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Samsung's solar cell business stands at crossroads

Author: admin Date: June 1, 2011 Categorys: Default

SEOUL, June 2 (Xinhua) -- Solar cell business is one of the five areas that South Korea's No.1 conglomerate Samsung Group has planned to nurture as new growth engines.

Samsung announced in May last year it will inject 23.3 trillion won (21.69 billion U.S. dollars) by 2020 into new growth drivers such as electric vehicle batteries, light-emitting diode (LED), biomedicine and medical equipment as well as solar batteries.

Samsung Electronics' LCD business unit has been tasked with producing solar cells and modules since 2009, but the unit failed to pay off in the past two years, resulting in rumors that Samsung is reassessing its solar energy business.

On May 27, Samsung Electronics decided to transfer its solar battery business to its affiliate Samsung SDI for 160.8 billion won. The flagship unit of Samsung Group will hand over personnel and equipment as of July 1 to Samsung SDI, which produces electric car batteries and plasma flat screens.

Market watchers said the business shift was aimed at unifying Samsung Group's energy-related businesses and generating synergies between the solar cell business and Samsung SDI's existing businesses such as rechargeable batteries and energy storage systems.

Stock investors, however, seemed to see the business transfer from a negative perspective. Shares in Samsung SDI nosedived 11.47 percent to close at 177,500 won on Monday. It was the biggest daily drop since May 2009.

Experts were divided over the transfer. Optimistic experts said the acquisition of solar cell business will strengthen Samsung SDI ' s growth potential as the energy-focused arm of Samsung Group. But,pessimists focused on the solar cell industry entering the down cycle and enormous investment requirements.

COMING DOWN CYCLE

Solar power industry, including polysilicon, ingot & wafer, cell and module, is widely expected to fall into the down cycle in the near term due to excess supply and expected demand weakness.

Moody's said Wednesday in a special report that the solar photovoltaic industry will face challenges from weaker demand and global overcapacity despite the sector's favorable long-term outlook.

Following the devastating Japanese earthquake in March, many countries felt the need to embrace safer renewable energies, including solar power, as a means to generate electricity. Radiation leaks from Japan's nuclear power plant prompted Germany to shut down all nuclear power stations by 2022, and encouraged Italy to extend its own moratorium on nuclear projects indefinitely.

Rising costs of fossil fuels and growing needs for reducing carbon-dioxide emissions require countries to expand the usage of solar and wind power as electricity-generating sources. The International Energy Agency (IEA) has advised governments to halve their carbon-dioxide emissions by 2050, and the share of renewable energies in the European Union (EU) will rise from 9 percent to 20 percent by 2020.

Overcapacity and weaker demand, however, is projected to worsen the solar power industry in the short term.

The pullback of government incentives and subsidies in Europe will cut demand for solar power in the near term, according to Moody's. Europe, which accounts for 80 percent of the world's solar power demand, has lowered subsidies in response to ballooning fiscal deficits in the wake of the global financial crisis.

Europe's incentives, including tax credits and favorable feed- in tariffs, have recently contracted, adding pressure to demand for solar power. Germany, the world's largest market, cut feed-in tariffs by 15 percent in January, with further decreases expected. Feed-in tariffs, introduced by Germany for the first time, fix the rate at which utilities buy electricity generated by renewable energy sources such as solar power.

Excessive supply is forecast to drive down profits of solar power manufacturers and to crowd out marginal players by increasing mergers and acquisitions (M&A) among rivals. As a sign of excess capacity, solar module makers planned to raise exports by 55 percent this year, but full-year growth in demand will be much lower, according to the San Francisco-based industry publisher Solarbuzz.

A reduction in average selling prices (ASP), driven by overcapacity and competition, will hurt high-cost players with limited ability to control their input costs and producers with uncompetitive processing, Moody's warned.

BURDENSOME INVESTMENT

Latecomer Samsung SDI will be required to make aggressive investments in expanding its production lines amid the upcoming down cycle in the solar power industry.

"It may be burdensome for Samsung SDI that its electric vehicle, energy storage system and solar cell businesses should require enormous investments for at least two years without any contributions to earnings," Hwang Joon-ho, an analyst at Daewoo Securities in Seoul, wrote in a report Monday.

Hwang predicted this year's investments of Samsung SDI to exceed 1 trillion won, including 500 billion won for the expansion of its rechargeable battery production capacity and related repair& maintenance works, 380 billion won for participation in rights offerings and 160.8 billion won for the acquisition of the solar cell business from Samsung Electronics.

Given the company's estimated EBITDA of 825 billion won this year, Samsung SDI's free cash flow is forecast to turn negative for the first time since 2007, according to Daewoo. EBITDA, gauging a company's ability to generate cash flow, stands for earnings before interest, tax, depreciation and amortization.

Samsung SDI said last Friday it will invest 2.2 trillion won in the solar battery business by 2015 in a bid to generate 3.5 trillion won in sales from the business it will take over from Samsung Electronics.

The analyst at Daewoo Securities said Samsung SDI is forecast to increase its investments in large-sized rechargeable batteries and solar cell business starting next year. It may put additional pressures on financial conditions for Samsung SDI.

POSITIVE VIEWS

Despite worsening business conditions, local brokerages assessed the business transfer positively due to the expected Samsung Group-wide supports for the solar power business and the continued earnings momentum.

"The business shift is significantly positive for Samsung SDI as solar battery business is one of five areas that Samsung Group sought to nurture as new growth engines. Samsung SDI will receive the group-wide resources," Lee Hak-moo, a Seoul-based analyst at Mirae Asset Securities, wrote in a report on May 27.

Lee also noted latecomer Samsung SDI will enter the solar power market more easily than expected because the industry fell into the down cycle, under which new comers may have more chances to acquire marginal players at a cheaper price.

Samsung Group's units are responsible for a part of the solar battery business. Samsung Fine Chemical is tasked with producing polysilicons, with Samsung Corning Precision Glass making wafers and ingots. Samsung SDI will maker solar cells and modules, and Samsung Everland and Samsung C&T are charged with building and operating a solar power plant respectively.

Samsung Group completed its vertical integration of the solar power business by shifting the solar cell business to Samsung SDI from Samsung Electronics. Vertically-integrated players are projected to perform well through the coming down cycle, according to Moody's.

Samsung SDI's existing businesses such as rechargeable batteries and energy storage system are expected to achieve solid earnings in the second and third quarters due to seasonal factors, market watchers here said.

"Earnings of Samsung SDI peaked at the second and third quarters in the past as rechargeable battery industry heavily depends on seasonal factors," Kang Yoon-heum, an analyst at NH Investment & Securities in Seoul, said in a report.

Kang forecast Samsung SDI's operating profits will jump 74 percent on-quarter to reach 105.1 billion won during the second quarter of this year, with the third-quarter profits expected to increase 17 percent on-quarter to 122.9 billion won in the third quarter.

"Smartphone and tablet computer demand is surging amid the rapid expansion of the mobile Internet. The subsequent spike in the demand for rechargeable batteries means a major earnings boost to the world's top supplier of rechargeable batteries Samsung SDI, " Soh Hyun-cheol, an analyst at Shinhan Investment Corp., wrote in a report.

According to Gartner, Global smarphone sales leaped 85 percent on-year to 101 million units in the first quarter. Apple's smartphone sales are expected to grow 74 percent on-year to 80 million units this year, while Samsung Electronics' sales are set to soar 116 percent to 55 million units.

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