Bank Of America Cites Chinese Policy Decision In First Solar Downgrade

China's "surprising decision" to suspend construction of new solar farms and slash subsidies prompted Bank of America Merrill Lynch to downgrade U.S.-based solar company First Solar, Inc. FSLR.

The Analyst

BofA's Julien Dumoulin-Smith downgraded First Solar rating from Buy to Neutral with a price target lowered from $83 to $63.

The Thesis

China's decision to rein on its local solar industry poses the risk of an oversupplied Chinese solar market flooding the U.S. market, Dumoulin-Smith said in the downgrade note. This will naturally create "significant competition" in the U.S. market and result in price declines and margin declines for First Solar and its peers, the analyst said — and the problems could last until 2019 or even 2020. (See Dumoulin-Smith's track record here.)

Even when factoring in taxes and a 30-percent Section 201 tariff, Chinese imports of solar modules to the U.S. would still have a pricing advantage in the mid-20 cents/W versus nearly 33 cents/W for American firms, Dumoulin-Smith said. This could prompt First Solar's margins to fall from an estimated 35 percent in 2019 to 20 percent by 2022 if the company wishes to remain competitive, the analyst said. 

First Solar's solar Investment Tax Credit is a "safe harbor" for the company, and recent actions at the U.S. Treasury and Office of Management and Budget suggest the existing 30-percent ITC could be extended from 2019 to 2023, according to BofA. This alone would give First Solar and its peers the ability to accelerate from a mid-teens GWs/year and potentially increase their systems development beyond 1GW/year, Dumoulin-Smith said. 

Finally, First Solar's existing order book of at least 10.6GW of firm and fixed-price contracts should give the stock some form of near-term support even at a time when international pricing becomes "more depressed," the analyst said.

But the support may not last after 2020, which creates the potential for risk beyond the next two years, he said. 

Price Action

Shares of First Solar were trading lower by 2.75 percent at $60.04 at the time of publication Tuesday morning. 

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