Relatively cheap valuations and government incentives

should help shares of companies that install solar panels on customers’

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roofs outperform investments in producers of photovoltaic cells,

analysts said.

The German solar market is estimated to become the

world’s biggest in 2009, with the European Photovoltaic Industry

Association (EPIA) forecasting up to 2.5 gigawatts in new

installations, more than a third of expected global volume.

There

are few positive triggers in the short term for an industry currently

suffering from overcapacity, tight credit conditions and a lack of

project funding.
However, analysts said that solar retailers — who

instal solar panels on customers’ roofs — should benefit in Germany,

where demand is suffering less and financing conditions are better than

elsewhere.

“In contrast to the project business, the German retail

market is developing quite promisingly and common expectations

regarding the total size of the German (Photovoltaic) market in 2009

are in a range of 2-2.5 gigawatt peak (2008: 1.5 gigawatt peak),” Sal

Oppenheim analysts wrote in a note.

The solar value chain consists

of upstream players—companies such as Q-Cells, LDK Solar and Sunpower

that are active in product manufacturing and distribution—and

downstream players, who deal with end customers and install the actual

solar products, including Centrosolar and Phoenix Solar.
“As end

customers access is becoming the most important asset for PV companies,

we favour system integrators over manufacturers in our coverage

universe,” BHF Bank analyst Goetz Fischbeck wrote in a note.

Financing

conditions for the funding-hungry solar industry have deteriorated

worldwide, with banks being less willing to provide credit lines,

hitting upstream players hard at a time when they are suffering from an

oversupply of cells and modules.

“The solar industry remains over

supplied and financing remains tight, especially outside Germany,”

Credit Suisse said in a note.

While Germany has held up relatively well, upstream players are not immune to the industry’s troubles.

Eastern

Germany-based Q-Cells, the world’s biggest maker of solar cells, for

example, had to cut its 2009 sales outlook three times within less than

six months, as pricing pressure and oversupply hit the company.

Add

favourable legislation regarding small end-customer oriented

installations—roof installations of solar systems receive higher

subsidies per kilowatt hour than big, free-field installations—and it

is obvious why German downstream companies are faring better.

“With

the German incentives directed more favourably towards small scale

installations, we expect increasing focus around opportunities in the

fast growing BIPV (Building Integrated Photovoltaic) market,” Barclays

Capital analyst Vishal Shah wrote in a note.

“We expect the BIPV

market segment to remain an attractive niche segment where returns on

projects are still expected to be healthy on low subsidy regime.”
BIPV

refers to solar systems that are integrated into the architecture of a

building, such as windows or walls made out of solar cells.

Based

on the average of 10 European solar upstream and downstream players,

calculations show that both groups have gained about 70 percent since

European markets reached a 2009 low on March 9, according to Reuters

data, outperforming the FTSE clean tech index by about 13 percentage

points.

But according to StarMine, which weights analyst estimates

based on their track records, the group of upstream players trades at

an average 14.8 times estimated 12-month forward earnings, a premium to

the downstream players’ 10 times.

HSBC analyst Burkhard Weiss, who

generally prefers larger silicon and wafer upstream players, said:

“From a valuation point of view, there are some interesting picks at

the moment in the downstream sector.”

German solar module maker Aleo

Solar is a case in point. Despite posting a loss for the first quarter

of 2009 — a dire one for the whole industry — analysts regard its

closeness to end-customers in Germany as a clear asset.

However, the company trades at the lower end of its peer group in terms of 12-month forward earnings.

“We

believe Aleo may be more insulated due to its large proportion of sales

in Germany which to date has proved more resilient to the economic

downturn,” Goldman Sachs analysts wrote in a recent note, upgrading the

stock to “buy” from “neutral”.

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