SMA Solar’s Q2 2011 performance was fine in light of all indicators pointing downwards for the inverter industry and its leader, SMA. Reasons for concern include:
-Material costs are high when ASPs are falling in a PV market that is more uncertain then ever.
-Chinese PV producers have been said to be giving away inverters for free in exchange for big solar project supply contracts that will allow them to dump their PV inventory already written off.
–Power One is grabbing share from SMA even in SMA’s main market, Germany.
-Shifts in the inverter market are occurring with the addition of new functions like energy storage in inverters, changing the business.
In this difficult PV market, SMA’s shipments doubled in Q2 versus Q1 and its overall performance has laid the groundwork for a strong outlook in H2 and possibly beyond. In some particular geographies, inverter demand should be very strong.
Four points are notable from the SMA report:
– Geographically, SMA generated 56% of sales internationally, ie outside of Germany where it still commands 45% of the market.
– The US has become a hugely promising market for SMA’s high-power solutions, ie utility-scale. “The USA still has the best potential… It is a market that could surprise,” according to the CEO. He forecasts the total US market to reach 3.5GW in 2011.
– Japan could be a boon as it transitions to renewable energy alternatives. SMA has been building a local presence there (local sales and technical teams) since early 2010 and may soon benefit from being perceived as a ‘local’ Japanese supplier. Being ‘local’ and offering good value, low cost and high quality products is unanimously regarded as the perfect marketing approach for Japan, otherwise nearly impossible for non-Japanese to penetrate. Total Japanese market is forecast by SMA to reach a hefty 5GW in 2013.
– India is proving successful for SMA, particularly in utility-scale projects.
– The EU became more competitive last year when SMA could not meet demand, allowing new entrants to compete. Recently it has gained back some share. Also, SMA says the newer Tier 2 players with weak balance sheets have their days numbered. Offering financial backing to some customers is now a service. A strong balance sheet with an excess of 300ME in June (and no risk of inventory depreciation unlike peers) gives SMA a competitive advantage with such customers.
– Total German and Italian markets are forecast to be 5GW and 3.5GW respectively for 2011.
– Product: High power solutions saw the lion’s share of growth in Q2 thanks to the plethora of utility-scale projects, especially in the US but elsewhere as well.
– Cost flexibility: SMA’s well-known flexible production has kept costs down (salaries (thanks to temp workers), materials, and inventories) in a period of uncertain markets for PV. Cost flexibility together with dynamic marketing, targeting new strategic geographies and product types, are again proving key assets for the company.
– Pricing: Despite a rumor to the contrary, SMA has not cut prices, and management argues that price is not a competitive factor in the inverter market (inverter spending is too small relative to the total development cost of a project). Quality, however, has proven a ticket to winning share for big scale projects in the US. Balance sheet strength is also proving an advantage in geographies where bankability is poor such as in EU, for example.
Assuming the overall solar macro environment for equipment suppliers remains tough, SMA Solar is a strong hold at 72 euros. The valuation is reasonable on 9x 2011 EPS(E) and 5.3x EV/Ebitda, the balance sheet is strong, management is visionary and executing well, and products are still the highest quality in the market. We are optimistic for solar long term; however, equipment manufacturers will continue to suffer margin pressure this year. We will closely watch margins for SMA and for Power One (also performing nicely and selling on an historically cheap valuation). We generally prefer developers. Looking forward, solar demand in several markets, including Japan, the US, Germany and perhaps India, may surprise on the upside.