Based on market cap, ReneSola (SOL +0.00%), at $317 million, is one of the smaller Chinese PV manufacturers; however, the company ranked No. 6 according to the NPD Solarbuzz list of top ten PV module suppliers of 2013. ReneSola's impressive 2013 performance certainly suggests a need for closer examination. Plus, over the previous twelve months, ReneSola shares are up 36%, while Guggenheim Solar ETF shares are up 115% over the same time period. Does this suggest a buying opportunity? Let's take a closer look at why ReneSola deserves consideration for investment and how close analysis of the earnings release could help inform our decision making.
1) Success in Japan
More and more PV manufacturers are racing into the Japanese market, and ReneSola is no exception. Management said in the Q3 earnings call that Japan (and the United States) are emerging markets that are showing large demand -- so much so that there's the possibility of a 10% increase in sales for 2014. Throughout the first nine moths of 2013, ReneSola continually increased its sales in Japan: 0.8% in Q1, 2.3% in Q2, and 4.9% in Q3. During the Q4 earnings release, look to see if management's estimates are correct and the trend is continuing; however, even if it isn't continuing at a remarkable rate, there are other ways to verify the company's commitment to success in Japan.
Last week, ReneSola announced that, in partnership with electronics trading company, Vitec, it will be opening a manufacturing plant in Japan. In a Bloomberg article, a Vitec spokesman said that the plant will be capable of producing 80 MW of panels a year. The company doesn't have to wait too long to recognize the value of opening the plant.
In January, the company announced that a leading solar project developer based in Japan has awarded it a contract for 420 MW worth or PV panels. Delivery of the panels has begun, and it is expected to be completed by December 2015. To put this in perspective, ReneSolar in Q3 2013 shipped 23 MW of panels in Japan.
2) Confirming that "one time" doesn't happen a second time
Looking through the financials for the company in the most recently reported quarter, one sees that revenue grew 11.1% to $419.3 million, and gross margins improved from 7.3% to 8.1% quarter over quarter. For Q4, management is guiding for increased improvement in gross margins of between 9% and 11%.
The company's trouble for the quarter came in the form of an operating loss of $180.3 million and total operating expenses of $214.3 million. These were due, in large part, to the closing of a Sichuan polysilicon facility. Assuming (dangerous as it may be) that there is no new one-time charge that deals a massive blow to operating margins, look to see if ReneSola can continue to improve here.
Operating margin was negative 43%. Excluding the non-cash impairment charge and the nonrecurring gain, the operating loss would have been $0.2 million, representing operating margin of negative 2.9% compared to operating margin of negative 4.4% in the same quarter.
|
Q3 2012 |
Q1 2013 |
Q2 2013 |
Q3 2013 |
* Q3 2013 | |
|---|---|---|---|---|---|
|
Operating Margin |
- 38% |
- 11.8% |
- 4.4% |
- 43% |
- 2.9% |
* Operating margin excluding one-time gains and loss
3) Will this be a game-changer?
One opportunity for the company is in the micro-inverter market. Unlike traditional inverters, which convert direct current, DC, from multiple solar panels to alternating current, or AC, which can then be used by the consumer, micro-inverters convert power from each panel; this is advantageous because it yields more energy from the PV modules.
ReneSola is the only PV manufacturer that also manufactures micro-inverters. In the Q3 earnings call, management acknowledged that its Replus micro-inverters have received certification from most of its target markets and is now available for order. Although the company did not release any sales figures, Greentech Media reported in July that Brian Armentrout, Marketing Director at ReneSola America, said that the company is "delivering 10,000 units per month in the U.S. alone and about to ink a deal that will add 5,000 to 7,000 more units per month on top of that."
This endeavor into the micro-inverter market may prove to be extremely lucrative for the company, providing a revenue stream that is not as susceptible to the volatility that surrounds tariffs and duties on PV modules. According to marketing firm IHS, the micro-inverter market will quadruple by 2017, increasing to 2.1 GW from the approximate 500 MW in 2013. There are several companies that are already gobbling up market share in this fairly new space.
One of the more dominant companies is Enphase Energy (ENPH +2.73%). Shipping 485,000 micro-inverters in Q4 2013 and earnings $67 million in revenue, Enphase exceeded 100 megawatts shipped in a single quarter for the first time -- up 30% year over year. Non-GAAP operating income was $0.4 million, resulting in the company's first profitable quarter on a non-GAAP operating income basis.
Foolish final thoughts...
In a rapidly evolving industry like solar power it's easy to be blinded by the bigger names. But, the bigger names don't always guarantee the biggest returns. Is ReneSola a lesser-known company that will provide superior returns to investors? Is the company's foray into the micro-inverter market a disruptive move among PV manufacturers? Is the company's growth story just beginning? Only time will tell, but closely reading the next earnings report is a good next step.
