging as the dominant clean energy market. the rising number of other markets (latin american, african and other asian) for solar and wind mirrors the spread of supportive policy developments for renewables to an ever increasing number of countries. as the hsbc climate change team highlight in their 07 january note, 2013: the great disconnect, 2013 should be marked by a growing disconnect between ever-stronger evidence of climate change and the inadequate policy response. for climate and cleantech equities, the growing disconnect between climate equity valuations and policy response could drive renewed investor interest in the sector. 4,sector may have troughed in 2012 2012 was marked by a risk-averse market which penalised sectors such as renewables reliant on public subsidies in an austerity environment. weakening growth prospects, particularly in europe, exacerbated oversupply concerns and increased downward pressure on pricing and manufacturer margins we believe the picture has been improving over the past months as risk appetite among investors has begun rising again. sector risks upside risks rising gas prices particularly in the us, low gas prices have shifted capex to new gas power infrastructure at the expense of new renewables and have made ppas for wind difficult to sign at attractive prices. if gas prices rise, the relative attractiveness of renewables will increase. volume upside we expect market growth in 2013 to slow in solar and to decline outright in wind, due to stop-start policy in the us. higher than expected volumes would drive higher revenues and better margins among oems. downside risks slowing global economy. hsbc economists forecast 8-10% earnings growth globally in equities in 2013 driven by strong gdp growth particularly in china (+8.6% y-o-y) offsetting a mild recession in the eurozone. worsening economic conditions may revive austerity conditions and negatively affect sentiment for the subsidy-dependent renewables sector. tighter availability of credit. renewable energy projects are capital intensive and light on opex. deterioration in the cost and availability of financing for projects may negatively impact new investments in renewables and affect returns for developers and manufacturers.,abc,0,any,industrials global 24 january 2013 solar downturn in europe compensated by chinas domestic push and the emergence of new growth markets ex-europe overcapacity is still an issue but pricing may bottom in 2013 if further capacity rationalisation and supply discipline occurs polysilicon producers should benefit most from improved supply/ demand balance but chinese import tariffs are a major risk factor,abc,we turn more positive on 2013 installations we forecast growth of global solar installations to reach 9% in 2013, which represents a sharp decline from the +29% y-o-y seen in 2011 and +18% y-o-y in 2012. key reasons for the weaker demand are negative policy changes especially in mature european markets like italy and germany. nevertheless, compared to our previous estimates (9 july, global solar: volumes rising; industry turning point yet to materialise) we have turned increasingly more positive on global installations as we believe weakness in europe will be offset by higher volumes in china, japan and the us. key changes to solar forecasts (in mwp),for germany, we expect the monthly tariff digressions of currently 2.5% and the ban of new utility scale systems (10mw) to cause a drop in installations from a record 7.6gw in 2012e to 4.5gw in 2013e and 3.5gw in 2014. this slow- down is confirmed by recent monthly installation data for germany which revealed installations of around 400mw compared to c700mw on average during 9m 2012. in addition, in contrast to previous years no year-end rush occurred this time. however, as todays system returns of 5-7% are still attractive in the current low interest rate environment, our forecasts are still at the upper end of the german governments sustainable corridor solar market is shifting away from europe to asia and row,-2,000 -1,000 n et tota germ l italy r oe,1,000 2,000 3,000 4,000,100% 80% 60% 40%,us c hina india j apan r ow,20% 0%,2009 germany,2010 italy,2011,2012e roe,2013e 2014e usa,2013e,2014e,china,japan,row,source: hsbc estimates,source: hsbc estimates, epia,5,industrials global 24 january 2013 global solar demand forecast (annual new installed capacity in mwp),abc,2007,2008,2009,2010,2011,2012e,2013e,2014e,2015e,germany spain italy greece france belgium bulgaria czech republic uk rest of europe usa china japan south korea india australia row total annual demand % y-o-y,1,271 569 58 1 13 23 0 3 4 30 207 20 210 45 20 6 49 2,529 60%,1,809 2,843 338 10 58 81 1 61 6 90 342 45 230 276 40 12 88 6,330 150%,3,806 20 712 36 185 519 6 398 7 114 477 228 480 167 30 79 173 7,437 17%,7,408 441 5,826 150 719 417 28 1,490 62 326 878 520 991 138 60 387 476 20,317 173%,7,485 372 5,784 426 1,671 974 100 6 784 837 1,855 2,200 1,296 92 300 774 1,209 26,165 33%,7,643 250 4,000 900 1,400 600 150 50 850 1,300 3,000 4,000 2,000 250 1,000 500 3,000 30,893 18%,4,500 100 1,500 450 1,000 500 200 150 800 1,550 4,000 8,000 4,000 300 1,000 600 5,000 33,650 9%,3,500 300 1,000 450 1,000 500 250 250 300 2,000 5,000 9,000 5,000 350 1,500 700 6,000 37,100 10%,3,500 365 1,500 450 1,000 500 300 263 340 2,100 6,000 10,000 5,500 375 2,000 770 7,800 42,763 15%,source: hsbc estimates, epia,target of 2.5-3.5gw. we therefore cannot rule out another political reaction post elections in germany especially as recent electricity price hikes for residential customers as well as negative electricity prices at the electricity exchange during december and january highlight the growing cost burden for renewables to consumers. going forward, back-up and storage systems will become increasingly important to manage the fluctuation electricity production of the german solar assets and to ensure grid stability. according to several press reports, the german government will introduce an incentive system for storage systems already in q1 2013. solar generation costs (in eur/kwh, system price in eur)* 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00,the cost of solar subsidies to be borne by italian consumers has reached eur6.5b and under current legislation will be capped at eur6.7b, potentially leading to a subsidy freeze as seen in spain in 2012. though we do not think new solar projects will dry up completely in italy, we have reduced our forecasts to 1-1.5gw per year in 2013 and 2014. the fukushima nuclear disaster in march 2011 and the major shift away from nuclear power prepared the ground for a solar boom in japan. the country is currently one of the fastest-growing markets globally thanks to government-initiated incentive,2012,2013 germany,2014 spain,italy,2015 us (california),2016,ccgt,2017,note: *discount rate of 6%, performance ratio of 77%, lifetime 20 years source: hsbc estimates 6,(rmb/kwh),insolation,hours,1,700,insolation,hours,industrials global 24 january 2013 schemes and a generous feed-in tariff (jpy42 per kwh for 10 years for systems less than 10 kw, and jpy40 for larger systems, for 20 years) as well as pull-in of demand. recent developments may,china irr sensitivity to power tariff and system price rooftop installation projects under golden sun program commercial system price power tariff (after rmb5.5/w subsidy) (rmb / kwp),abc,however put pressure on our installation targets. the newly elected government said it may consider,0.51 0.66,7,979 19.0% 25.9%,8,979 12.3% 17.2%,9,979 8.4% 12.4%,10,979 5.7% 9.2%,11,979 3.7% 6.8%,switching on nuclear again as imports of natural gas in substitution of nuclear have created a large trade deficit for the country. the ministry of economy, trade and industry of japan is now in discussions,0.81 32.9% 0.96 40.4% 1.11 48.2% 1.26 56.6% source: hsbc estimates,22.1% 27.0% 32.0% 37.2%,16.2% 20.0% 23.7% 27.6%,12.4% 15.6% 18.6% 21.7%,9.7% 12.5% 15.1% 17.7%,over a potential tariff cut to jpy38 per kwh for systems less than 10kw. in 2012 around two-thirds of japans installations were residential and reliant on this subsidy. the effective date for the potential cut in subsidy is april 2013.,china irr sensitivity to insolation hours and system price - rooftop installation projects under golden sun program system price (after rmb5.5/w subsidy) (rmb / kwp) 7,979 8,979 9,979 10,979 11,979 38.3% 25.6% 18.9% 14.7% 11.7%,during the last months, the chinese government has implemented several measures to support the local,1,600 1,500 1,400 1,300,35.6% 32.9% 30.4% 27.8%,23.8% 22.1% 20.3% 18.6%,17.6% 16.2% 14.8% 13.4%,13.6% 12.4% 11.3% 10.1%,10.7% 9.7% 8.7% 7.7%,solar industry and to significantly grow the domestic market. on 11 december the chines