Mid cap

Energy equipment
abc
Global Research

Global solar  We now see 20% volume growth in

2011, but that requires a decline of c20-
30% in module ASPs from Q4 prices
Anti-nuclear sentiment drives the sector,
but not all companies are equal  Positive sentiment shift but H2 earnings
outlook is bleak: input costs are rising,
capacity keeps growing, Italy slows and
Ratings and target prices of key stock ideas from our universe
lower-ASP markets are driving demand
Company BBG Current New Old New Old
price rating rating target target  Our highest conviction call in Europe is
GCL***** 3800 HK 4.2 UW(V) UW(V) 2.1 2.1 Wacker Chemie; in Asia, we prefer OCI;
Meyer Burger*** MBTN SW 36.4 OW(V) OW(V) 45.0 45.0
OCI**** 010060 KS 428,500 OW(V) OW(V) 530,000 530,000 in equipment, we like Meyer Burger
PV Crystalox** PVCS LN 62 N(V) N(V) 65 60
Q-Cells QCE GR 3.2 UW(V) N(V) 3.0 3.0
REC* REC NO 19.2 N(V) N(V) 20.0 17.5 Inventory and ASP correction ahead: The solar sector is
SMA Solar S92 GR 81.1 UW(V) UW(V) 58.0 58.0 likely to benefit in the medium-term from a public and political
SolarWorld SWV GR 10.4 OW(V) OW(V) 12.5 12.5
SunTech****** STP US 8.8 UW(V) UW(V) 6.6 6.6 backlash against nuclear power, but investors should not ignore
Trina Solar****** TSL US 27.5 UW(V) UW(V) 27.0 27.0
Wacker Chemie WCH GR 154.4 OW OW 175.0 175.0
near-term trends. We suspect the solar value chain has
Yingli****** YGE US 11.9 UW(V) UW(V) 8.9 8.9 overestimated further growth in the Italian market in light of the
Note: * NOK, ** GBPp, *** CHF, **** KRW, ***** HDK, ****** USD
Source: HSBC estimates, Bloomberg
government’s recent announcements on feed-in tariffs, and
therefore overstocked inventories in Q1. In addition, regulatory
30 March 2011 changes in key European markets lead us to expect short-term
industry growth will slow to 20% from the stellar 132% in
Christian Rath*
Analyst 2010. We assume the sector will face an inventory correction in
HSBC Trinkaus & Burkhardt AG, Germany coming weeks, because pricing has to adapt to new tariffs and
+49 211 910 3049 christian.rath@hsbc.de
volumes have to be reallocated to lower-ASP markets.
Robert Clover*
Analyst Raw-material pressure: We estimate silver now accounts for
HSBC Bank Plc 20-30% of solar-cell processing costs following the c90% run-
+44 207991 6741 robert.clover@hsbcib.com
up in the silver price since mid-2010. We see higher raw-
Keith Hwang* material costs as a major risk for mid-stream and integrated
Analyst
The Hongkong and Shanghai Banking Corporation (HK) Limited
low-cost players. They have little pricing power and production
+ 822 3706 8763 keithhwang@kr.hsbc.com capacity is continuing to grow. Consequently, they might not be
Shishir Singh*
able to pass on higher input costs and would face more margin
Analyst pressure despite solid demand.
The Hongkong and Shanghai Banking Corporation (HK) Limited
+852 2822 4292 shishirkumarsingh@hsbc.com.hk Remain selective: We focus on the following themes:
1) Polysilicon producers provide better visibility, because of
long-term contracts, and they should benefit from aggressive
downstream capacity expansions. Our picks are Wacker and
View HSBC Global Research at: http://www.research.hsbc.com OCI. 2) We expect companies like SolarWorld, with high
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, exposure to the US and the German roof-top market, to partly
and is not registered/qualified pursuant to FINRA regulations
mitigate price pressure and to outperform in the more difficult
Issuer of report: HSBC Trinkaus & Burkhardt AG
market in H2. 3) We would avoid market segments with
Disclaimer & Disclosures growing competition and believe cell and low-cost players will
This report must be read with the face cost inflation and margin pressure. Hence, we downgrade
disclosures and the analyst certifications Q-Cells to UW(V) and stick to our Underweight ratings in the
in the Disclosure appendix, and with the Asian sector. We also see downside potential for SMA Solar.
Disclaimer, which forms part of it
 Mid cap
Energy equipment abc
30 March 2011

Contents

Sector investment stance 3

Inventory and ASP correction

ahead 15

Company profiles 31
GCL Poly 32

Meyer Burger 36

OCI Company Ltd 40

PV Crystalox 46

Q-Cells 50

REC 54

SMA Solar 58

SolarWorld 62

Suntech 66

Trina Solar 70

Wacker Chemie 74

Yingli Green 78

Disclosure appendix 85

Disclaimer 88

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30 March 2011

Sector investment stance

 Tariff cuts and caps in key markets, inventory effects and raw-
material pressure will weigh on ASPs and margins in H2;
reactions against nuclear power could be a medium-term driver
 We like polysilicon producers and prefer exposure to the US and
the German roof-top market but stay cautious on inverter and mid-
stream players
 Our highest conviction call in Europe is Wacker Chemie; in Asia,
we prefer OCI; in the equipment sector, we like Meyer Burger

Demand growth will slow but
still show positive momentum
Eleven of the 21 solar companies we cover
globally have reported Q4 2010 and full-year
results that beat consensus expectations. The
strong earnings were triggered by record
installations in Italy – 3.5 GW, compared with our
June 2010 forecast of 0.9 GWp – which helped to
keep prices stable at the end of the year. Overall,
global solar demand grew 132% y-o-y in 2010,
reaching a record of about 16.7 GWp. That beat
even the most optimistic consensus forecasts.
The main reasons were low interest rates, which
held down financing costs and opportunity costs,
and the limited availability of other asset classes
yielding attractive long-term returns – after-tax
project IRRs were above 10% in Germany in
H1 2010. Also contributing were artificially high
feed-in tariffs in several countries, such as Italy
and the Czech Republic. As a result, European
countries were again the dominant markets, with
Italy and Germany together accounting for
10.9 GWp, or roughly 65% of global installations.

HSBC global solar sector key stocks

Company BBG Rating LCY Price Target Potential EV/EBITDA EV/EBITDA PE PE PB
price return 2011e 2012e 2011e 2012e 2010e
GCL 3800 HK Underweight (V) HKD 4.2 2.1 -50% 10.3 11.2 17.9 31.5 1.3
Meyer Burger MBTN SW Overweight (V) CHF 36.4 45.0 24% 4.6 4.6 11.0 13.0 2.5
OCI 10060 KS Overweight (V) USD 428,500 530,000 24% 7.3 6.7 11.7 10.7 4.8
PV Crystalox PVCS LN Neutral (V) GBP 62.0 65.0 5% 3.8 3.5 11.8 11.3 1.0
Q-Cells QCE GR Underweight (V) EUR 3.2 3.0 -5% 5.4 4.3 27.0 11.4 0.5
REC REC NO Neutral (V) NOK 19.2 20.0 4% 4.1 4.5 20.4 20.0 0.9
SMA Solar S92 GR Underweight (V) EUR 81.1 58.0 -28% 6.8 6.4 13.9 13.9 3.9
SolarWorld SWV GR Overweight (V) EUR 10.4 12.5 20% 5.9 5.4 11.3 9.6 1.2
SunTech STP US Underweight (V) USD 8.8 6.6 -25% 7.3 5.3 11.9 10.6 0.8
Trina Solar TSL US Underweight (V) USD 27.5 27.0 -2% 4.5 4.3 9.1 10.5 1.4
Wacker Chemie WCH GR Overweight EUR 154.4 175.0 13% 5.7 4.8 12.9 10.6 3.2
Yingli YGE US Underweight (V) USD 11.9 8.9 -25% 5.7 5.7 12.1 15.7 1.5
Source: HSBC estimates, company data, prices as at 21 March.

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30 March 2011

Total European solar installations reached about
14 GWp, a 144% increase y-o-y, exceeding wind
installations for the first time. The European wind
market shrank 10% y-o-y to 9.3 GWp, according
to the European Wind Energy Association.
2010 solar installations surpassed wind in Europe (in GWp)
15
helped wafer and cell producers to partly pass
through the higher input costs. Spot wafer ASPs
(average selling prices) gained c20% to USD0.98
and cell ASPs c14% to USD1.42. Another
significant bottleneck, especially in the first half
of 2010, was inverters. Their manufacturers had
enough capacity but couldn’t source the required
electric components.

10 German feed-in tariffs declined during 2010 by

about 25% on average following the regular cuts
5 in January and the extraordinary mid-year cuts in
July and October. But in contrast to the previous
0 year, module price pressure on the German spot
2007 2008 2009 2010 2011e 2012e market was limited but showed only gradual
Solar Wind declines. On average, the spot price for European
modules declined at an annual rate of about 15%.
Source: HSBC estimates, EWEA, EPIA
However, with European and Asian tier-1
As companies cut their expansion plans during the producers fully utilised, tier-2 and tier-3 players
financial crisis, production capacities rapidly also started to benefit from the strong growth.
reached their limits. Prices began to stabilise Chinese producers even used the positive demand
during Q2 2010 and for some parts of the value environment to increase module ASPs in the
chain even increased later in the year. Given the summer. As a result, the previous discount
long lead times of two to three years for new between European and Chinese modules declined
capacities, the polysilicon market was again one from c23% to only 12% at the end of 2010.
of the major bottlenecks. Spot prices reached Although most companies posted significant top-
USD80 per kilogramme in November, up about line and earnings recoveries, their share prices
45% from USD55 in January. The strong demand usually lagged behind, held back by worries about

Share price performance of the solar and wind sector compared to the Stoxx 600

140
130
120
110
100
90
80
70
60
50
40
01/2010 04/2010 07/2010 10/2010 01/2011

Solar (Asia) Solar (European) Solar (US) STOXX 600 Wind

Source: FactSet

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Energy equipment abc
30 March 2011

Solar installations: Germany will remain the #2 market over the next five years despite going “ex-growth”

30, 000 60%

25, 000 40%

20, 000
20%
15, 000
0%
10, 000

5, 000 -20%

0 -40%
USA Germany China Japan Italy India F rance Spain

Cummulativ e installations ov er 2011-16e (MWp) 5y r C AGR (RHS)

Source: HSBC estimates

2011 overcapacity and a resulting multiples
compression. From a regional perspective, the
share prices of the European solar sector dropped
about 30% in 2010 and the US sector around
12%. Only the Asian solar sector, which gained
c2%, slightly outperformed the Stoxx 600, while
the wind sector showed the worst share price
performance in 2010, falling 47%.
We upgrade our 2011
demand estimate to 20 GW
We forecast 20% volume growth in 2011
We doubt the strong growth will continue this
year. However, while we previously assumed a
15% decline in demand in 2011, we now forecast
further volume growth and stable pricing for
wafers and polysilicon early in the year. We are
raising our 2011 global demand estimates from
13.5 GWp to 20 GWp on the back of stronger-
must be completed by end of 2016, which is a
very attractive regulation for large-scale utility
projects, in our view.
Data for 2010 already suggest that the utility-scale
market in the US is gaining market share: Grid-
connected solar installations in the US grew last
year by 102% to 878 MW, c40% of which was
installed in Q4. Utility-scale installations more
than tripled in 2010 to 242 MW, up from 70 MW
in 2009. According to the US Solar Energy
Industries Association (SEIA), utility-scale
projects with a total capacity of more than 6 GW
will be completed within the next four years. Of
those, projects with more than 700 MW capacity
should be completed in 2011.
Utility-scale market in the US gains share (grid-tied solar
capacity additions, in MWp)
1000

than-expected dynamics in Italy, France and some 800

emerging solar markets like Canada and India. 600

We have also slightly upgraded our US forecast 400

after the one-year extension of the treasury grant 200

programme last December. The program, part of 0
the American Recovery and Reinvestment Act of 2005 2006 2007 2008 2009 2010
2009, allows project developers to claim a 30% Utility Non-residential Residential
solar-investment tax credit as a cash grant.
Source: SEIA
Projects must be started by the end of 2011 and

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Energy equipment abc
30 March 2011

…but supply dynamics are
also ahead of expectations…
Potential supply of more than 26 GWp
However, while demand dynamics are stronger
than initially expected, supply additions also
remain high. In contrast to our expectations, order
intake in the solar equipment sector remained at
record levels during Q4 2010 and showed stable
development beginning of 2011 as the value chain
prepared for continual demand growth in the
Italian market. For 19 listed solar players from
Asia, Europe and the US, consensus now forecasts
capex will increase about 18% y-o-y compared
capacity) tier-2 and tier-3 player which benefitted
from the tight supply situation in 2010. But the
large integrated players also continue to expand
their capacity due to market share gains. In the
wafer market, we saw slightly different patterns as
a smaller number of players announced
substantial capex plans; GCL, for example, targets
a wafer capacity of 6.5 GWp by end-2011, up
3 GW y-o-y)
Consensus forecasts capex growth in 2011
6,000 40%
5,000
30%
4,000

with the nearly 30% decline that consensus 3,000 20%

2,000
expected by the end of October last year. 10%
1,000

Based on order backlogs at the end of 2010, 0 0%

which reached a record, and shipment times of 2008 2009 2010 2011 2012

around two to four months, we forecast about

Capex (in EURbn) Capex / Sales (RHS)
12 GWp new solar-cell capacity will be added
during the first nine months of 2011. About 90% Source: HSBC, FactSet consensus for 19 listed solar companies

of this additional capacity will be ramped up in

China and Taiwan.
We assume about 50% of the new capacity was
ordered by smaller-sized (<500 MW production
Since polysilicon production is growing at a
slower pace than the mid-stream capacity
additions, we believe polysilicon supply will also
remain the limiting factor of the crystalline solar

Global solar market 2006 to 2013e

(in MWp) 2006 2007 2008 2009 2010e 2011e 2012e 2013e
Germany 843 1,271 1,809 3,806 7,408 6,000 5,000 4,000
Spain 98 560 2,605 166 375 477 423 301
Italy 9 70 338 717 3,500 4,900 2,000 2,000
Greece 1 2 11 36 200 400 500 500
France 8 11 46 185 719 1,500 1,500 500
Portugal 0 14 50 32 70 90 105 115
Belgium 2 18 50 292 200 160 170 200
Bulgaria 0 0 2 7 10 12 15 37
Czech Republic 0 3 51 411 1,200 200 250 300
UK 1 4 6 10 25 500 140 210
Rest of Europe 12 16 92 46 200 400 700 945
USA 145 207 342 477 878 1,750 3,000 3,750
China 12 20 45 160 500 1,000 1,500 2,000
Japan 287 210 230 484 950 1,200 1,700 2,000
South Korea 20 43 274 168 50 180 200 300
India 12 20 40 30 50 250 350 500
Australia 10 12 22 79 185 231 297 342
RoW 135 113 77 97 188 750 1,450 2,000
Total annual demand 1,596 2,594 6,090 7,203 16,708 20,000 19,300 20,000
% growth 12% 63% 135% 18% 132% 20% -4% 4%
Source: EPIA, HSBC estimates

6
 Mid cap
Energy equipment
30 March 2011
value chain in 2011. Including thin-film modules,
we assume total potential supply will reach
slightly more than 26 GW this year.
…and raw-material prices will
be another margin burden
Price increases for key materials (eg, polysilicon,
wafers) and consumables like silver, copper and
aluminium have materially accelerated since mid-
2010. Silver, for example, now represents up to
30% of total solar-cell processing cost and is
thereby one of the most important input factors.
We see this as a material risk for non-integrated
mid-stream players, which have limited pricing
power and will struggle to pass through the input
costs. We also believe this lowers the cost
reduction potential for the Asian low-cost players,
which therefore could face margin pressure
despite solid demand growth.
Inventory effects and policy
moves will keep volatility high
A decline of 20%-30% in module ASPs from the
Q4 spot level is required to drive demand
We believe during Q1 the value chain prepared
for a further lift-off of the Italian market and
therefore increased stock holdings. However,
following the recent regulatory changes in Italy
and the resulting uncertainty, the availability of
project financing for solar installations declined,
projects were delayed and demand from Italy
slowed substantially.
We expect a short-term module overhang from
Italy and resulting inventory effects, as modules
have to be reshuffled to different channels and
pricing has to be adapted to the changes in
demand. In our view, Germany is the only market
that will be able to take the additional supply,
because it is the only uncapped market with high
price elasticity as well as sufficient subsidies and
installation capacity.
abc
We assume sharp declines in module ASPs are
required to clear the excess inventory, guarantee
sufficient IRRs for ground-mounted projects and
justify an expansion of the German market from
the current monthly run-rate of around 475 MW.
We assume the H2 2011 clearing spot price in
Germany for ground-mounted installations is at
cEUR1.15 per Watt. We assume the German roof-
top market is less price-sensitive than the ground-
mounted segment, and while prices in this
segment have to be adjusted as well (HSBCe
cEUR1.45 per Watt), we believe companies with
strong brand positioning and a high-quality
product that offers differentiation potential can
still earn a price premium in the segment.
Compared with the average spot price in Q4, our
assumptions yield some 20%-30% downside.
From the current spot price, the required price
decline is around 15%.
Greece and Bulgaria could become the next Italy
In Europe, policy moves will be rather volatile
and erratic in the coming months. Solar
installations are overshooting government targets
– France and Italy will both likely implement
annual market caps. Total costs for renewable
energy are increasing, leading Germany to
implement mid-year tariff cuts. Other markets
with artificially high tariffs include the UK, where
tariff cuts of up to 70% were proposed in mid-
March; Bulgaria; and Greece. While those
markets are still very small and suffer from
complex grid connection and bureaucratic
hurdles, they might experience the same boom-
and-bust scenario we have seen in Spain, Italy and
the Czech Republic.
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 Mid cap
Energy equipment abc
30 March 2011

Views on renewables improve
after Japan nuclear crisis
Little impact on the solar supply chain
So far, the catastrophe in Japan has had little
impact on the solar supply chain, since most
players are located in the western part of Japan.
Japan itself accounted for about c6% of demand
in 2010, making it the fourth most important
market. But it is dominated by local companies
such as Sharp and Kyocera, so it has limited
importance for other Asian and European players.
Importance of the Japanese solar market
40
30
20
10
0 0%
Ins talled PV Annual PV
based Demand
Japan Global
Source: HSBC
However, the power outages (planned and
unplanned) are a major issue for the Japanese
wafer and polysilicon producers like Tokuyama
and M.Setek, which rely on a stable electricity
supply. Japanese producers should account for
about 10% to 15% of global 2011 polysilicon
supply, but they are geared more to semi-grade
polysilicon, so we expect only a limited impact on
the solar supply chain. Still, given the high
capacity utilisation of the incumbent players, a
prolonged shut-down because of power cuts could
raise prices for semi-grade polysilicon.
Policy reactions and nuclear backlash are likely
to be medium-term positive for renewables
At the end of 2010, 441 nuclear reactors were in
operation and another 63 with a total capacity of
about 65 GW were under construction. But the
events in Japan have again shown the risks of
nuclear power and also revealed the vulnerability
15%
of centralised power networks, since lack of
supply has led to temporary power outages.
10%
5%
In the past few weeks, public and political
opposition to nuclear power has grown.
Governments around the world have reacted with
Poly capac ity several measures. The European Union plans to
conduct stress tests of nuclear plants, and nuclear
Share
safety will be a topic at the next G20 summit.
Various governments, among them the US,
Switzerland, the UK and Spain, have ordered a
review of their reactors or suspended approval of
new plants.
The German government imposed a three-month
moratorium that suspends the extension of the
running times of German nuclear power plants.

Share price performance since the start of the nuclear crisis 12m forward PE trading range of selected stocks

140 22
130

120 17

110
12
100
90
7
11/03 12/ 03 13/03 14/03 15/03 16/03 17/03
03/2010 06/ 2010 09/ 2010 12/2010 03/2011
SWV DAX S92 QCE
SWV WCH S92

Source: FactSet Source: FactSet

8
 Mid cap
Energy equipment abc
30 March 2011

That required the immediate shut-down of the
seven oldest of Germany’s 17 existing plants. The
government said it would speed up the conversion
to renewable sources and look again at
support mechanisms.
Germany: Electricity mix in 2009 (total: 597 TWh)
30% to solar, would create additional demand for
27 GW of solar capacity and 45 GW of wind, we
calculate. We believe the regular revision of the
German renewable-energy law (EEG), which is
scheduled for January 2012, could provide an
opportunity for potential changes in subsidies.

Rene wables No changes to our forecasts so far

Nuclear
23%
Ga s
13%
Source: HSBC, BDEW
In 2009, Germany’s nuclear plants generated
about 135 TWh, making them the second-most
important electricity source of the country,
providing c23% of total gross electricity
production. Replacing that with renewable energy
in the medium term, with 70% going to wind and
1 6% While the possible long-term policy responses
from governments around the world are likely to
O thers
benefit renewables (and gas), we don’t expect an
6% immediate order boom as a consequence of the
Japanese disaster. We believe subsequent effects
from increasing gas, CO2 and electricity prices
Coal will be medium-term drivers for the solar
4 2%
industry, since that will make renewable energy
sources in general more competitive. But given
the high uncertainty we haven’t made any changes
to our demand forecasts so far.

Where we stand versus consensus

(in LCY) ________ 2011e sales _________ __________2011e EBIT___________ _________ 2012e sales__________ _________ 2012e EBIT __________
HSBCe Consensus % diff HSBCe Consensus % diff HSBCe Consensus % diff HSBCe Consensus % diff
Solar component producers and retailers
Centrosolar 430 424 1% 21 27 -22% 495 475 4% 27 30 -10%
GCL Poly 20,700 24,084 -14% 5,922 8,021 -26% 22,514 29,855 -25% 4,326 10,310 -58%
Gintech 20,282 32,676 -38% 1,882 3,993 -53% 21,291 40,058 -47% 2,515 2,515 0%
LDK Solar 2,306 3,372 -32% 375 499 -25% 2,159 3,276 -34% 238 588 -60%
Phoenix Solar 565 678 -17% 25 32 -22% 650 690 -6% 32 32 0%
Motech 32,842 46,666 -30% 3,282 5,657 -42% 28,508 58,645 -51% 2,203 3,414 -35%
OCI 3,285 3,308 -1% 1,066 1,033 3% 3,461 3,848 -10% 1,181 1,183 0%
PV Crystalox 260 281 -7% 34 43 -21% 282 305 -8% 35 42 -17%
Q-Cells 1,469 1,435 2% 62 84 -26% 1,697 1,514 12% 104 91 15%
REC 16,174 16,677 -3% 1,962 2,204 -11% 16,271 15,859 3% 2,031 2,044 -1%
SMA Solar 1,440 1,692 -15% 288 387 -26% 1,465 1,709 -14% 286 362 -21%
Solaria 153 153 0% 8 12 -33% 156 144 8% 10 10 0%
SolarWorld 1,525 1,516 1% 176 167 5% 1,675 1,650 2% 201 169 19%
Suntech 2,444 3,460 -29% 280 379 -26% 2,600 3,604 -28% 274 383 -28%
Trina Solar 1,783 2,484 -28% 298 410 -27% 1,836 2,744 -34% 271 406 -33%
Wacker Chemie 5,200 5,134 1% 880 863 2% 5,800 5,649 3% 1,090 1,003 9%
Yingli 1,741 2,521 -31% 295 442 -33% 1,891 2,758 -31% 260 438 -41%
Solar equipment suppliers
Centrotherm 700 692 1% 81 78 4% 660 713 -7% 63 76 -17%
Manz 205 250 -18% 11 13 -15% 230 328 -30% 18 22 -18%
Meyer Burger 1200 1040 15% 190 103 83% 1130 1079 5% 164 111 47%
Roth & Rau 305 311 -2% 18 22 -18% 359 332 8% 29 24 21%
Source: HSBC estimates, FactSet consensus

9
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30 March 2011
Our preferred stocks in the
value chain
We prefer polysilicon producers, German roof-
top and US market exposure
The Japanese nuclear crisis, the political reactions
in various countries and the situation in the
Middle East, which has pushed up the oil price to
above USD100 per barrel, brought the solar sector
back into focus. The price of some renewable
stocks rose as much as 50% in the days following
the start of the crisis.
That said, share prices only recovered their losses
following the Q3 earnings season last November.
While PEs jumped 10% to 40%, valuations are
still not expensive, but are more in line with the
2010 average. We continue to see some
opportunities for stocks with still-attractive
valuations and existing turnaround stories or more
protected business models. We believe market
expectations of 10% to 20% volume growth are
reasonable, but the current favourable prices will
fade in the coming weeks. In any case, we expect
external factors – for example, positive as well as
negative policy reactions – will keep uncertainty
in the sector and share price volatility high.
Hence, within renewables, we prefer the wind
sector over the solar sector due to the more stable
fundamentals and regulatory environment. In
solar, we stay selective and prefer polysilicon
producers like Wacker Chemie and OCI, which
are less exposed to raw-material prices and higher
processing costs. They also provide good
visibility from their long-term contracts which
require prepayments (c10-15% of contract value)
and thus should be able to maintain their above-
average margins. In addition, Wacker ships
around 50% of its polysilicon volumes to Asian
customers, so in our view, should be one of the
few European companies that can capitalise on the
market growth in Asia.
10
abc
In the short term, we expect wafer companies to
benefit from still tight upstream capacities and
significant downstream capacity expansions and
resulting wafer price hikes. Hence, we see stable
to expanding upstream margins in H1 2011,
whereas capacity additions and cost inflation will
limit margin expansion potential for mid-stream
players and module players.
Given our cautious outlook for ASPs and the
expected price pressure, especially in the ground-
mounted market, we prefer companies which have
above-average exposure to the residential and
roof-top market in Germany and limited exposure
to Italy. We also prefer exposure to the US and
other emerging solar markets, which have more
stable regulatory environments than the most
European countries.
Based on our medium-term forecasts, we see
policy risks especially in the UK (substantial tariff
cuts of up to 70% proposed in March; new tariff
system will be implemented in August), Bulgaria
and Greece. Germany, on the other hand, might
further push renewables following the crisis in
Japan, in the face of growing opposition to the
government’s nuclear policy. In this regard, we
like SolarWorld, which has a strong brand
positioning, especially in the German roof-top
segment. Furthermore, the company has hedged
its silver exposure and we see an earnings
turnaround in the US business which generated an
EBIT loss of cEUR10m in 2010.
With about 25% of Q4 2010 shipments delivered
to Italy (12% of 2010 sales), Q-Cells seems overly
exposed to demand shifts and ASP pressure, in
our view. We also remain concerned that higher
silver and wafer prices will limit the company’s
margin recovery potential in H1 2011. Currently
trading at 27x 2011e PE, the stock looks
expensive in our view and does not offer an
attractive risk/reward profile anymore.
 Mid cap
Energy equipment abc
30 March 2011

Q1 2011 reporting calendar Book-to-bill trend German solar equipment

Company Reporting date
3.0
Centrosolar 10 May
2.5
Centrotherm 10 May
GCL not scheduled yet 2.0
Manz Automation 12 May
1.5
Meyer Burger 01-Sep
OCI not scheduled yet 1.0
Phoenix Solar 11 May
0.5
PV Crystalox 18-Aug
Q-Cells 12 May 0.0
REC 4 May
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
Roth & Rau 13 May
SMA Solar 13 May 08 08 09 09 10 10 11e 11e
SolarWorld 12 May
Suntech not scheduled yet
Trina Solar not scheduled yet Source: HSBC estimates, VDMA
Wacker Chemie 4 May
Yingli not scheduled yet
We continue to prefer Meyer Burger, which was
Source: Company data
able to gain market share in the solar wafer-
Cautious on equipment due to order peak and equipment market in 2010 and has above-average
declining book-to-bill ratios high visibility from its >CHF1bn order backlog.
Based on current order trends and high order On our estimates, the company currently trades on
backlogs, we forecast further top- and bottom-line 11x 2011e PE and 4.6x 2011e EV/EBITDA,
growth for solar equipment makers in 2011. which looks attractive given the earnings growth
However, we believe the current order run-rate for potential (19% 2010-13e EPS CAGR), its market-
solar-cell equipment is not sustainable and was leading position, strong cash generation and solid
mainly driven by peak demand from Italy and balance structure. Hence we maintain our
resulting supply shortages. Overweight (V) rating on the stock.

Our Asian team sees negative earnings

We expect order intake to slow in the coming
quarter, as growth momentum slows in the end revisions for the most Asian solar stocks

market. With book-book-bill ratios starting to
decline, issues with thin-film equipment and most
stocks trading only slightly below their average
historical valuations, we see only limited positive
near-term share price drivers for most solar-
equipment players and hence remain cautious on
that part of the value chain.
In contrast to the European solar stocks,
consensus still forecasts top- and bottom-line
growth for the most stocks in the Asian sector.
Hence, we remain cautious on the Asian solar
names, except OCI, and would avoid upstream
stocks like GCL and LDK, which have benefited
the most from a tight supply of solar wafers and
where investors’ rich expectations might be
disappointed. As a result, we expect multiple
contraction and estimate revisions to catalyse
sharp corrections (30% to 50% downside) in these
stocks. We also have UW ratings on stocks like
Motech (UW(V), current price TWD124) which
have rallied in anticipation of a demand recovery.

11
 Mid cap
Energy equipment abc
30 March 2011

Consensus still forecasts 2011 growth for the most Asian stocks Our anti-consensus calls
Company Sales EBIT EPS HSBC EPS
growth growth growth growth Consensus is most optimistic on Centrotherm,

GCL 73% 89% 86% -10% GCL, OCI and Trina; most negative on Q-Cells,
Gintech 15% -3% -18% -52% Roth & Rau and SolarWorld
LDK 25% 15% 5% -44%
Motech 15% -5% -4% -42% We have analysed the sell-side consensus ratings
OCI 21% 32% 22% +31%
Suntech 16% 89% 99% -28%
trend for solar stocks since our last sector report
Trina 35% 5% 3% -32% (Expectations running high ahead of the seasonal
Yingli 37% 8% 20% -42%
slow-down, 27 October 2010) to determine which
Source: HSBC estimates, FactSet consensus
stocks are currently most loved or unloved (see
chart on page 13) and where consensus has
Italian regulatory changes are an upside risk
changed its opinion substantially (see table on the
Italian solar associations are lobbying to extend the
bottom of page 12). We calculate an average
existing tariff structure until the end of the year,
consensus rating by assigning 3 points for each
which would provide planning security for projects
positive recommendation, 2 points for neutral
under way. Such an extension would ease the
recommendations and 1 point for negative ratings.
expected inventory overhang and should more
The higher the average rating, the more bullish is
stabilise pricing. In that case, we assume the current
the consensus view on the stock.
750 to 1,000 MW of monthly installations could be
maintained and the Italian market could reach even Our analysis shows that consensus continues to back
9 to 12 GWp this year. That would imply substantial most Asian solar stocks, while we are clearly more
2011 EPS upside for the sector but wouldn’t change cautious. In Europe, consensus became significantly
our preferences, since the slowdown of the Italian more negative on Phoenix Solar, Roth & Rau and
market and the related ASP pressure would be SMA Solar. Nevertheless, Phoenix Solar and SMA
delayed by only a few months, in our view. Solar are still “loved” companies in the European
However, it would help the valuations and target sector, with around 40% positive ratings and only
prices for the Asian solar stocks, which are based on 20% negative ratings.
an oversupply and multiple compression base case.

Selected consensus rating changes and share price performance over the past six months
Company Consensus Current Change Rating trend Performance Performance Performance
rating as of consensus % 6 Months % 3 Months % 1 Months
27/10/2010 rating
Centrotherm 2.6 2.7 0.1 + -6.6% 10.8% -5.8%
First Solar 2.5 2.3 -0.2 -- -7.2% -3.4% -17.6%
LDK 2.1 2.3 0.2 ++ 23.1% -2.0% -19.4%
Manz Automation 2.3 2.2 -0.1 - -9.3% -3.1% -4.5%
Meyer Burger 2.4 2.3 -0.1 - -2.6% 4.1% -4.9%
Motech 2.0 2.3 0.3 +++ -4.2% 2.7% 1.3%
OCI 2.8 3.0 0.1 + 12.1% 16.1% 14.4%
Phoenix Solar 2.8 2.4 -0.5 ----- -23.0% -2.5% -6.2%
PV Crystalox 2.4 2.6 0.2 ++ 3.3% 9.2% -5.7%
Q-Cells 1.5 1.7 0.3 +++ -37.1% 6.8% -2.8%
REC 2.3 2.2 -0.1 - -13.3% -2.8% -19.1%
Roth & Rau 2.4 1.8 -0.6 ------ -28.3% 17.0% -9.4%
SMA Solar 2.7 2.2 -0.5 ----- -18.1% -2.4% -8.1%
SolarWorld 2.1 2.1 -0.1 - -15.7% -4.8% -8.4%
Wacker Chemie 2.4 2.6 0.2 ++ 2.9% -1.1% -3.7%
Trina Solar 2.8 2.8 -0.1 -- -19.1% -4.7% -13.3%
Source: HSBC, FactSet consensus

12
 Mid cap
Energy equipment abc
30 March 2011

We agree on Phoenix Solar (OW(V), current price
EUR23.41, target EUR32). We believe downstream
players with low capex requirements, solid balance
sheets, strong end-customer relationships, good
project pipelines and sourcing flexibility offer an
attractive position in the value chain. Trading at 10x
2011e PE, the stocks looks attractive whereas key
risks remain potential inventory write-downs and
higher costs for the international expansion.
We are also in line with consensus’ cautious view
on Roth & Rau (UW(V), current price EUR17.10,
target EUR12). We appreciate the recent
restructuring of the turnkey activities and the
stronger focus on the core business, but we
continue to see some project executions risks and
risks related to a potential CdTe-order. In
addition, refocusing the activities should lower
Roth & Rau’s sales potential and cause negative
scale effects. Key upside risk remain increased
M&A activities in the still very heterogeneous
solar equipment sector.
In contrast to consensus, we like SolarWorld
(OW(V), target EUR12.5) because it is exposed to
the less price-sensitive German rooftop market
and might benefit from a change in German
subsidies after the crisis in Japan. We believe the
turnaround of the US production, which is still
making losses, will be a key driver of 2011
earnings. It should also help to lower
SolarWorld’s tax rate. Hence, our earnings
forecast for 2011e is about 30% above consensus.
However, we don’t share the market’s optimism
on SMA Solar (UW(V), target EUR58). While the
company is a play on growing solar installations
and we also like its flexible business model and its
strong cash-flow generation, we are more
concerned that the inverter industry will face a
structural margin decline owing to price pressure,
product mix effects, increasing competition and a
higher share of international sales, which requires
a broader sales and service network. We believe
earnings peaked in 2010 and forecast a negative
24% 2010-12e EPS CAGR and expect ROIC to
drop from 115% in 2010e to 34% in 2012e.
We are also more cautious on GCL (UW(V), target
HKD2.1). We see a sharp y-o-y drop in wafer prices
and believe GCL’s e 2011 shipment guidance of
5.5GW wafers (HSBCe: 2.9GW) is too aggressive
as it assumes a significant increase in market share.
We also believe consensus overestimates the
visibility provided by over 50GW of framework
contracts signed by GCL with its customers for
deliveries between 2011 and 2016.

Love/hate barometer (rating distribution according to FactSet)

100%

67%

33%

0%
C3O CTN GCL* LDK M5Z MBTN OCI* PS4 QCE REC R8R S92 SWV STP TSL WCH YGE
GR GR US GR SW GR GR NO GR GR GR US US GR US

% buy % hold % s ell

*Note: Bloomberg code for OCI is 010060 KS and for GCL 3800 HK
Source: FactSet consensus

13
14
Our view on the sector: Continuous capacity additions and regional demand shifts will weigh on sector profitability in H2 2011
H 1 2 011
M id- y ear tar iff c ut s in G er m any an d It aly as w e ll as
M a cro / ot her E ur op ean co untri es ; im plem e ntat io n of ca ps i n
Reg ulation s om e c oun tries ; low inte re st r ates
Vo lu me s V ol um e gr ow th ah ead of m i d-yea r tarif f c uts in
G erm any ; It ali an m ark et t o s low -d ow n i n Q 2; s oli d
de m a nd from o ther r eg ion s
Seg men t m ix U tility s egm ent to g ain s hare in t he U S a nd C hin a b ut
l ow s har e in G er m an y; Eu ro pea n m ar ke ts m or e gear ed
to w ar ds hi ghe r- m ar gin r oof top proj ec ts
Pricin g P ric ing env iro nm ent rem ains po sitiv e f or pol ys i li c on
( c urre ntl y a ro und U S D 70- 80 ), s light w afer a nd ce ll
pr ice in cr ea se s s inc e en d of D ec em be r; st ron ger pr ic e
c or rec tio n to s tar t in M a rc h and Q 2
Cap acity S tr ong c- S i c ell c a pac it y e xpa ns io n, e sp ec iall y i n A s ia;
w af er an d p oly s il ic on sh ortage du e to lo nge r ca pac it y
l ead-tim e s
Eq u ipm ent S ol id sa les a nd m argi ns s uppo rt ed b y goo d ord er
ba ck l ogs ; o rd er in tak e s ti ll s oli d b ut p eak ed
Earnin gs / P os iti v e s ur pris e p oten tia l f or pol y si li co n an d w afer a nd
s upp lier s; non -i nte gr ate d do w ns trea m p lay ers s hou ld
Cas h flo w s uff er from dec lini ng m odu le pric es an d high er in put
c os ts ; c ell prod uc er s to s uff er fr om higher w a fer an d s ilv er
c os ts ; c as h fl ow s to su ffer f rom inc re as ing in ve ntori es
Valu atio n F ol lo w ing th e J apa nes e n uc le ar c ris is m u ltipl es
r ec ov ered to th e 2 010 av er ag e of c 13x 12- m ont h
fo rw a rd E PS and 7 x E V/ EB IT D A
New s flow A si an pl aye rs lik el y to r em ai n bu llis h b ut fo cu s w ill b e
m ore on H 2 outlook ; re gulato ry en vir onm ent to rem ain
un ce rt ain es pe ci ally in th e E ur ope an c ou ntrie s
Source: HSBC estimates
30 March 2011
Energy equipment
Mid cap
H 2 2 011
E C B w il l r aise interes t r at es; nuc l ear c r is is in J apa n
m igh t ha ve im pac t o n po li cies ; r eg ula r re vis ion of the
E E G i n G erm any
S tr onge r G er m an dem an d du e to pric e el as tic ity a nd
m odule p ri c e c uts ; n orm al s eas on ality c har ac ter ize d
by a slow H 1 an d s tr ong er H 2; en d of tr eas ur y gr ant
pr og ra m i n t he U S s ho uld r es ult in s trong yea r- e nd
H i gher s ha re of gr oun d-m o unte d i ns talla tio ns in
G erm a ny ; po li cy c han ges i n ot her E ur op ean
c oun tries a re neg ative for u til it y s c ale proj ec ts
M o dule p ri c es to dec li ne by c1 5% f rom th e M a rc h
s pot le vel ( c 20- 30% vs Q 4 201 0)
C ap ac ity u tiliz ation to d ec li ne i n H 2 as a dditio nal
c apa city w ill be r am ped ; s lo w ing ex pa ns ion c ape x
D ec l in ing or der b ac klog s d ue t o s oft er or der i nta ke as
th e m ark et has t o diges t the addi ti onal c ap ac ity ; s om e
s upp or t fr om tec hn olo gy up gr ade s and ne w pr od uc ts
N on -inte gr ate d do w ns trea m p lay ers to bene fit fr om
de clin ing in put co st s; high- qua li ty pol ys ilico n be tter
po sitioned du e to lo ng- ter m c ont ra cts ; d iff ic ult
en viro nm ent for pu re c ell prod uc er s
In the las t dow n tur n s olar s toc k s w e r e tradi ng ar ou nd
10 x 12-m o nth for w ar d E P S a nd 6x EV /E BI T D A; a
s li ght m ul ti ple c om p re ss io n fo r les s -p ro tec ted bus i nes s
m odels is l ik el y
abc
F oc us rem ain s on u nc er tai n go v er nm ent pol ic ie s a nd
i ndus tr y c ons olida ti on; n uc le ar c ris is m i ght re su lt in
po sitive polic y r evi s ion s in Ge rm any a nd o the r c ou ntr i es
 Mid cap
Energy equipment abc
30 March 2011

Inventory and ASP

correction ahead
 We upgrade our global solar demand forecasts and now assume
20% growth to 20 GW in 2011 but a 4% decline in 2012
 We expect raw-material price pressure (especially silver) to limit
cost-reduction potential in the mid-stream segment
 We forecast module price cuts of 20%-30% from Q4 are required
to drive German demand as Italy will slow significantly

Regulatory shocks drive We previously assumed a seasonal slowdown of

H1 2011 demand
We expect German demand to decline slightly
but it will remain the most important market
German solar demand peaked in June 2010, when
installations reached 2.1 GWp before the mid-year
tariff cuts. However, H2 2010 installations slowed
significantly and Q4 installations of 1.9 GWp
were about 20% below the previous year’s.
Excluding December, the average monthly run
rate in H2 was about 475 MWp (annualised
5.7 GWp) as module prices remained quite firm
and weren’t adjusted to the new feed-in tariffs,
given strong demand from more attractive
markets such as Italy or the Czech Republic.
German demand in H1 2011 and the absence of
any pull-in effects like the previous year’s. But in
early February the German government adapted a
further mid-year reduction of solar feed-in tariffs.
Accordingly, a tariff cut of up to 15%, depending
on the annualised market size between March and
May 2011, will take place on 1 July. Unlike the
extraordinary adjustments in July and October
2010, the adjustment in 2011 will not be an
additional cut but will bring forward the planned
(variable) adjustment in January 2012. Due to the
longer lead times, the tariff for ground-mounted
installations will be adjusted in September. The
regular 9% tariff cut in January 2012 might be

German mid-year feed-in tariff adjustment (effective on 1 July 2011)

Annualised market size Tariff cut Tariff (EUR/kWh) Tariff (EUR/kWh) Tariff (EUR/kWh) Tariff (EUR/kWh)
March – May 2011 01-Jul-11 < 30 kW > 1000 kW conversion land ground-mounted
> 3.5 GW < 4.5 GWp -3% 0.279 0.209 0.214 0.205
< 5.5 GWp -6% 0.270 0.203 0.207 0.198
< 6.5 GWp -9% 0.262 0.196 0.201 0.192
< 7.5 GWp -12% 0.253 0.19 0.194 0.186
> 7.5 GWp -15% 0.244 0.183 0.188 0.179
Source: BMU

15
 Mid cap
Energy equipment abc
30 March 2011

Required system price in Germany for realising an IRR of 8% (in EUR per Wp)

3,500
3,000
2,500
2,000

1,500

1,000
500

0
2010 (H1) 2010 (H2) 2011 (H1) 2011 (H2)

Roof-top system ( <30 kW) RTS (> 30 kW) RTS (> 100 kW) RTS (> 1000 kW) Ground-mounted, conversio n land

Note: unlevered pre-tax project IRR; simplified calculation based on 950 kWh/kWp
Source: HSBC estimates

adjusted again if demand overshoots the expected Based on the current run-rate we forecast
annualised demand (ie, a maximum tariff cut of annualised demand of around 5-5.5 GWp in the
24% in two steps is still possible). period and therefore assume only a moderate tariff
cut of 6-9% in July. We forecast installations will
From March to May 2010, about 1.34 GWp
accelerate in H2 2011 and assume total demand to
(annualised 5.4 GWp) were installed. June 2010
reach 6 GWp (-19% y-o-y) as modules shipments
was the strongest month with 2.1 GWp of new
have to be reallocated to Germany following the
installations. However, the realizable IRRs last
recent regulatory changes in Italy. However, to
year were much more attractive (currently about
yield attractive IRRs and to stimulate installations,
6.5% compared to 10-13% for a roof-top system
we assume the spot price has to drop around 20%
in H1 2010) and hence we don’t assume demand
to 30% from the last quarter, to around EUR1.15
growth will accelerate sharply through Q2 as it
for ground-mounted installations and EUR1.45
did last year.
for residential roof-top systems.

Germany: Unusual seasonality in 2010 due to mid-year tariff cuts (installations in MWp)

2,500

2,000

1,500

1,000

500

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0-30 kWp 30-100 kWp 100-1000 kWp > 1 MW
Source: Bundesnetzagentur

16
 Mid cap
Energy equipment abc
30 March 2011

We continue to see upside risks to our volume Italy: Cumulative grid connected installations (in MWp)

forecast for Germany, due to the high price 3500

elasticity and as Germany is the only real 3000
uncapped market with feed-in tariffs, an existing 2500
installer infrastructure, good availability of project 2000
financing and low bureaucratic hurdles. Also, 1500
additional demand might be triggered by the 1000
planned revisions of the German Renewable 500
Energy Act (EEG). However, this will require 0
further module price reductions and could trigger 2006 2007 2008 2009 2010
a further tariff adjustment in January 2012.
Source: GSE

Italy emerged as the biggest market in H2 2010

 The majority of the Italian solar installations
At the end of January, Italy’s Gestore dei Servizi
Energetici (GSE) said about 1.7 GW of new solar
capacity was connected in 2010, bringing grid-
connected capacity to 2.9 GW. That was broadly in
line with market expectations, but the GSE also said
another 54,106 systems with total capacity of about
3.77 GW were installed but not connected so far.
This demand explosion was mainly caused by:
 Italy’s subsidy scheme (Conto Energia 2)
granted tariffs about 30% higher than
Germany’s for small-scale systems on buildings
and 65% higher for larger systems, even though
Italy has a much higher sun insolation level
(2010 tariffs were EUR0.42 – EUR0.47 per
kWh). We assume investors could realise
attractive unleveraged IRRs of up to 20%.
are located in the north. Sun insolation in the
area is usually lower than the south’s, but
timely grid connection is often a major issue
in the south (with the exception of Puglia),
where it can take several months. However, in
August 2010 the Italian government passed
Conto Energia 3, which lowered feed-in
tariffs from January 2011. Interventions by
solar associations and lobby groups also led
the government to implement the Salva Alcoa
decree, which allowed installers to secure the
attractive 2010 tariff after an installation was
completed even if it was not grid connected.
Hence, there was a strong incentive to finish
installations before year-end, or at least to
claim the completion.

Italy: Majority of installations is located in the North (2010) Italy: Small and commercial systems dominate (2010)
Lombardia Veneto
< 1 MW
11% 10% Emilia < 200 kW
Romagna 34%
20%
10%
Puglia
Piemonte
19%
7%

Others < 20 kW
> 1 MW
43% 25% 21%

Source: GSE Source: GSE

17
 Mid cap
Energy equipment
30 March 2011
Industry utilisation to decline in Q2 and Q3 2011
30, 000
25, 000
20, 000
15, 000
10, 000
5, 000
0 0%
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011
Annualised demand (in MWp)
Source: HSBC estimates
But market growth is likely to be short-lived
On 3 March 2011, the Italian cabinet published a
new decree on the solar subsidy program. Fears
about an 8 GW cap included in an earlier version,
which would have been in line with Italy’s
NREAP target for 2020, were overstated, but
uncertainty in the market persists.
According to the new decree, all projects which
are connected before the end of May 2011 will
receive the current still generous tariffs under
Conto Energia 3. All systems that will be
connected after the end of May will fall under a
new tariff system, Conto Energia 4, which will be
defined latest by the end of April. In addition to
sharp tariff reductions, the new subsidy system
will impose higher tariffs in the north and lower in
the south and will include an annual cap. It will
also put some limits on installations on agricultural
land (eg no feed-in tariff for ground-mounted
plants with a capacity of more than 1 MW).
In recent weeks, lobby groups, regulators and the
government have held several meetings, but there
is still no clarity on the final level of the tariffs and
the size of an annual cap. Latest newsflow (eg,
Reuters, 28 March) suggests that the Italian
government plans not to cap the total amount of
installations but to cap the total amount of money
18
abc
140%
120%
100%
80%
60%
40%
20%
Av ailable capacity (in MWp) Utilisation (RHS)
allocated to feed-in tariffs (eg EUR6bn) which
however would also limit annual installations to a
certain level. We believe an annual cap of around
1-2 GW and a tariff cut to the German level or
lower is likely. That would still be an attractive
tariff, but the cap would imply a substantial drop
in demand. Given an increasing number of systems
awaiting grid connection and uncertainty over
whether a system receives a tariff and which tariff,
banks stopped providing project financing in the
recent weeks and most projects were put on hold.
Upside risks exist in 2011
The various solar associations are lobbying to
extend the existing tariff structure until the end of
the year, which would provide planning security
for projects already begun. Such an extension
would obviously be positive as it would ease the
expected inventory overhang and would result in
more stable pricing. In such an optimistic scenario
we assume the current run-rate of 750-1,000 MW
monthly installations could be maintained and the
Italian market could reach 9-12 GWp this year.
That would imply substantial 2011 EPS upside for
the sector but wouldn’t change our relative value
chain preferences, since the slow-down of the
Italian market and the related ASP pressure would
be only delayed a few months.
 Mid cap
Energy equipment abc
30 March 2011

Sharp tariff cuts and a 500 MW cap in France the end of last year. Those projects can benefit
but solid demand in 2011 and 2012 expected from the old tariffs if they are completed in the
New solar installations in France grew from next 18 months. The government assumes about
185 MW to 719 MW in 2010 and cumulative 2 GW of the backlog will be completed in that
installations reached 1,025 MW by the end of time, which should provide solid installation in
2010. Most installations are in the south of France. 2011 and 2012. However, after 2012 we expect
the market to drop to the cap level of 500 MW.
In early March, the French government published
a new regulatory framework to limit solar growth ASP pressure to grow in H2
since installations were already approaching the
We forecast a 20-30% ASP decline for modules
2012 target of 1.1 GW (5.4 GW by 2020) and
from the Q4 spot price level
more than 6 GW project applications had been
Average price assumptions
submitted. For residential and small-scale
(USD/Wp) 2010 2011 2012 2013
systems, the new law includes a 20% tariff cut
Polysilicon (spot, USD / kg) 61 59 48 43
from September 2010 levels and quarterly Wafer 0.90 0.73 0.62 0.56
Cell 1.33 1.08 0.92 0.83
adjustments of 2.6% thereafter. European module (EUR/Wp)* 1.90 1.50 1.28 1.15
Chinese module (EUR/Wp)* 1.57 1.20 1.08 0.89
All solar projects above 100 kW and ground- * wholesale price in Germany
Source: HSBC estimates
mounted projects will be allocated via a tender
process (the first tender will be launched before
Crystalline solar cell prices dropped sharply in Q4
summer 2011) and the tariff will decline to
due to seasonally slow demand. They have now
EUR0.12 cents, which means insufficient IRRs
stabilised at about USD1.20 per Wp. Polysilicon
are likely to eliminate the segment. Even more
prices are still around USD70-80 per kg and wafer
important, the government introduced a 500 MW
prices remain strong at cUSD0.95 per Wp, because
annual cap. That cap will be reviewed in mid-
firm demand enabled producers to pass through
2012 and could be raised to 800 MW. the higher polysilicon costs. Solar module prices
The French government said about 3.4 GW of continued their moderate decline in the second half
projects had received construction permission by of 2010. On the German spot market, the
wholesale price for European modules dropped

Spot price development of solar wafers, cells and modules

1,80

1,60

1,40

1,20

1,00

0,80
12/2009 02/2010 04/2010 06/2010 08/2010 10/2010 12/2010 02/2011

Wafer (USD/Wp) Cell (USD/ Wp) Module (USD/Wp)

Source: PVInsight

19
 Mid cap
Energy equipment
30 March 2011
from cEUR1.90 to EUR1.75 in December 2010.
However, this decline of about 8% was less than
the German mid-year feed-in tariff adjustments
(13% in July, 3% October), so IRRs decreased and
German H2 demand developed below initial
expectations (ie, the market reached 7.4 GWp in
2010, roughly 20% below the 9.5 GWp estimate
used to calculate the EEG surcharge).
Given the expected slowdown of the Italian
market and the demand shift to the more
competitive German market, we see increased
ASP pressure in coming weeks. We assume the
H2 2011 clearing spot price, which provides an
unlevered pre-tax project IRR of around 8% for
German ground-mounted installations, is at
cEUR1.15. We expect less price pressure in the
German roof-top market and expect pricing in this
segment has to be lowered to cEUR1.45 per Watt.
Overall, we forecast module ASPs will decline by
about 20% y-o-y to EUR1.50 per Wp for
European modules and by c24% to EUR1.20 per
Wp for Chinese module. Compared with Q4 spot
prices, this indicates ASPs must decline 20%-
30%. Compared to our previous forecasts, we now
assume 10-20% lower ASPs. Based on our system
ASP and demand assumptions, we assume a
flattish end-market size in euro terms in 2011,
compared with nearly 90% growth the year before.
Polysilicon market will remain tight over the next months
250,000
200,000
150,000
100,000
50,000
0 0
2007 2008
Poly supply (in metric tonnes, LHS)
Source: HSBC estimates
20
abc
We note that due to high leverage higher interest
rates could become an obstacle as rising
opportunity and financing costs put pressure on
IRRs, which would require lower system ASPs.
After the ECB’s March press conference, our
economists now believe the ECB will raise rates
in April by 25bps to 1.25%. They expect further
increases by 25 bps in Q3 and Q4.
Polysilicon remains the sweet spot in 2011
We expect poly spot prices to remain firm during
2011 (the average price increased to around
USD70-80 per kg during Q1) on the back of the
downstream capacity expansions in Asia and
growth in demand from the semiconductor
industry. We forecast polysilicon supply will
grow to about 205,000 tonnes in 2011, up 26%
from around 163,000 tonnes in 2010, due to de-
bottlenecking and as polysilicon producers like
Wacker, OCI and Hemlock ramp up new
capacities during the second half of 2011. Based
on our market forecasts, we assume total demand
will reach roughly 197,000 tonnes, which
indicates only minor overcapacities.
Furthermore, we continue to see a trend towards
long-term contracts with the leading poly players
to secure supply. Suntech, for example, divested
its stake in the small-sized player Asia Silicon and
30,000
25,000
20,000
15,000
10,000
5,000
2009 2010 2011e 2012e
Poly demand (in metric tonnes, LHS) Potential production (c-Si, in MWp, RHS)
 Mid cap
Energy equipment abc
30 March 2011

signed an USD429m contact with OCI. Wacker
has contracted its total production through 2014,
which already includes the initial production from
a new 15,000-ton plant in the US, which will be
completed in 2013.
thin-film manufacturers and the US company
SunPower, which uses a back-contact technology
for its cells, usually all solar-cell manufacturers use
silver pastes in the production process. Among the
suppliers of the pastes are Heraeus and DuPont.

Higher input costs likely to Sharp silver price increase over the last months (in USD/oz)

increase margin pressure 40

35
Increasing silver price could burden margins
30
Gold Fields Mineral Services estimates that silver 25
mine production reached 709.6moz in 2009. HSBC 20
forecasts mine production growth will reach 15

c15moz in 2010 and increase a further 12moz in 10

5
2011 (see Precious Metals Outlook, 21 October
0
2010). Two of the fastest-growing new areas for
03/2009 09/2009 03/ 2010 09/2010 03/2011
industrial silver demand are biomedical
applications and the solar industry. We estimate Source: Thomson Reuters Datastream

demand from the solar industry was around 20moz

in 2009 but grew to roughly 47moz in 2010 or
around 6% of total silver mine production.
The sharp increase in the silver price in recent
months in particular could put pressure on cell
manufacturing margins. Silver inks and silver
pastes are usually used in the screen printing of the
‘fingers’ and the ‘busbars’ on the frond
(metallization process) of a solar cell. The fingers
collect the current generated by the solar cell; the
‘busbars’ connect the fingers. With the exception of
On average, a solar cell contains about 80-100mg
of silver per watt, which corresponds to about 18
to 23 grams of silver for a 230 Watt module. At
the current silver price of cUSD35 per once, we
estimate the silver content of a solar cell amounts
to cEUR0.08 per Watt. It is thereby a main input
factor, accounting for about 20% to 30% of the
total solar cell processing costs.
Supply contracts for pastes usually contain price-
adjustment clauses for raw-material hikes. If not

Smaller polysilicon players will lose market share

100% 6%
19% 13%
21% 25%
80% 23%
17%
11% 14%
11%
8% 16% 16%
60% 9% 11% 15%
7% 7% 6% 7%
9% 8% 7%
7% 8%
40%
19% 19% 20% 19%
18%
20%
24% 20% 20% 21% 21%
0%
2009 2010 2011e 2012e 2013e
Hemlock Wacker REC MEMC GCL Poly OCI Other players

Source: HSBC estimates, company data

21
 Mid cap
Energy equipment abc
30 March 2011

otherwise hedged, the higher silver price will
directly affect the production costs of solar cells.
Our simplified sensitivity analysis shows that a
USD2 increase in silver prices could lower the
producer’s cell gross margin by about 0.5
percentage points.
Potential margin impact from higher silver prices
Silver price Cost impact
(USD/once) (EUR/Wp)
27
29
31
33
35
37
39
Note: simplified static calculation, assumes 90mg silver consumption
Source: HSBC estimates
Strategies to lower silver consumption include, for
example, smaller busbars or back-contact
technologies. However, that would require a
complete change of production technology and is
normally not feasible within a short time frame.
Given that, we see only limited potential to lower
silver consumption in the short-term and assume
that there is only limited cost differentiation
potential between the most manufacturers.
We believe higher raw-material costs are
especially a concern for producers that are not
vertically integrated; they have limited pricing
power given the high degree of commoditization.
This would be especially negative for cell
producers like Gintech or Motech as well as for
players like Q-Cells, which operate at a rather thin
margin. In our view, this would be also negative
for low-cost Asian producers. We believe they
have limited pricing power and won’t be able to
pass through higher input costs. It will also hurt
tier-2 and tier-3 manufactures, which have smaller
Cell margin
market shares and brand images but have
0.063 5.8% benefited from the strong German and Italian
0.068 5.2% demand in the previous year.
0.073 4.6%
0.078 4.0%
0.082 3.5% Installations in most of Europe
0.087 2.9%
0.092 2.3% are ahead of 2020 targets
We see policy risks in Greece and Bulgaria
As the feed-in tariff and IRR-driven markets in
Europe are created by external drivers, they are in
general finite. The ongoing regulatory changes
usually trigger pull-in effects and thereby create
high demand volatility. With European installations
rapidly approaching or even overshooting the 2020
targets recently set by the various governments, we
expect rather volatile and erratic policy reactions
over the next quarters. To indentify markets with
substantial policy risks, we have crosschecked the
expected 2011 installation run rate as well as our
medium-term and long-term installation forecasts
with the targets set out in the individual National
Renewable Energy Action Plans (NREAPs).

Copper price development (in USD / tonne) Aluminium price development (in USD / tonne)

12,000 3,000

10,000 2,500

8,000 2,000

6,000 1,500

4,000 1,000

2,000 500

0 0
03/2009 09/2009 03/2010 09/2010 03/2011 03/2009 09/2009 03/2010 09/2010 03/2011

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

22
 Mid cap
Energy equipment abc
30 March 2011

Installations in some European countries will clearly overshoot the 2020 targets (cumulative installations in MWp)
Country NREAP target NREAP target NREAP target HSBCe solar Difference 2020 Difference run-
end of 2010 end of 2015 end of 2020 forecast for 2020 HSBCe vs installations on rate vs NREAP
NREAP in 2020 current run-rate in 2020
Bulgaria 9 220 303 316 4% 127 -58%
Czech Republic 1,650 1,680 1,695 4,520 167% 3,466 104%
France 504 2,151 4,860 8,392 73% 14,491 198%
Germany 15,784 34,279 51,753 56,326 9% 71,193 38%
Greece 184 1,270 2,200 5,586 154% 3,856 75%
Italy 2,500 5,500 8,000 20,573 157% 48,773 510%
Portugal 156 797 1,000 1,497 50% 979 -2%
Spain 4,021 5,918 8,367 8,203 -2% 8,150 -3%
UK 50 1,070 2,680 3,099 16% 4,559 70%
Source: HSBC estimates, EU commission

Based on our assumptions, France, the Czech now approximately EUR0.14 to EUR0.20 per
Republic, Germany, Greece, Italy and the UK will kWh. Hence, regions with a high rate of sun
exceed their 2020 targets. In the Czech Republic, insolation and retail electricity prices above
France and Germany, discussions on how to EUR0.20, such as southern Italy and California,
adjust tariffs and limit market growth have should have reached grid parity.
already taken place; in the UK and Italy, they
Solar offers the highest cost reduction potential
continue. We believe especially Greece and
Technology Expected learning rate (2010-2035)
Bulgaria have attractive tariffs and might run into
Hydro 1%
the same boom-and-bust cycle we have already Wind (onshore) 7%
seen in the Czech Republic and Spain. Wind (offshore) 9%
Solar PV 17%

Growth trends intact, but key Source: IEA

markets will be outside Europe

We expect five-year global demand CAGR of 8%
In our view, the positive long-term fundamentals
of the solar industry remain intact. The industry
shows a high cost-reduction potential through
economies of scale and technological progress.
Various studies suggest the photovoltaic industry
experienced an average learning curve of 20%
(ie, capex reduction) per doubling of cumulative
capacity over the last three decades and the
learning rate is expected to remain at a rather high
level. In contrast, more mature technologies such
as hydropower or onshore wind will grow at a
slower pace and have less cost-cutting potential.
Driven by favourable feed-in tariffs and other
subsidy schemes, European installations reached
about 14 GWp and thereby accounted for around
80% of total solar demand in 2010. Despite that,
solar still represents only a minor percentage of
total electricity production, even in the more
mature solar markets – it’s 2% to 3% of gross
electricity production in Germany, for example.
Hence, we continue to see strong growth over the
next years and assume a five-year CAGR for
industry demand of 8% and a 10-year CAGR of
11%, with global solar demand reaching roughly
46 GWp in 2020 and total installed capacity
approaching 330 GWp.

This continuously improves the competitiveness
of the solar industry compared to other renewable-
energy sources. Depending on the region, our
levelised cost of electricity (LCOE) analysis
shows that solar electricity-generation costs are
European demand will become less important
However, we believe the solar industry is at a
crossroad. Structural demand should shift from feed-
in-tariff-driven European markets to more self-
sustaining market growth in the US and Asia over

23
 Mid cap
Energy equipment abc
30 March 2011

the next two years. We believe the short- to medium- 2035 and China is expected to overtake the US as
term growth potential in Europe is limited, especially the largest electricity consumer. India’s growing
for large-scale ground mounted installations, and we population and expanding economy will make it
forecast a decline to c50% of total installations by the third-largest electricity consumer by 2035.
2012e. The German market should remain one of the
Total electricity generation (in TWh)
most important for the next five years, but it will go
Region 2008 2020 2035 CAGR
‘ex-growth’ in 2011. We see the incremental growth
EU 3,339 3,572 3,938 1%
coming mainly from the US, China, Japan and India US 4,343 4,529 5,169 1%
(see chart on page 5). China 3,495 6,949 9,594 4%
India 830 1,652 3,106 5%
Middle East 771 1,120 1,613 3%
Europe will decline to c50% of global demand by 2012e World 20,183 24,513 35,336 2%

100% Source: HSBC, IEA

80%
Due to the surge in electricity demand and the
60%
high insolation level, we believe solar is an
40% attractive clean energy source in these countries.
20% But in terms of end-market demand, the US,
0% China and India were still rather small solar
2010e 2011e 2012e markets in recent years. Uncertain macro
Europe US Asia RoW conditions, lack of attractive incentives, low
natural gas and power-purchase agreement (PPA)
Source: HSBC estimates
prices were major obstacles to market growth in
the past. As a result, their total 2010 installations
US and Asia will be upcoming key markets
reached only c1.4 GWp, comparable to the Czech
The IEA forecasts global electricity demand to
Republic (1,200 MW) and Belgium (200 MW).
grow by 2.2% per year from 2008 to 2035, from
But recent policy changes, such as extending the
around 17,000 TWh to about 30,000 TWh.
treasury grant programme in the US, and
Increased energy efficiency and lower economic
installation targets defined by the governments,
growth in OECD countries mean their electricity
like China’s 12th five-year plan, should spur a
demand will grow only c1%. But electricity
rapid market expansion, in our view.
demand from China is set to triple from 2008 to

Solar accounts for a minor share of total electricity generation in most countries (share in % of gross electricity production)

10%

8%

6%

4%

2%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Germany USA China Japan India

Source: HSBC estimates, IEA

24
 Mid cap
Energy equipment abc
30 March 2011

Solar generation costs (in EUR/kWh, system price in EUR)*

0,35
0,30
0,25
0,20
0,15
0,10
0,05
0,00
2009 2010 2011 2012 2013 2014 2015 2016 2017

Germany Spain Italy US (California) Average retail electricity price (EU) CCGT

Note: *Discount rate of 6%, performance ratio of 77%, lifetime 20 years

Source: HSBC estimates

Italy, China and nuclear fears to exceed its targets in non-fossil development.
could be demand factors Based on our 2020 forecasts for China, solar
would only account for 0.7% of the country’s total
The biggest European swing factor to our long-
electricity generation. A more optimistic scenario,
term forecasts is Italy, which has a comparably
which assumes a contribution of 3% (the current
low 2020 target despite its good sun conditions
level in Germany), would require a cumulative
and expensive retail electricity. In fact, Italy
solar capacity of about 140 GWp by 2020 or
should have already reached retail grid-parity in
14 GWp installations per year.
some sunny Southern regions.
Huge potential if planned reactors replaced
In Asia, we believe, China could surprise to the
In addition, some countries might review their
upside. The 12th five-year plan (2011-15) sets a
ambitious nuclear-energy programs after the
target of 70 GW of new wind installations and
catastrophe in Japan. As of January 2010, 437
only 5 GW for solar. We assume those are only
nuclear reactors were in operation globally and
minimal targets and we expect China will continue

Nuclear power reactors in operation and under construction (as of January 2010)
Country _____ Reactors in operation ______ ___Reactors under construction____ _Nuclear electricity supplied in 2009
Number of units MWe net Number of units MWe gross TWh % of total
Belgium 7 5,863 - - 43.4 53.8
Canada 18 12,577 - - 88.3 14.8
China 11 8,438 20 19,920 65.3 2.2
France 59 63,260 1 1,600 419.8 76.2
Germany 17 2,470 - - 140.9 28.8
India 18 3,984 5 2,708 13.2 2
Japan 54 46,823 1 1,325 241.3 24.9
South Korea 20 17,647 6 6,520 144.3 35.6
Russia 31 21,743 9 6,894 152.1 16.9
Ukraine 15 13,107 2 1,900 84.5 47.4
UK 19 10,097 - - 48.2 13.5
USA 104 100,683 1 1,165 806.7 19.7
Others 64 63,495 10 8,823 349.8 n/a
Total 437 370,187 55 50,855 2597.8 14
Source: IEAE

25
 Mid cap
Energy equipment
30 March 2011
55 were under construction. By December 2010,
that had increased to 441 reactors in operation and
another 63 under construction. The average age of
the operating nuclear reactors is more than 25
years. More than c34% of installed nuclear capacity
was built before 1980.
Some countries, like Russia, say they see no need
to revise nuclear investment. On the other hand,
Germany has already suspended for three months
plans to extend the running time of its nuclear
power plants and will temporarily shut the oldest
plants. The German government has also said it
plans to speed up the move towards renewable
energies. Other governments, such as the UK,
ordered a review of their reactors. China, which
has the most ambitious nuclear expansion plan,
announced that it will temporarily suspend
approval of nuclear power projects. The European
Union plans to conduct stress tests on its nuclear
power plants, and nuclear safety will be a topic at
the G20 summit end of March.
Gas would be the short-term beneficiary
Nuclear plants provide base-load power and work
at very high capacity factors, about 80% to 90%.
Solar and wind are considered intermittent energy
sources, which are by nature not continuously
available and provide volatile electricity output.
Their capacity factors are considerable lower – in
Germany, about 11% for solar and 21% for wind.
In general, gas- and coal-fired plants would
benefit at first from changes in nuclear policy. But
in most countries, only gas-fired plants seem a
viable substitute, because of emission targets and
environmental concerns. That may increase gas
prices and push up power prices in markets where
gas is the marginal generation fuel. It could also
have an effect on CO2 prices in Europe, if nuclear
plants are shut and more CO2 is emitted. Both
would increase the competitiveness of renewable
energy in the medium term. Our LCOE analysis
shows solar would be able to compete with
26
abc
combined cycle gas turbine (CCGT) plants from
2017 onwards.
In an optimistic scenario, in which all of the
nuclear capacity under construction is replaced
with solar, we calculate that about 300 GW of
new solar capacity would be required. When it is
replaced by 70% wind and 30% solar, about
120 GW new wind capacity and 85 GW new solar
capacity would required.
But to use more renewable energy systems
reliably, geographically and technologically
diverse generation capacity, additional storage
capacity and backup sources like pumped-storage
hydro plants and gas-fired power plants would be
needed. We think it will take considerable time to
set up the required infrastructure and technology.
Korea green growth: from
zero to hero
Korea’s solar industry is often overshadowed by the
established Chinese and Taiwanese solar players, but
it provides attractive investment opportunities, such
as our preferred Asian solar pick, OCI. In 2010,
according to the Ministry of Knowledge and
Economy, the industry grew 6.5x in revenue, 5.9x in
exports, 3.6x in employment, 2.2x in number of
corporate entities and 5.0x in civil investments. Year
on year, the total number of corporate entities rose
12% to 215 the number of employees increased 29%
to 13,380, revenue gained 58% to KRW8.1trn,
exports rose 77% to USD4.6bn and civil investments
increased 22% to KRW3.6trn.
Korea’s solar revenue reached cKRW5.9trn in 2010,
nearly doubling from 2009 and rising more than 80x
from 2005, according to Korea’s photovoltaic
industry association. Domestic module capacity is
expected to reach 2.2GW this year (c1.3GW in
2010), and a domestic research institute, Solar &
Energy, projected exports would reach USD9bn, a
91% increase y-o-y and investments by major
conglomerates would rise 23% to KRW4.5trn. Our
 Mid cap
Energy equipment abc
30 March 2011

Korea renewable: Government investment agenda

(KRWmn) 2010 2011e Change %
Total investment 808,391 1,003,455 195,064 24%

R&D 252,751 267,655 14,904 6%

- Technology development 243,751 257,655 13,904 6%
- Human resource development 9,000 10,000 1,000 11%
Distribution 292,040 311,800 19,760 7%
- Installation support 85,500 90,000 4,500 5%
- Green home construction 96,200 89,000 -7,200 -7%
- Renewable energy complex 18,000 17,000 -1,000 -6%
- Financing 91,340 111,800 20,460 22%
- Saemankeum complex 1,000 4,000 3,000 300%
Feed-in-tariff 263,600 395,000 131,400 50%
Infrastructure 0 29,000 29,000 n.a.
- Test-bed build-up 0 20,000 20,000 n.a.
- Export support 0 9,000 9,000 n.a.
Source: MKE, HSBC

checks with sales forces at Korea 2011 Solar Expo
indicated Korean modules are selling at a c15%
discount to Japanese products but a 5% to 10%
premium over Chinese products. Some 90% of
exports go to Europe, the sales forces reaffirmed that
prices and brand are the key factors that grant orders
than quality (efficiency) for industrial panels.
2011 outlook
1. Renewable R&D supplementation
Total budget in 2011 will increase KRW15bn to
KRW268bn from KRW253bn. Main items will
include technology such as thin-film solar cells,
offshore wind-power development and new-
generation bio-fuels. It will also include core
equipment such as wind gearboxes, blades and
other renewable materials.

We foresee ongoing growth, backed by solar cell 2. Renewable energy distribution

and module quality improvements from major
conglomerates and a commitment to R&D
investment under the current administration’s
renewable energy agenda. The Ministry of
Knowledge and Economy has announced plans to
invest KRW1.35trn to further support renewable
growth in 2011, up 24% from KRW808bn in
2010. Key areas of inputs will include:
Total budget for distribution-system development
will increase KRW19.8bn from KRW292bn to
KRW311.8bn in 2011e. That will include
KRW90bn for installation supports to solar and
thermal power; KRW89bn for green-home-related
business; KRW17bn to speed up industrialization of
renewable grid complex in Buan City, KRW4bn to

No. of employees in Korea solar sector Exports in Korea solar sector

14,000 8,000

12,000 7,000
6,000
10,000
5,000
8,000
4,000
6,000
3,000
4,000
2,000
2,000 1,000
0 0
2004 2005 2006 2007 2008 2009 2010 2011e 2004 2005 2006 2007 2008 2009 2010 2011e

Source: MKE Source: MKE

27
 Mid cap
Energy equipment abc
30 March 2011

establish a wind-power grid zone in Saemangeum
area, and KRW111.8bn to finance production and
maintenance of renewable facilities.
3. Renewable subsidies
The Korean government will allocate KRW395bn
for feed-in-tariffs (KRW63.2bn in 2010), mainly
targeting additional solar-farm installations
(80MW) and storage batteries (16MW). RPS
standards are set to be adopted from 2012e,
targeting 10% of solar energy contribution to
nationwide power generation by 2020e.
expect its 2010 solar division sales will rise to
cKRW1trn in 2011 from cKRW600bn in 2010,
and it should be boosted further once it enters the
ingot manufacturing business next year.
LG Electronics had invested cKRW220bn in its
solar business by the end 2010 and generated
divisional sales of cKRW200bn. LGE also noted
aggressive plans to expand its capacity to 1GW by
2013 and invest a total of KRW1trn by 2015. Its
new module product is scheduled to be launched
in H2 2011, both in local and overseas markets.

4. Infrastructure Samsung Electronics showcased its new module,

The government plans to invest KRW29bn to build scheduled to be launched this year. It noted long-
up infrastructure for two new projects (solar and term plans to expand its module capacity from the
wind). It is set to implement four or five test beds current 30MW to 130MW and to pursue vertical
for certification regarding technology, new product integration at the group level. The Samsung group
prototypes, qualifications, and credibility for those recently announced a joint venture of Samsung
developed by small and mid-sized enterprises. Fine Chemical and MEMC (US) to engage in
polysilicon manufacturing (10,000tpa), which is
Conglomerates; chasing the sun
expected to come on-stream from 2013. Samsung
Major conglomerates showcased their latest cells C&T and Everland look set to carry out solar
and modules at the Solar Expo. We found that installations in the domestic market.
Hyundai Heavy leads the Korean mid-stream
companies with the highest cell/module
efficiency; a new product designed for 277Wp
could generate efficiency of as much as 17.1%,
compared with an industry average of 16%. Next
are LG Electronics (260Wp, 16.2%) and Samsung
Electronics (260Wp, 15.9%).

Hyundai Heavy Industries noted plans to

expand module capacity to c580MW in 2011 and
to 1GW in 2012, from 320MW in 2o10. We

Korea conglomerates: 2011 solar snapshot

Samsung Group LG Group Hyundai Group Hanwha Group OCI Group Woongjin Group Shinsung Group
Poly-Si Samsung Fine Chem LG Chem KAM (JV with KCC) Hanwha Chem OCI Woongjin poly-Si Hankook poly-Si
10,000tpa by 2013 Agenda pending 6,000tpa by 2011, 10,000tpa by 2013 62,000tpa by 2013 5,000tpa by 2011 10,000tpa by 2012
Ingot/wafer Samsung Corning LG Siltron Hyundai Heavy Nexolon Woongjin Energy
Wafer 150MW by 2011 LT plan: 1,800MW 1,100MW/500MW by 2011
Cells Samsung Electronics LG Electronics Hyundai Heavy Hanwha Chem Sunpower (US) Shinsung Holdings
Modules Samsung Electronics LG Electronics Hyundai Heavy Hanwha Chem Shinsung CS
130MW by 2011 330MW by 2011 580MW by2011 1.5GW by 2011
System Samsung C&T LG CNS, Solar Energy Hyundai Heavy Cornerstone Shinsung Engineering
Source: Company data, HSBC

28
 Mid cap
Energy equipment abc
30 March 2011

EPS estimate revisions for selected solar stocks

Wacker Chemie (in EUR) SolarWorld (in EUR)

18.00 2.30

16.00
1.80
14.00
1.30
12.00
0.80
10.00

8.00 0.30
04/2009 10/2009 04/2010 10/2010 04/2009 10/2009 04/2010 10/2010
2011 2012 2013 2010 2011 2012

Source: FactSet consensus Source: FactSet consensus

SMA Solar (in EUR) OCI (in KRW)

11.00 45,000
40,000
9.00
35,000
7.00 30,000
25,000
5.00
20,000
3.00 15,000
04/2009 10/2009 04/2010 10/2010 04/2009 10/2009 04/2010 10/2010
2010 2011 2012 2010 2011 2012

Source: FactSet consensus Source: FactSet consensus

Meyer Burger (in CHF) Yingli Green (in USD)

2.20 1.70
2.00 1.50
1.80
1.30
1.60
1.10
1.40
0.90
1.20
1.00 0.70
0.80 0.50
04/2009 10/2009 04/2010 10/2010 04/2009 10/2009 04/2010 10/2010
2010 2011 2012 2010 2011 2012

Source: FactSet consensus Source: FactSet consensus

29
30

HSBC Global solar coverage universe

30 March 2011
Energy equipment
Mid cap
Company BBG Local currency Market cap Rating Price Target price Potential return Sales CAGR 2010-12e EBIT CAGR 2010-12e EPS CAGR 2010-12e
Centrosolar C3O GR EUR 120 Overweight (V) 5.9 6.5 11% 11% 0% -1%
Centrotherm PV CTN GR EUR 788 Neutral (V) 37.3 35.0 -6% 3% -9% -9%
GCL Poly Energy 3800 HK HKD 64,389 Underweight (V) 2.6 1.3 -50% 11% -16% -29%
Gintech 3514 TT TWD 29,610 Underweight (V) 91.9 48.0 -48% -13% -25% -27%
LDK Solar LDK US USD 1,498 Underweight (V) 11.4 9.8 -14% -7% -26% -64%
Manz Automation M5Z GR EUR 209 Underweight (V) 46.8 50.0 7% 15% 75% 80%
Meyer Burger MBTN SW CHF 1,662 Overweight (V) 36.4 45.0 24% 17% 13% 13%
Motech 6244 TT TWD 50,206 Underweight (V) 132.0 71.0 -46% -14% -39% -37%
OCI 10060 KS USD 9,806 Overweight (V) 428,500.0 530,000.0 24% 15% 28% 21%
Phoenix Solar PS4 GR EUR 167 Overweight (V) 22.7 32.0 41% 1% -6% -8%
PV Crystalox PVCS LN GBP 256 Neutral (V) 62.0 65.0 5% 5% 0% 0%
Q-Cells QCE GR EUR 680 Underweight (V) 3.2 3.0 -5% 12% 13% 46%
REC REC NO NOK 12,744 Neutral (V) 19.2 20.0 4% 9% 66% 25%
Roth & Rau R8R GR EUR 247 Underweight (V) 15.2 12.0 -21% 12% n/m n/m
SMA Solar S92 GR EUR 2,814 Underweight (V) 81.1 58.0 -28% -12% -24% -24%
Solaria Energia SLRS SM EUR 203 Underweight (V) 2.0 0.9 -56% -5% -5% -9%
SolarWorld SWV GR EUR 1,160 Overweight (V) 10.4 12.5 20% 13% 2% 7%
Suntech STP US USD 1,548 Underweight (V) 8.8 6.6 -25% -5% -1% -24%
Trina Solar TSL US USD 3,135 Underweight (V) 27.5 27.0 -2% -1% -19% -20%
Wacker Chemie WCH GR EUR 7,669 Overweight 154.4 175.0 13% 11% 19% 22%
Yingli YGE US USD 1,730 Underweight (V) 11.9 8.9 -25% 1% -21% -25%
Source: HSBC estimates

HSBC Global solar coverage universe

EV/EBITDA10e EV/EBITDA 11e EV/EBITDA 12e PE 2010e PE 2011e PE 2012e PB 2010e ROIC 2010e ROIC 2011e ROIC 2012e ROE 2010e ROE 2011e ROE 2012e
Centrosolar 4.6 5.4 4.7 7.6 9.7 7.6 1.3 14.1% 10.1% 10.9% 18.1% 12.1% 13.5%
Centrotherm PV 6.1 5.5 6.0 15.4 14.4 18.6 2.0 18.5% 16.5% 11.5% 13.8% 13.2% 9.3%
GCL Poly 10.3 10.3 11.2 16.1 17.9 31.5 4.0 27.2% 16.6% 9.6% 28.4% 19.9% 9.7%
Gintech 5.6 10.0 7.3 7.1 17.1 12.7 1.7 33.5% 11.9% 14.6% 27.0% 9.3% 11.4%
LDK Solar 4.8 4.7 5.4 5.2 9.4 39.3 1.5 18.0% 13.2% 7.4% 28.8% 12.7% 2.6%
Manz Automation 11.7 8.5 6.4 47.3 24.9 14.6 1.2 3.2% 5.0% 7.1% 2.5% 4.5% 7.3%
Meyer Burger 6.8 4.6 4.6 16.7 11.0 13.0 2.5 51.3% 42.8% 32.0% 23.3% 21.4% 15.1%
Motech 6.2 8.8 10.3 9.7 16.6 24.4 2.0 33.2% 14.8% 9.4% 26.0% 12.2% 8.1%
OCI 10.3 7.3 6.7 15.4 11.7 10.7 4.8 37.6% 34.9% 26.1% 36.2% 34.8% 28.8%
Phoenix Solar 3.7 4.2 3.2 6.6 9.9 7.9 1.1 22.8% 14.3% 17.9% 20.2% 11.5% 12.9%
PV Crystalox 4.3 3.8 3.5 12.2 11.8 11.3 1.0 14.0% 13.1% 12.7% 8.6% 8.2% 7.9%
Q-Cells 5.4 4.3 3.9 22.6 27.0 11.4 0.5 5.6% 3.7% 6.0% 2.6% 2.4% 5.5%
REC 6.5 4.1 4.5 31.4 20.4 20.0 0.9 1.5% 4.5% 4.4% 5.1% 4.4% 4.3%
Roth & Rau 15.4 4.6 3.4 n/m 17.5 11.0 0.8 -1.1% 5.3% 8.1% -1.0% 4.9% 7.3%
SMA Solar 4.5 6.8 6.4 8.0 13.9 13.9 3.9 115.4% 40.1% 34.2% 62.6% 26.5% 22.9%
Solaria Energia 12.9 12.8 11.1 33.4 68.9 40.3 0.9 2.7% 1.9% 2.4% 2.6% 1.2% 2.1%

abc
SolarWorld 5.4 5.9 5.4 12.9 11.3 9.6 1.2 9.3% 9.3% 9.3% 9.8% 10.4% 11.0%
Suntech 7.4 7.3 5.3 8.6 11.9 10.6 0.8 18.0% 11.4% 12.5% 10.7% 6.8% 7.0%
Trina Solar 4.0 4.5 4.3 6.2 9.1 10.5 1.6 41.1% 24.0% 18.4% 36.5% 17.5% 12.5%
Wacker Chemie 6.4 5.7 4.8 15.6 12.9 10.6 3.2 18.7% 19.5% 20.0% 22.6% 22.6% 23.1%
Yingli 4.7 5.7 5.7 7.0 12.1 15.7 1.5 22.3% 13.0% 10.0% 23.7% 11.6% 8.1%
Source: HSBC estimates
Mid cap
Energy equipment abc
30 March 2011

Company profiles

31
 Mid cap
Energy equipment abc
30 March 2011

GCL Poly
 We expect oversupply to increase price pressure, and a lack of
differentiation to result in 10% y-o-y EPS fall in 2011
 Consensus overestimating reliability of long-term supply contracts
 We have an Underweight (V) rating with target price of HKD2.10

Investment summary
Peak in past, weak in future
GCL’s 2010 diluted EPS of HKD0.36 was in sharp
contrast to its HKD0.02 loss per share in 2009.
Much like its peers, GCL benefited from the 140%
y-o-y growth in solar demand during 2010 which
helped it grow sales by 272% y-o-y, with the
above market growth rate due to the acquisition of
its polysilicon business in 2009 and the ramp up of
poly and wafer capacity. Strong demand growth in
2010, however, also had the adverse effect of
draining generous solar subsidies and increasing
electricity bills globally. This has clouded the
future prospects of the sector and GCL.
Although GCL will have almost tripled its
polysilicon capacity and almost doubled its wafer
capacity by mid 2011 since the end of 2010,
demand is deteriorating. Consensus, however,
assumes another strong year for GCL, in which it
would outperform the market to increase EPS by
more than 50% y-o-y. We believe that consensus Shishir Singh*
Analyst
fails to factor in the negative impact of regulatory The Hongkong and Shanghai
changes as well as the effect of a lack of Banking Corporation (HK)
Limited
differentiation across the value chain. We also + 852 2822 4292
shishirkumarsingh@hsbc.com.hk
believe consensus overestimates the visibility
* Employed by a non-US
provided by over 50GW of framework contracts affiliate of HSBC Securities
signed by GCL with its customers for deliveries (USA) Inc, and is not
registered/qualified pursuant to
between 2011 and 2016. We believe contracts are FINRA regulations
rarely anything more than an announcement of
land-grab. Most have negligible prepayments (2-
3%) relative to the contract value as well as
flexible pricing and volume. As witnessed in the
last downcycle (2008-09), most contracts ended
up being renegotiated and, we believe, history will
repeat itself.
Because of low brand loyalty and a lack of
product differentiation, oversupply of polysilicon
is again likely to result in a price war. Unlike
consensus, we factor this scenario into our
estimates and expect a 10% y-o-y decline in

Financial summary (HKDm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC 3800.HK
Revenue 18,377 20,700 22,514 25,454 Dividend yield (%) 1.2 0.0 0.0 0.0 Bloomberg 3800 HK
EBITDA 7,441 8,355 7,609 8,221 EV/EBITDA 10.3 10.3 11.2 9.8 Rating Underweight (V)
EBIT margin (%) 33.2 28.6 19.2 19.4 EV/IC 3.6 2.5 2.3 2.3 Share (HKD) 4.16
HSBC net profit 3,989 3,593 2,046 2,599 HSBC PE 16.1 17.9 31.5 24.8 Target (HKD) 2.10
HSBC EPS (HKD) 0.26 0.23 0.13 0.17 ROIC (%) 27.2 16.6 9.6 11.0 Market cap (USDm) 8,255
HSBC EPS growth (%) NM -9.9 -43.1 27.1 HSBC REP 1.24 1.39 2.28 1.97 Free float 40

Source: HSBC estimates Source: HSBC estimates

32
 Mid cap
Energy equipment abc
30 March 2011

2011e EPS. We expect GCL’s wafer ASP to fall
to USD0.58/W in Q4 2011e from USD0.83/W in
Q4 2010. The operating margin is likely to drop to
under 20% by Q4 2011 from c50% in Q4 2010e
due to the falling ASP and relatively modest
decline in costs.
Outlook for 2011
We believe that a strong oversupply situation has
not been averted but only postponed to H2 2011.
We expect prices to fall and a decline in
shipments in 2011. As a result, we expect the H1
2011 revenue to hold the high level achieved in
H2 2010 but expect it to decline by 34% in H2
2011e compared to H1, even though market share
gains would partly offset the decline.
GCL expects wafer ASP to fall by 25-30% y-o-y
by Q4 2011, which is in line with our
expectations. However, 2011 shipment guidance
of 5.5GW (HSBCe: 2.9GW) assumes a very
aggressive market share of 40%, up from 9% in
2010. This assumes many of its competitors exit
the industry and rapid consolidation in the sector
– a scenario which may be too rosy, given the
robust balance sheets in the sector, particularly
those of poly-Si competitors.
2011 as wafers replace polysilicon (-85% y-o-y)
as the firm’s primary product along with a 16%
y-o-y decline in wafer ASP.
Valuation and risks
Valuation
We apply a PE-based approach to value companies
in a sector where differentiation is declining and
demand/supply dynamics are becoming more
uniform across the value chain. We continue to
value GCL at a PE of 9x 2011 EPS, which
represents the sector PE at its trough following the
start of the credit crisis in March 2009. This results
in an unchanged target price of HKD2.10, implying
a potential negative return of 47%. Under HSBC’s
research model, Chinese equities with a volatility
indicator and a potential return of 0-20% fall within
the Neutral rating band. Since GCL’s potential
return is below this band, we reiterate our
Underweight (V) rating on the stock.
Upside risks
The key upside risks are higher-than-forecast
demand, lower electricity costs than we have
assumed, and higher-than-expected market share
and ASPs in the solar business

HSBCe vs consensus
Our 2011 EPS estimate is 35% below consensus
as we model a slump in second half sales due to
oversupply and pricing pressure. We forecast
annual wafer sales of 2.9GW (+98% y-o-y) in

GCL Poly: HSBCe vs consensus

(USDm) 2011e 2012e 2013e
Sales HSBCe 20,700 22,514 25,454
Consensus 24,084 29,855 30,507
Difference -14% -25% -17%

EBIT HSBCe 5,922 4,326 4,942

Consensus 8,021 10,310 8,803
Difference -26% -58% -44%

EPS HSBCe 0.23 0.13 0.17

(USD, fully Consensus 0.36 0.47 0.49
diluted) Difference -35% -72% -66%
Source: FactSet consensus, HSBC estimates

33
 Mid cap
Energy equipment abc
30 March 2011

GCL Poly at a glance

Sales split by segment (2011e) Sales and EBIT margin (2008-12e)

Utility 35.0% 25,000

24% 30.0% 28. 6%
33.2%
20,000
25.0%
20.0% 25.8% 15,000
Poly-si 15.0% 19.2% 10,000
3% 10.0% 11.7%
5,000
5.0%
0.0% 0
Wafers
73% 2008a 2009a 2010a 2011e 2012e
Sales (HKD mn, RHS) EBIT margin

Source: HSBC estimates based Source: Company, HSBC estimates

Working capital (HKDm) (2008-12e) Capex (HKDm) (2008-12e)

10,000 16,000
14,000
8,000
12,000
6,000 10,000
4,000 8,000
6,000
2,000
4,000
0 2,000

2008a 2009a 2010a 2011e 2012e 0

A/c recb. Inv . A/c pay b. 2008a 2009a 2010a 2011e 2012e

Source: Company, HSBC estimates Source: Company, HSBC estimates

Net Debt/EBITDA (2008-12e) Shareholder structure (2010a)

5.0x 4.3x
Chariman
4.0x
&
Public
3.0x associates
40%
1.9x 2.0x 40%
1.8x
2.0x
1.0x
1.0x

0.0x CIC
2008a 2009a 2010a 2011e 2012e 20%

Source: Company, HSBC estimates Source: Company

34
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: GCL Poly Energy Holdings Underweight (V)

Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (HKDm) Poly-silicon ASP ($/Kg) 52 43 34 33
Poly-Si Unit CoGS ($/Kg) 29 24 24 23
Revenue 18,377 20,700 22,514 25,454 Wafer ASP (US Cents/W) 79 67 56 53
EBITDA 7,441 8,355 7,609 8,221 Wafer Unit CoGS (US Cents/W) 58 54 47 44
Depreciation & amortisation -1,346 -2,433 -3,283 -3,280 Electricity unit price (RMB/MW) 479 485 492 501
Operating profit/EBIT 6,096 5,922 4,326 4,942 Steam unit price (RMB/tonne) 184 172 175 179
Net interest -606 -883 -1,298 -1,101
PBT 5,500 5,039 3,028 3,840
HSBC PBT 5,500 5,039 3,028 3,840
Taxation -1,149 -1,046 -621 -783 Valuation data
Net profit 3,989 3,593 2,046 2,599 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 3,989 3,593 2,046 2,599
EV/sales 4.2 4.2 3.8 3.2
Cash flow summary (HKDm) EV/EBITDA 10.3 10.3 11.2 9.8
Cash flow from operations 5,771 5,820 5,493 6,301 EV/IC 3.6 2.5 2.3 2.3
Capex -9,008 -14,481 -4,814 -1,551 PE* 16.1 17.9 31.5 24.8
Cash flow from investment -10,006 -14,481 -4,814 -1,551 P/NAV 4.0 3.2 2.9 2.6
Dividends 0 0 0 0 FCF yield (%) -4.7 -12.4 1.0 6.8
Change in net debt 3,923 8,934 -648 -4,750 Dividend yield (%) 1.2 0.0 0.0 0.0
FCF -3,250 -8,672 679 4,750 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (HKDm)

Intangible fixed assets 1,130 1,173 1,176 1,176 Issuer information
Tangible fixed assets 23,327 36,263 37,864 36,135 Share price (HKD) 4.16 Target price (HKD) 2.10 Potent'l rtn (%) -49.5
Current assets 12,464 5,509 6,804 7,218
Cash & others 6,413 479 480 655 Reuters (Equity) 3800.HK Bloomberg (Equity) 3800 HK
Total assets 39,779 45,901 48,805 47,491 Market cap (USDm) 8,256 Market cap (HKDm) 64,389
Operating liabilities 9,052 7,528 8,631 8,834 Free float (%) 38 Enterprise value (HKDm) 85966
Gross debt 13,595 16,595 15,948 11,373 Country Hong Kong Sector Independent Power Producers
Net debt 7,182 16,116 15,468 10,718 Analyst Shishir Singh Contact +852 2822 4292
Shareholders funds 15,923 20,123 22,207 24,806
Invested capital 21,456 34,938 36,732 35,041
Price relative
6 6
Ratio, growth and per share analysis
5 5
Year to 12/2010a 12/2011e 12/2012e 12/2013e
4 4
Y-o-y % change 3 3
Revenue 271.8 12.6 8.8 13.1 2 2
EBITDA 300.4 12.3 -8.9 8.0 1 1
Operating profit 375.7 -2.9 -26.9 14.2
PBT -8.4 -39.9 26.8 0 0
HSBC EPS 166.1 -9.9 -43.1 27.1 2009 2010 2011 2012
GCL Poly Energy Holdings Rel to HANG SENG INDEX
Ratios (%)
Source: HSBC
Revenue/IC (x) 1.0 0.7 0.6 0.7
ROIC 27.2 16.6 9.6 11.0
ROE 28.4 19.9 9.7 11.1 Note: price at close of 21 Mar 2011
ROA 14.8 11.0 7.3 8.2
EBITDA margin 40.5 40.4 33.8 32.3
Operating profit margin 33.2 28.6 19.2 19.4
EBITDA/net interest (x) 12.3 9.5 5.9 7.5
Net debt/equity 41.9 74.0 63.8 39.3
Net debt/EBITDA (x) 1.0 1.9 2.0 1.3
CF from operations/net debt 80.4 36.1 35.5 58.8
Per share data (HKD)
EPS reported (fully diluted) 0.26 0.23 0.13 0.17
HSBC EPS (fully diluted) 0.26 0.23 0.13 0.17
DPS 0.05 0.00 0.00 0.00
NAV 1.03 1.30 1.44 1.60

35
 Mid cap
Energy equipment abc
30 March 2011

Meyer Burger
 Bright 2011 earnings outlook underpinned by record order backlog
of more than CHF1bn and solid order dynamics in Q1
 2011 EBITDA margin guidance of 20% looks cautious to us given
strong earnings in H2 (26% margin) and further scale effects
 We maintain our CHF45 target price and Overweight (V) rating

Investment summary
Leading wafer equipment supplier
Through its merger with 3S in 2010 and earlier
acquisitions, Meyer Burger is currently evolving
into an integrated system supplier, capturing large
parts of the equipment chain, from wafers to solar
panels. The company currently has no major
processes for the production of solar cells, but has
a strategic cooperation with Oerlikon for the anti-
reflection coating system. Although Meyer Burger
had a year-end 2010 net cash position of
CHF389m, management proposed no dividend but
plans to keep this for potential further acquisitions,
presumably in the cell equipment sector.
Strong order intake continuous in 2011
In 2010 Meyer Burger received new orders worth
CHF1.3bn (+587% y-o-y), and the order backlog
increased to CHF1.0bn, of which the vast majority
is related to 2011. The company currently benefits
from strong wafer capacity additions, especially in Christian Rath *
Analyst
Asia (76% of 2010 sales), and also gained some HSBC Trinkaus & Burkhardt
market share from its main competitor, Applied AG, Germany
+ 49 211 910 3049
Materials (HCT). Furthermore, Meyer Burger christian.rath@hsbc.de
successfully integrated 3S and expanded its product * Employed by a non-US
affiliate of HSBC Securities
portfolio and regional positioning. While the rollout (USA) Inc, and is not
of the diamond wire technology for the solar registered/qualified pursuant to
FINRA regulations
industry is behind our initial expectations, Meyer
Burger has received several orders from the LED
industry for the wafering of sapphire wafers and
thus benefits from growth in this industry as well.
Since January 2011 Meyer Burger has already
announced three additional contracts worth at least
CHF235m, which provides further visibility. We
note, that the company only usually announces
orders above CHF25m and therefore order intake
should be even higher (eg, only c.40% of the H2
2010 order volume was announced), which provides
good visibility for the coming moths.

Financial summary (CHFm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC MBTN.S
Revenue 826.0 1,200.0 1,129.7 1,300.6 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg MBTN SW
EBITDA 187.5 252.0 226.0 272.5 EV/EBITDA 6.8 4.6 4.6 3.2 Rating Overweight (V)
EBIT margin (%) 15.5 15.8 14.5 16.3 EV/IC 3.9 3.0 2.6 2.1 Share (CHF) 36.35
HSBC net profit 97.9 153.8 130.3 169.3 HSBC PE 16.7 11.0 13.0 10.0 Target (CHF) 45.00
HSBC EPS (CHF) 2.18 3.31 2.80 3.64 ROIC (%) 51.3 42.8 32.0 40.1 Market cap (CHFm) 1662.4
HSBC EPS growth (%) 130.5 51.9 -15.3 29.9 HSBC REP 0.7 0.7 0.8 0.5 Free float (%) 94

Source: HSBC estimates Source: HSBC estimates

36
 Mid cap
Energy equipment
30 March 2011
Outlook for 2011-13e
In 2010, Meyer Burger nearly doubled sales to
CHF826m, of which 62% was related to organic
growth. Driven by scale effects, optimised
production processes and improved sourcing, the
EBITDA margin expanded from 18.1% in H1 to
26.2% in the second half of the year. Despite that,
management guides for a 2011 EBITDA margin
decline to c20% which yields an EBITDA of
CHF240m (+28% y-o-y). We believe this is rather
cautious (HSBCe 21%) given positive scale
effects, the completed integration of 3S as well as
Meyer Burger’s strong market position and
limited price pressure in the industry.
Following rapid growth in 2010 and 2011 and the
strong expansion from Chinese key accounts, we
currently expect sales to fall (-6% y-o-y) in 2012e
as the market has to digest the additional capacity.
Despite that, Meyer Burger should be able to
protect its margins to some extent as the new
facility (to be finished in April-August 2012)
should lead to increased and more flexible
production capacity as well as optimised material
flows and reduced working capital.
HSBCe vs consensus
We expect Meyer Burger to grow at 2010-13e
CAGRs of 16% for sales and 19% for EPS. While
our top-line growth rate is broadly in line with
consensus assumptions, we are significantly ahead
on EBIT.
Meyer Burger: HSBCe vs consensus
(in CHFm) 2011e
Sales HSBCe 1,200.0
Consensus 1,039.6
Difference 15%
EBIT HSBCe 189.5
Consensus 103.4
Difference 83%
EPS (CHF, HSBCe 3.31
fully diluted) Consensus 2.30
Difference 44%
Source: HSBC estimates, FactSet consensus
abc
We believe consensus has not fully adjusted its
forecasts following the full-year results (21 March)
and expect positive consensus earnings revisions
over the next weeks to support the share price.
Valuation and risks
We use a DCF-model to value Meyer Burger. Our
model is based on an explicit forecast period until
2013, a semi-explicit forecast period until 2018
thereafter and a fade-period of 25 years. We forecast
a sales CAGR of 7% through 2018, starting in 2011
and a terminal EBIT margin of 15%. We assume
neither excess returns nor value destruction are
feasible in the long run, so we adjust our ROIC
forecast during the fade period on a straight-line
basis to our unchanged WACC of 9.95% (risk-free
rate of 3.5%, equity risk premium of 4.0%, beta of
1.5). Based on our assumptions, our DCF model
yields a fair value of CHF45 per share. The stock
currently trades at 11x 2011e PE and 4.6x 2011e
EV/EBITDA, which is a significant discount to our
peer group and, in our view, not justified given the
strong order backlog, the above-average EBITDA
margins and the company’s market-leading position
in the wafer equipment market.
While the historical volatility of Meyer Burger does
not exceed 40%, we maintain the volatility indicator
on our rating as we expect significant volatility
owing to potential regulatory changes in the two
largest solar markets Italy and Germany. For volatile
Europe ex-UK stocks the Neutral band under the
HSBC rating system is -1.5% to +18.5% around the
current share price. Our 12-month target price of
2012e 2013e
CHF45 implies a potential return of c24%, which is
1,129.7 1,300.6
1,079.1 1,278.3
above the Neutral range, and we therefore maintain
5% 2% our Overweight (V) rating on the stock. We have
163.6 211.6 identified the following major downside risks: (1)
111.2 189.8 stronger-than-expected top- and bottom- line growth
47% 11%
due to project delays and order cancellations; (2)
2.80 3.64
2.13 3.46 delayed sales impact from diamond wire products as
32% 5% customers stick with known technologies owing to
tight capacity or process issues.
37
 Mid cap
Energy equipment abc
30 March 2011

Meyer Burger at a glance

Sales by region (2010) Sales and EBIT margin (2009-13e)
1,400 18%
USA
Europe 16%
7% 1,200
17% 14%
1,000
12%
800 10%
600 8%
6%
400
4%
200 2%
0 0%
2009 2010 2011e 2012e 2013e
Asia
76% Sales (C HFm) EBIT margin (% , RHS)

Source: Company data Source: Company data, HSBC estimates

Working capital (2009-13e) Capex (2009-13e)

60 10% 60 5%
40
5% 50
20 4%
0 40
-20 2009 2010 2011e 2012e 2013e 0% 3%
-40 30
-5%
-60 2%
20
-80 -10%
-100 1%
10
-120 -15%
-140 0 0%
-160 -20% 2009 2010 2011e 2012e 2013e

Working capital (CHFm) Working capital (% of sales, RHS) Capex (CHFm) Capex (% of sales, RHS)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Balance sheet ratios (2009-13e) Shareholder structure (March 2011)

60% 0% V ontobel
-10% Peter P auli 5%
50% 4%
-20%
40%
-30%
30% -40%
-50%
20%
-60%
10% -70%
0% -80%
2009 2010 2011e 20 12e 2013e
Free float
RoIC (%) RoE (%) Gearing (% , RHS) 91%

Source: Company data, HSBC estimates Source: Company data

38
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: Meyer Burger Overweight (V)

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (CHFm) EV/sales 1.5 1.0 0.9 0.7
EV/EBITDA 6.8 4.6 4.6 3.2
Revenue 826.0 1200.0 1129.7 1300.6 EV/IC 3.9 3.0 2.6 2.1
EBITDA 187.5 252.0 226.0 272.5 PE* 16.7 11.0 13.0 10.0
Depreciation & amortisation -59.7 -62.5 -62.3 -60.9 P/Book value 2.5 2.1 1.8 1.5
Operating profit/EBIT 127.9 189.5 163.6 211.6 FCF yield (%) 19.9 6.4 7.7 10.8
Net interest -0.7 1.6 4.5 6.8 Dividend yield (%) 0.0 0.0 0.0 0.0
PBT 93.4 191.1 168.2 218.5
HSBC PBT 93.4 191.1 168.2 218.5 Note: * = Based on HSBC EPS (fully diluted)
Taxation 4.6 -37.3 -37.8 -49.2
Net profit 97.9 153.8 130.3 169.3
HSBC net profit 97.9 153.8 130.3 169.3 Issuer information

Cash flow summary (CHFm) Share price (CHF) 36.35 Target price (CHF) 45.00 Potent'l rtn (%) 23.8

Cash flow from operations 364.0 154.8 201.8 230.2 Reuters (Equity) MBTN.S Bloomberg (Equity) MBTN SW
Capex -25.6 -50.0 -50.0 -45.5 Market cap (USDm) 1835.4 Market cap (CHFm) 1662.4
Cash flow from investment -315.1 -62.0 -61.3 -58.5 Free float (%) 94 Enterprise value (CHFm) 1167.4
Dividends 0.0 0.0 0.0 0.0 Country Switzerland Sector Machinery
Change in net debt -350.1 -105.8 -137.2 -170.8 Analyst Christian Rath Contact +49 211 910 3049
FCF equity 330.7 105.6 127.1 180.2
Balance sheet summary (CHFm) Price relative
Intangible fixed assets 395.4 364.3 338.5 319.0 45 45
Tangible fixed assets 34.2 64.8 89.6 106.7
Current assets 627.3 895.3 998.7 1212.1 40 40
Cash & others 393.5 499.3 637.2 808.9
35 35
Total assets 1066.8 1334.8 1437.7 1649.2
Operating liabilities 339.3 434.6 386.5 412.6 30 30
Gross debt 4.9 4.8 5.5 6.4
Net debt -388.7 -494.5 -631.7 -802.5 25 25
Shareholders’ funds 642.9 796.8 927.1 1096.4
Invested capital 324.0 390.5 403.1 416.3 20 20
Mar-10 Sep-10 Mar-11
Meyer Burger Rel to SMI

Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 96.2 45.3 -5.9 15.1
EBITDA 196.2 34.4 -10.3 20.6
Operating profit 209.5 48.2 -13.7 29.3
PBT 137.5 104.7 -12.0 29.9
HSBC EPS 130.5 51.9 -15.3 29.9
Ratios (%)
Revenue/IC (x) 3.2 3.4 2.8 3.2
ROIC 51.3 42.8 32.0 40.1
ROE 23.3 21.4 15.1 16.7
ROA 13.4 13.1 9.6 11.2
EBITDA margin 22.7 21.0 20.0 20.9
Operating profit margin 15.5 15.8 14.5 16.3
EBITDA/net interest (x) 260.1
Net debt/equity -60.5 -62.1 -68.1 -73.2
Net debt/EBITDA (x) -2.1 -2.0 -2.8 -2.9
CF from operations/net debt
Per share data (CHF)
EPS reported (fully diluted) 2.18 3.31 2.80 3.64
HSBC EPS (fully diluted) 2.18 3.31 2.80 3.64
DPS 0.00 0.00 0.00 0.00
Book value 14.55 17.42 20.27 23.97

39
 Mid cap
Energy equipment abc
30 March 2011

OCI Company Ltd

 Diversifying from poly-Si to solar farm, green-home and sapphire ingots
 Eye on H1 2011e order flow; c51% of P3.7-4 capacity secured to date
 Reiterate OW (V) and our SOTP-based target price of KRW530,000

Investment summary Read-across from y-t-d new orders Keith Hwang *

Analyst
At the current solar upstream cycle, we see two key The Hongkong and Shanghai
Evolving into all-round green player
factors in generating earnings from poly-Si. One is a Banking Corporation Limited,
OCI’s management has clearly focused on Seoul Securities Branch
swift ramp-up of the new capacity’s production + 822 3706 8763
polysilicon as its core growth driver, building on c50 keithhwang@kr.hsbc.com
volume, including eliminating bottlenecks. The other
years of operational know-how in high-end * Employed by a non-US
chemicals. But its longer-term strategy includes is stabilising prices with long-term contracts, which affiliate of HSBC Securities
are normally fixed for five to seven years, unless (USA) Inc, and is not
expanding into solar farms and green businesses, registered/qualified pursuant to
such as vacuum insulation panels. Earlier this year, spot prices fall drastically below the contract level FINRA regulations

OCI announced plans to acquire a 76% stake in
Cornerstone Power, a solar developer in the US, for
USD36.1m. It also plans to invest KRW93.8bn to
produce LED sapphire ingots, to keep up with the
Korean government’s green-growth agenda.
Although OCI is not a holding company, it has
several subsidiaries, such as OCI Materials, a
leading NF3 gas maker. Given the long-term
supply relationship between OCI Materials and
leading tech conglomerates in Korea, we think
OCI may benefit as a group from the tech giants’
mid-stream solar investment and by supplying
first-ever 11N high-grade poly-Si to the
semiconductor market in H2 2011e (targeting
c3,000tpa to Japanese peers)
for a long period of time.
Strong order flows now from a wide range of mid-
stream players would reaffirm our confidence in:
(1) stable earnings generation via fixed pricing
from its order backlog; (2) tight supply and
demand for high-grade poly-Si among Asian mid-
stream players (c12GW out of 20GW of cell
capacity additions were from China in 2010),
which ought to remove oversupply concerns; (3)
liquidity improvement to offset balance-sheet
risks and support KRW1,639bn 2011e capex (we
project cKRW630-900bn worth of down
payments from total P3.7-4 long term contracts.
OCI has secured USD3.5bn worth of LT contracts

Financial summary (KRWbn) Valuation summary (x) Key data

Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e RIC 010060.KS
Revenue 2,102 2,606 3,285 3,461 Dividend yield (%) 0.5 0.8 0.8 0.8 Bloomberg 010060 KS
EBITDA 695 936 1,368 1,533 EV/EBITDA 14.1 10.3 7.3 6.7 Rating Overweight (V)
EBIT margin (%) 25.6 27.5 32.4 34.1 EV/IC 6.7 5.3 3.4 2.5 Share (KRW) 428500.00
HSBC net profit 385 639 848 928 HSBC PE 23.6 15.4 11.7 10.7 Target (KRW) 530000.00
HSBC EPS (KRW) 18122 27905 36671 40155 ROIC (%) 40.7 37.6 34.9 26.1 Market cap (KRWb) 9,806
HSBC EPS growth (%) 21.5 54.0 31.4 9.5 HSBC REP Free float (%) 100

Source: HSBC estimates Source: HSBC estimates

40
 Mid cap
Energy equipment abc
30 March 2011

for new capacity (27,000tpa for P3.7-4) so far this
year. Its annualized LT backlog now stands at
USD11.6bn, for 2012 to 2018e. OCI won USD950m
(KRW1trn, applying FX rate of 1,120.7) worth of
orders from Yingli, running from January 2012 to
December 2018, the largest contract amount ever
settled for OCI, far above our expectations. Contract
price is practically undisclosed, but assuming LT
contract price of USD45/kg, these y-t-d orders now
represent c51% of P3.7-4 to come on-stream in
2011-12e (P3.7 in 4Q11e, P4 in 4Q12e).
Of note, we are positive on recent order flow from
LG Siltron, which was the first-ever order won from
Korea’s major conglomerate. This, in our view,
implies potential diversification into the domestic
market (Korea’s module capacity is expected to
reach 2.2GW, double from last year). We expect
cUSD2.5bn worth of orders to kick in over the
coming weeks; these will outstrip the risks from
spot price fluctuations (20% of OCI’s shipments are
sold at spot market), and we expect OCI to secure 7-
10% down-payments from its new capacity, which
should support KRW1,639bn of capex in 2011e.

OCI: LT contract milestones

(USDm) 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e Total
SunPower (US) 50 50 100
Trina Solar (China) 17 17 17 17 17 85
Evergreen Solar (US) 30 30 30 30 120
Nexolon (Korea) 58 58 58 58 232
Evergreen Solar (US) 35 35 35 35 35 175
Deutsche Solar AG (Germany) 73 73 73 73 73 365
Yingli Green Energy (China) 38 38 38 114
Motech Industries Inc (Taiwan) 25 25 25 25 25 125
Sino-American Silicon Products (Taiwan) 32 32 32 32 32 32 192
Green Energy Tech (Taiwan) 32 32 32 32 32 32 192
Wuxi Suntech Power (China) 79 79 79 79 79 79 474
Space Energy Corporate (Jpn) 24 24 24 24 24 120
Comtec Solar (HK) Ltd 23 23 23 23 23 115
Wafer Works Corp (Taiwan) 30 30 30 30 30 30 180
DC Wafers Investments Sociedad Limitada (Spain) 15 15 15 15 15 15 15 15 120
Semi-Materials (Korea) 42 42 42 42 168
Green Energy Technology (Taiwan) 114 114 114 114 114 114 684
Eversol Corp (Taiwan) 96 96 96 96 96 96 576
Nexolon (Korea) 127 127 127 127 127 635
Sino-American Silicon Products (Taiwan) 87 87 87 87 87 435
Deutsche Solar AG (Germany) 83 83 83 83 83 83 498
Helios Technology SRL (Italy) 30 30 30 30 30 30 180
Wafer Works Corp (Taiwan) 40 40 40 40 40 40 240
Motech Industries Inc (Taiwan) 23 23 23 23 23 23 138
Swiss Wafer AG (Switzerland) 64 64 64 64 64 64 384
Space Energy Corporation (Jpn) 26 26 26 26 26 26 156
Wuxi Suntech Power (China) 107 107 107 107 107 107 642
Green Energy Tech (Taiwan) 45 45 45 45 45 225
Comtec Solar (HK) Ltd 31 31 31 31 124
Nexolon (Korea) 70 70 70 70 70 350
Yingli Green Energy (China) 136 136 136 136 136 136 136 952
Ferrotec Corporation (Japan) 16 16 16 16 16 16 16 109
LG Siltron (Korea) 24 24 24 24 24 24 24 168
Suntech (China) 61 61 61 61 61 61 61 429
Green Energy Technology (Taiwan) 73 73 73 73 73 73 73 509
Danen Technology (Taiwan) 23 23 23 23 23 23 23 161
Motech Industries Inc (Taiwan) 40 40 40 40 40 40 40 281
Changzhou Trina Solar Energy (China) 81 81 81 81 81 81 81 566
Neo Solar Power Corp. (Taiwan) 22 22 22 22 22 22 22 152
SKC Solmics (Korea) 20 20 20 20 20 20 20 143
Total 1,546 2,042 1,992 1,954 1,793 1,267 511 511 11,614
Source: Company data

41
 Mid cap
Energy equipment
30 March 2011
Expanding P5?
For the longer term, we remain positive on the
company’s diversification into the domestic
market, boosted largely by Korea’s green growth
momentum and major conglomerates’ expansion
into the solar midstream chain. On 16 March, the
Korean government released its master plan to
design Saemangeum Complex, including the
world’s largest renewable energy hub, with a
proposed size of 20 square kilometres.
Management has yet to provide detailed guidance;
its latest long-term agenda indicates expanding P5
in this area by 2020 (capacity of c100ktpa).
Strong Q1 2011e expected
OCI’s Q1 2011 spot volume has already sold out at
cUSD79/kg – the spot price on 16 March,
according to PVinsights.com. Its Q2 2011e
volume is now bid at an equally competitive level,
in addition to robust long-term contract shipment
prices ranging from USD53 to USD55/kg. We
project Q1 2011 sales at KRW805bn, up 32% y-o-
y and 10% q-o-q. We expect operating profit
margin of 31%, driven by strong polysilicon prices
and volume growth (10,000tpa P3 ramping up
from late 4Q10) and by resilient petrochemical
and coal-chemical margins, after crude-oil price
hikes were passed through into selling prices,
backed by strong demand from the auto industry.
First-ever shipments to semi in 2H11e
Moreover, we expect OCI to supply 11N high-
grade polysilicon to the semiconductor market
from H2 2011. We expect initial shipments of
3,000tpa, at most. Most will go to Japan, where
qualification testing is nearly complete, reportedly
from semi wafer makers such as SUMCO.
We believe visibility on these contracts will
increase from Q3 2011. Right now, Tokyo Electric
is experiencing a severe electricity shortage due to
the earthquake and electricity comprises c20% to
25% of the cost of polysilicon manufacturing. The
first priority for power will be for requirements
42
abc
for daily life, such as transportation. Production
has been suspended or cut back by major
polysilicon makers in Japan: with total capacity of
Tokuyama 8,000tpa, M.Setek 5,000tpa,
Mitsubishi 3,000tpa, and much of the production
is for semiconductors rather than solar.
While we estimate 2011 polysilicon production
volume from Japan will be c20,000tpa at most,
the impact of shutdowns is likely to translate into
less than 10% of global polysilicon supply in
2011. That may not be a meaningful amount if we
consider Japan’s high gearing to semiconductors,
but it should be enough to support near-term
prices for high-grade polysilicon at a competitive
level above USD75/kg heading into Q2 2011.
Outlook for 2011-2012e
earnings
We project OCI’s EBITDA will rise 46% y-o-y in
2011 and 12% y-o-y in 2012, assuming USD56/kg
and USD47/kg blended ASP over the coming years.
On top of its leading global capacity, such growth
should be driven by volume growth play of poly-Si
(economies of scale) to outweigh poly-Si price
downturn in H2 2011e after German tariff cuts of
c15% materialise from July.
Looking ahead, OCI should demonstrate a clear
standout against oversupplied global solar market as
market consolidation (China has announced
tightening measures against new poly-Si facilities in
January) will likely materialize when price and
margin pressure intensifies further to squeeze out
new entrants, possibly after the July fit-in-tariff cuts
in Germany plus growing policy risks from Italy.
We stick to upstream names (OCI and Wacker
Chemie) who are least exposed to ASP pressure as
well as having leading cash costs and robust LT
backlog sold via prepayments and fixed pricing.
 Mid cap
Energy equipment abc
30 March 2011

HSBCe vs consensus Key risks to our investment view are (1) delays in
P3-4 ramp-up, (2) spot poly-Si prices falling
Our top-line forecast for 2011e is 1% below
below USD45/kg and (3) unexpected oil price
consensus, due mainly to our conservative
weakness that may pull down macro conditions
assumptions for a spot poly-Si price of USD42/kg
for renewable energy order flows.
by Q4 2012e. But our operating margin
assumptions are slightly above market OCI: HSBCe vs consensus
expectations, based on OCI’s record in ramping (KRWbn) 2011e 2012e
up new capacity (maintained yield rate above 75% Sales HSBCe 3,285 3,461
Consensus 3,308 3,848
for the additional volumes from new capacity and Difference -1% -10%
debottlenecking, to successfully ramp up above EBIT HSBCe 1,066 1,181
Consensus 1,033 1,183
90% overall utilisation rate within a quarter). That Difference 3% 0%
EPS HSBCe 35,678 39,151
was shown in the Q4 2010 results, when P3 Consensus 34,201 40,691
volume kicked in a month ahead of the original Difference -2% -6%
ramp-up schedule. Source: Bloomberg, HSBC estimates

Valuation and risks

Our target price of KRW530,000 is based on a
sum-of-the-parts valuation. We apply a 7.5x target
EV/EBITDA for the polysilicon business, which
is a c20% premium to its major global peers based
on its superior earnings generation, leading
capacity and competitive cash cost.

We apply 9.0x EV/EBITDA to the coal/petro

chemicals business (Korea’s BTX chemical peer
average) with an operational value of
KRW10.7trn. We add non-core assets
(KRW1.0trn) and deduct net debt (KRW541bn).

OCI: Poly-Si production & EBITDA outlook (tonnes, KRWbn) OCI: Cash cost and spot price outlook (USD/kg)

80,000 1,800 80 25
23
60,000 1,500 70
21
40,000 1,200 60
19
20,000 900 50 17
0 600 40 15
2010 2011e 2012e 2013e 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

Production (LHS) EBITDA (RHS) Spot price (LHS) Cash cost (RHS)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

43
 Mid cap
Energy equipment abc
30 March 2011

OCI at a glance
Sales by division (2008-12e) Sales and EBIT margin (2008-12e)

4,000 3,500 40%

3,000
3,000
2,000 30%
1,000 2,500

0
2,000 20%
2008 2009 2010 2011e 2012e
2008 2009 2010 2011e 2012e

Petro/coal chemicals Poly -Si Others Sales EBIT margin

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Working capital (2008-12e) Capex (2007-12e)

1,500 800 2,000

700
1,300 600
500 1,500
1,100 400
900 300
200 1,000
700 100
0 500
500 -100
2008 2009 2010 2011e 2012e
0
Cash Flow s from Operating (LHS)
Changes in Working Capital (RHS) 2007 2008 2009 2010 2011e 2012e

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Balance sheet ratios (2008-12e) Shareholder structure (2010)

12 30 Ow ner
11 11%
10 20 Related
parties
9
11%
8 10
7 Mirae
6 0 Asset
Others
2008 2009 2010 2011e 2012e 10%
68%
Inv entory (RHS) Receiv ables (LHS)

Source: Company data, HSBC estimates Source: Company data

44
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: OCI Company Ltd Overweight (V)

Financial statements Key forecast drivers
Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (KRWb) Poly-Si sales 803 1,198 1,743 1,979
Poly-Si OP 354 496 851 969
Revenue 2,102 2,606 3,285 3,461 Poly-Si EBITDA 465 668 1,106 1,274
EBITDA 695 936 1,368 1,533 Blended ASP (USD/kg) 72 57 56 47
Depreciation & amortisation -157 -219 -302 -352 Cash cost(USD/kg) 31 25 20 17
Operating profit/EBIT 538 717 1,066 1,181
Net interest -23 -16 -19 -33
PBT 465 719 1,078 1,183
HSBC PBT 465 719 1,078 1,183 Valuation data
Taxation -80 -103 -253 -278 Year to 12/2009a 12/2010e 12/2011e 12/2012e
Net profit 385 617 825 905
HSBC net profit 385 639 848 928 EV/sales 4.7 3.7 3.0 3.0
EV/EBITDA 14.1 10.3 7.3 6.7
Cash flow summary (KRWb) EV/IC 6.7 5.3 3.4 2.5
Cash flow from operations 507 865 1,412 1,307 PE* 23.6 15.4 11.7 10.7
Capex -830 -661 -1,639 -1,594 P/Book value 6.6 4.8 3.5 2.7
Cash flow from investment -846 -803 -1,576 -1,562 FCF yield (%) -3.6 1.8 -2.7 -3.3
Dividends -30 -47 -74 -75 Dividend yield (%) 0.5 0.8 0.8 0.8
Change in net debt 254 -149 296 358 Note: * = Based on HSBC EPS (fully diluted)
FCF equity -336 167 -250 -309
Balance sheet summary (KRWb)
Issuer information
Intangible fixed assets 7 5 -3 -14 Share price (KRW) 428500 Target price (KRW) 530000 Potent'l rtn (%) 23.7
Tangible fixed assets 2,020 2,705 4,052 5,304
Current assets 926 1,080 929 509 Reuters (Equity) 010060.KS Bloomberg (Equity) 010060 KS
Cash & others 432 511 398 -18 Market cap (USDm) 8,742 Market cap (KRWb) 9,806
Total assets 3,364 4,264 5,423 6,246 Free float (%) 100 Enterprise value (KRWb) 9599
Operating liabilities 1,067 1,457 1,683 1,734 Country Korea Sector Chemicals
Gross debt 816 746 930 872 Analyst Keith Hwang Contact +822 3706 8763
Net debt 384 235 532 890
Shareholders funds 1,478 2,060 2,811 3,641
Invested capital 1,454 1,822 2,897 4,083 Price relative
495842 495842

Ratio, growth and per share analysis 445842 445842

395842 395842
Year to 12/2009a 12/2010e 12/2011e 12/2012e
345842 345842
Y-o-y % change 295842 295842
245842 245842
Revenue -0.8 24.0 26.0 5.4
EBITDA 3.2 34.7 46.1 12.1 195842 195842
Operating profit -9.2 33.2 48.7 10.8 145842 145842
PBT 14.2 54.6 49.9 9.7 Mar-10 Se p-10 Mar-11
HSBC EPS 21.5 54.0 31.4 9.5 OCI Company Ltd Rel to KOSPI INDEX

Ratios (%) Source: HSBC

Revenue/IC (x) 1.9 1.6 1.4 1.0

ROIC 40.7 37.6 34.9 26.1 Note: price at close of 21 Mar 2011
ROE 28.3 36.2 34.8 28.8
ROA 12.8 17.0 17.6 16.0
EBITDA margin 33.0 35.9 41.6 44.3
Operating profit margin 25.6 27.5 32.4 34.1
EBITDA/net interest (x) 30.4 57.4 70.2 46.6
Net debt/equity 26.0 11.4 18.9 24.4
Net debt/EBITDA (x) 0.6 0.3 0.4 0.6
CF from operations/net debt 131.9 367.6 265.7 146.9
Per share data (KRW)
EPS reported (fully diluted) 18161.37 26912.33 35677.63 39151.30
HSBC EPS (fully diluted) 18122.14 27905.20 36671.56 40155.18
DPS 2000.00 3250.00 3250.00 3250.00
Book value 64590.91 89087.30 121565.64 157466.93

45
 Mid cap
Energy equipment abc
30 March 2011

PV Crystalox
 2010 results better than expected; lower costs of in-house
polysilicon partly offset margin erosion from falling ASPs
 We expect margin will remain under pressure from declining ASPs
during 2011
 We reiterate our Neutral (V) rating but increase our target price to
65p from 60p on increasing sales volume

Investment summary The group reduced average wafer production costs Christian Rath*
Analyst
by 20 % during 2010 and is targeting a further 10% HSBC Trinkaus & Burkhardt AG
PV Crystalox (PVCS) reported its 2010 results on 24 +49 211 910 3049
to 15% reduction in 2011, thanks to the lower
March 2011, which were better than the market christian.rath@hsbc.de
polysilicon cost, as production from Bitterfeld
expected. Its wafer sales volume increased by 48% Robert Clover*
facility increases. PVCS expects lower polysilicon Analyst
y-o-y due to strong demand and it operated at full HSBC Bank Plc
cost from its internal facility to be a significant driver + 44 20 7991 3464
capacity in H2 2010. The company said its Bitterfeld
of future profitability. We believe margins will robert.clover@hsbcib.com
polysilicon facility achieved an annualised output
remain under pressure this year, as we estimate a Charanjit Singh*
averaging 1450MT during the first two months of Analyst
15% to 20% decline in average prices during 2011, HSBC Bank Plc
2011 and is expected to operate at its nameplate + 91 80 3001 3776
given the oversupply in the solar market across the charanjit2singh@hsbc.co.in
capacity of 1,800MT during the second half of 2011.
value chain, especially in H2 of 2011. We therefore
Also, the internal polysilicon costs have been below * Employed by a non-US
continue to be cautious and maintain our Neutral (V) affiliate of HSBC Securities
average contracted costs since August 2010. (USA) Inc, and is not
rating. But we raise our target price to 65p from 60p registered/qualified pursuant to
During 2010, margins declined in spite of increased on increasing sales volume. FINRA regulations

volumes. EBIT margin (before currency losses) in

2010 decreased to 13.5% from 20.8% in 2009 as
average selling prices fell 28% y-o-y. That was
partly offset by reductions in average wafer costs.

Financial summary (EURm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC PVCS.L
Revenue 256 260 282 317 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg PVCS LN
EBITDA 48 48 51 57 EV/EBITDA 4.3 3.8 3.5 3.1 Rating Neutral (V)
EBIT margin (%) 13.5% 13.1% 12.6% 12.3% EV/IC 1.1 1.0 0.9 0.8 Share (GBp) 62
HSBC net profit 23 24 25 27 HSBC PE 12.2 11.8 11.3 10.3 Target (GBp) 65
HSBC EPS (EUR) 0.06 0.06 0.06 0.07 ROIC (%) 14.0 13.1 12.7 12.6 Market cap (GBPm) 256
HSBC EPS growth (%) -21.3 3.0 4.5 9.9 HSBC REP 0.6 0.5 0.5 0.4 Free float (%) 100

Source: HSBC estimates Source: HSBC estimates

46
 Mid cap
Energy equipment abc
30 March 2011

Outlook for 2011 Valuation and risks

PV Crystalox guided for H1 2011 shipment
volume of 225 to 240MW, up from 155MW in 1H
2010. The company says the outlook for H2 2011
is less clear, but it expects double-digit growth in
global PV installations in 2011. It is increasing its
ingot production capacity from 430MW in 2010
to 535MW by the end of Q1 2011 and 670MW by
the end of 2011.
The company emphasised that in terms of
geographical breakdown of revenue, China and
Japan markets were of similar importance in
2010. China’s share of its revenues has increased
to 30.7% in 2010 from 9% in 2009, while Japan
has fallen to 31.1% from 56.3%. It also expects
Taiwan, which contributed 11% of revenues in
2010 (up from 2.9% in 2009) to become an
increasingly significant regional customer and that
its share will increase two- to threefold from
current levels.
HSBCe vs consensus
We have made changes to our forecasts for 2011
onwards after incorporating the 2010 numbers
into our model. Our forecasts factor in company
guidance for 2011.
PV Crystalox: HSBCe vs consensus
(EURm) 2011e
Sales HSBCe 260
Consensus 281
Difference -7%
EBIT HSBCe 34
Consensus 43
Difference -21%
Valuation
We value PV Crystalox using our two different
DCF methodologies – the HSBC four-stage
ROIC-based DCF and a ‘classic’ FCF-based DCF.
We use a WACC of 8.1%, a beta of 1.1, an EMRP
of 3.5% and a risk-free rate of 4.50%, and we
derive fair values of 67p and 59p. This gives us an
average of 63p which we have rounded up to 65p,
to get our target price (previously 60p).
Under our research model, for stocks with a
volatility indicator, the volatile Neutral band is
10ppt above and below the hurdle rate of 7.50%
for UK stocks. Our 12-month target price of 65p
implies a potential return of 5.7% which is within
the -2.5% to 17.5% Neutral band for volatile UK
stocks under HSBC’s research model; thus, we
reiterate our Neutral (V) rating.
Risks
The downside risks to our view include:
 A delay in the ramp-up of the polysilicon
production facility in Bitterfeld, Germany
 Oversupply in the polysilicon market
adversely affecting ASPs and margins
 Negative FX effects due to euro depreciation
2012e 2013e  Loss of key customers to competition
282 317
305 384  Increasingly uncompetitive cost position
-8% -17%
relative to Chinese producers
35 39
42 48 The upside risks to our valuation include:
-16% -18%

EPS (EUR, HSBCe 0.057 0.060 0.066

 Stronger-than-expected global demand
fully Consensus 0.067 0.065 n.m. leading to improved product pricing
diluted) Difference -14% -8% n.a.
Note: Limited consensus available for 2013  A rebound in oil and coal prices, forcing
Source: Bloomberg consensus, HSBC estimates
governments across the world to bring in more
regulations supporting renewable generation

 Margins being higher than our estimates

47
 Mid cap
Energy equipment abc
30 March 2011

PV Crystalox at a glance
Sales by geography (2010) Sales and EBIT margin (2009-13e)
USA
350 25%
15%
300
20%
* *RoE 250
Japan
0% 200 15%
31%
Germany
150 10%
10%
100
5%
50
*RoA
China 0 0%
13%
31% 2009 2010 2011e 2012e 2013e
Sales (EURm) EBIT margin (%)

Note: * RoE – Rest of Europe; **RoA – Rest of Asia Source: Company data, HSBC estimates
Source: HSBC estimates

Working capital (EURm) (2009-13e) Capex (EURm) (2009-13e)

100 34% 35 11%

30
80 10%
32% 25
60 20 9%
30%
40 15 8%
28% 10
20 7%
5
0 26% 0 6%
2009 2010 2011e 2012e 2013e 2009 2010 2011e 2012e 2013e
Working capit al (EURm) Working capit al (%of sales) Capex (EURm) Capex (%of sales)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Balance sheet ratios (2009-13e) Shareholder structure (March 2011)

25%

20%

15%
Others Schroder
10%
86% In vt. Mgmt.
5% 14%

0%
2009 2010 2011e 2012e 2013e
RoIC (%) RoE (%)

Source: Company data, HSBC estimates Source: Company data

48
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: PV Crystalox Neutral (V)

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (EURm) EV/sales 0.8 0.7 0.6 0.5
EV/EBITDA 4.3 3.8 3.5 3.1
Revenue 256 260 282 317 EV/IC 1.1 1.0 0.9 0.8
EBITDA 48 48 51 57 PE* 12.2 11.8 11.3 10.3
Depreciation & amortisation -13 -14 -16 -18
P/Book value 1.0 1.0 0.9 0.8
Operating profit/EBIT 35 34 35 39
FCF yield (%) 5.4 7.3 2.4 1.2
Net interest 0 1 1 1
Dividend yield (%) 0.0 0.0 0.0 0.0
PBT 34 35 36 40
HSBC PBT 0 0 0 0 Note: * = Based on HSBC EPS (fully diluted)
Taxation -10 -11 -11 -12
Net profit 23 24 25 27
HSBC net profit 23 24 25 27 Issuer information

Cash flow summary (EURm) Share price (GBPp) 62 Target price (GBPp) 65 Potent'l return (%) 5.7

Cash flow from operations 34 46 34 35 Reuters (Equity) PVCS.L Bloomberg (Equity) PVCS LN
Capex -20 -26 -28 -32 Market cap (USDm) 417 Market cap (GBPm) 256
Cash flow from investment -20 -26 -28 -32 Free float (%) 100 Enterprise value (EURm) 183
Dividends 0 0 0 0 Country United Kingdom Sector Electrical Equipment
Change in net debt 15 -28 -4 -1 Analyst Christian Rath Contact 44 20 7991 6741
FCF equity 14 20 6 3
Balance sheet summary (EURm) Price relative
Intangible fixed assets 1 1 1 1 142 142
Tangible fixed assets 130 142 155 169
Current assets 233 235 243 258 122 122
Cash & others 101 101 101 101 102 102
Total assets 412 417 441 472 82 82
Operating liabilities 84 94 96 101
Gross debt 46 18 14 13 62 62
Net debt -55 -83 -87 -88 42 42
Shareholders funds 281 305 330 357
22 22
Invested capital 178 182 201 225
2009 2010 2011 2012
PV Crystalox Rel to FTSE ALL-SHARE

Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 6.5 1.7 8.2 12.6
EBITDA -20.4 0.3 6.7 11.1
Operating profit -31.0 -1.1 3.7 10.0
PBT -20.7 3.0 4.5 9.8
HSBC EPS -21.3 3.0 4.5 9.9
Ratios (%)
Revenue/IC (x) 1.5 1.4 1.5 1.5
ROIC 14.0 13.1 12.7 12.6
ROE 8.6 8.2 7.9 8.0
ROA 6.1 5.8 5.8 6.0
EBITDA margin 18.6 18.3 18.1 17.8
Operating profit margin 13.5 13.1 12.6 12.3
EBITDA/net interest (x)
Net debt/equity -19.5 -27.3 -26.5 -24.6
Net debt/EBITDA (x) -1.2 -1.7 -1.7 -1.6
CF from operations/net debt
Per share data (EUR)
EPS reported (fully diluted) 0.06 0.06 0.06 0.07
HSBC EPS (fully diluted) 0.06 0.06 0.06 0.07
DPS 0.00 0.00 0.00 0.00
Book value 0.67 0.73 0.79 0.86

49
 Mid cap
Energy equipment abc
30 March 2011

Q-Cells
 Working capital reduction in the systems business on track, but
the high exposure to Italy (25% of Q4 shipments) is a concern
 Higher wafer and consumable costs will remain a drag on the
earnings recovery in 2011, we believe
 We maintain our target price of EUR3 but downgrade to
Underweight (V) from Neutral (V)

Investment summary Wafer spot prices declined slightly at the Christian Rath *
Analyst
Working capital restructuring on track but input beginning of 2011 but have begun to increase in HSBC Trinkaus & Burkhardt
recent weeks, and are now again close to 2010 AG, Germany
costs and strategic repositioning are challenges + +49 211 910 3049
Following a sharp increase to EUR646m in Q3, Q- peaks owing to tight demand and manufacturers’ christian.rath@hsbc.de

Cells was able to substantially lower its working
capital to EUR340m (25% of 2010 sales) by year-
end, in part because it received payments for several
projects but also owing to the reallocation of one
project to fixed assets. Q-Cells also expanded its
module business in Q4 and shipped 80 MWp
crystalline modules and 16 MWp CIGS modules.
The company benefited notably from extraordinarily
strong Italian demand (25% of Q4 and 12% of full-
year shipments). However, Q-Cells’ Q4 EBIT
margin was down 1.9pp q-o-q after a shift in the
product mix towards modules (which entail higher
transport costs) and a rise in wafer and silver prices.
success in passing higher polysilicon costs * Employed by a non-US
affiliate of HSBC Securities
through to customers. However, solar cell prices (USA) Inc, and is not
came under pressure from the seasonal slowdown registered/qualified pursuant to
FINRA regulations
in demand and continued capacity additions
especially from Asian players. We believe market
conditions are markedly more challenging in 2011
and view higher personnel and input costs (eg
silver) as a further risk factor for Q-Cells’ margin
recovery. Given the unfavourable market
dynamics in the first quarter, we see the risk that
the company will be again EBIT loss making in
Q1 (Q1 2010 EBIT loss of EUR9.3m).

Financial summary (EURm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC QCEG.DE
Revenue 1354.2 1468.7 1697.2 1821.0 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg QCE GR
EBITDA 182.2 171.0 220.1 242.0 EV/EBITDA 5.2 5.4 4.3 3.9 Rating Underweight (V)
EBIT margin (%) 6.1 4.2 6.1 6.6 EV/IC 0.8 0.8 0.8 0.7 Share (EUR) 3.17
HSBC net profit 21.0 21.8 51.5 62.5 HSBC PE 22.6 27.0 11.4 9.4 Target (EUR) 3.00
HSBC EPS (EUR) 0.14 0.12 0.28 0.34 ROIC (%) 5.6 3.7 6.0 6.5 Market cap (EURm) 679.5
HSBC EPS growth (%) -16.1 136.7 21.4 HSBC REP 1.6 2.4 1.4 1.2 Free float (%) 77

Source: HSBC estimates Source: HSBC estimates

50
 Mid cap
Energy equipment abc
30 March 2011

Outlook for 2011-13e Valuation and risks

We forecast c12% top-line growth in 2011e
(guidance according to the annual report: EUR1.3-
1.5bn sales) given Q-Cells’ strategy shift and
positioning in the modules and systems business,
which should be accompanied by an ASP shift.
However, we expect earnings to drop from the H2
run rate owing to cost inflation and a regional
demand shift from Italy to lower-margin markets.
We also remain cautious about the acceptance and
profitability of Q-Cells’ CIGS business, given our
expectation of an ASP decline and still low module
shipments (16 MWp in Q4). Furthermore, Q-Cells
has cut capex more sharply than its competitors,
which could limit its medium-term growth potential.
HSBCe vs consensus
We are in line with consensus on 2011e sales but are
much more cautious about the earnings recovery.
Cell makers are reliant on partially integrated
module makers and, given the rapid capacity build-
up in Asia as well as the lack of differentiation in the
cell business, we believe Q-Cells’ stronger focus on
the downstream business is the right strategy. We
therefore expect a shift in the product mix over the
next few quarters. However, it will take time for Q-
Cells to develop a brand image and distribution
channels (eg, higher advertising costs), and we
expect the market environment to be more
competitive in 2011e. Consequently, we do not
expect the changed product mix to be reflected in
earnings in the short term.
Q-Cells: HSBCe vs consensus
(EURm) 2011e
Sales HSBCe 1,468.7 1,697.2
Consensus 1,435.0 1,513.7
Difference 2%
EBIT HSBCe 61.7
Consensus 84.1
Difference -27%
EPS (fully HSBCe 0.12
diluted, Consensus 0.20
EUR) Difference -40%
Source: HSBC estimates, FactSet consensus
Q-Cells currently trades on 27x 2011e PE and 5.4x
2011e EV/EBITDA, which places it at a clear
premium to its peer group, although we forecast RoE
and RoIC to remain well below the sector average
over the next few years. On our 2012e multiples of
11.4x PE and 4.3x EV/EBITDA, the stock looks
considerably more attractive. Despite management’s
solid track record in restructuring the group over the
past few quarters, we believe Q-Cells also benefited
from highly favourable market conditions in H2
2010. It is still unclear how successful the
company’s turnaround efforts will be over the
medium term, especially as the market environment
is more challenging than in 2010. We therefore
believe forecast risks are fairly high and, following
the recent share price rally in the solar sector, we
believe risks are more skewed to the downside.
Our DCF-model is based on an explicit forecast
period until 2013, a semi-explicit forecast period
until 2018 thereafter and a fade-period of 25 years.
We assume neither excess returns nor value
destruction are feasible in the long run, so we adjust
our ROIC forecast during the fade period on a
straight-line basis to our slightly increased WACC of
11% (previously 10.8%, RFR of 3.5% (down from
4.0%); an ERP of 5% (up from 4.5%) and beta of
1.7). Based on our assumptions, our DCF-model
yields an unchanged target price of EUR3. Under
our research model, the Neutral band for stocks with
a volatility indicator is 10 percentage points above
and below our hurdle rate of 8.5% for German
stocks, resulting in a Neutral band of -1.5% to
2012e 2013e +18.5% around the current share price. For Q-Cells,
1,821.0 our target price of EUR3 implies a potential return of
1,584.7
12% 15% -5%, which is below the N(V) band, and we
therefore downgrade the stock to UW(V).
104.3 120.2
91.4 103.0 Key upside risks are: a stronger-than-expected
14% 17%
recovery in demand and cost-cutting benefits;
0.28 0.34 lower wafer and consumable costs, and higher
0.26 0.27
8% 26% ASPs; a stronger performance in the QCI, thin-
film or module business; and M&A speculation.

51
 Mid cap
Energy equipment abc
30 March 2011

Q-Cells at a glance
Balance sheet ratios (2010-13e) Sales and EBIT margin (2009-13e)

7% 50%
2,000 20%
6% 30%
5% 0%
10% 1,500
4% -20%
-10%
3% 1,000
-30% -40%
2%
500 -60%
1% -50%

0% -70% 0 -80%
2010 2011e 2012e 2013e 2009 2010 2011e 2012e 2013e
Sales (EURm) EBIT margin (%, RHS)
RoIC (%) RoE (%) Gearing (%, RHS)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Working capital (2009-13e) Capex (2009-13e)

500 60% 400 50%

400 50% 40%

300
40%
300 30%
30% 200
200 20%
20%
100
100 10% 10%

0 0% 0 0%
2009 2010 2011e 2012e 2013e 2009 2010 2011e 2012e 2013e
Wkg cap (EURm) Wkg cap (% of sales, RHS) Capex (EURm) Capex (% of s ales, RHS)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Net debt and interest cover (2010-13e) Shareholder structure (March 2011)

6 2.0
Baillie Gifford Taube Hodson
5
1.5 5% Stonex
4 5%
Good
3 1.0 Energies
2 14%
0.5
1
0 0.0
2010 2011e 2012e 2013e
Free float
76%
Interest cover (x, LHS) net debt / EBITDA (x, RHS)

Source: Company data, HSBC estimates Source: Company data

52
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: Q-Cells Underweight (V)

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (EURm) EV/Sales 0.7 0.6 0.6 0.5
EV/EBITDA 5.2 5.4 4.3 3.9
Revenue 1354.2 1468.7 1697.2 1821.0 EV/IC 0.8 0.8 0.8 0.7
EBITDA 182.2 171.0 220.1 242.0 PE* 22.6 27.0 11.4 9.4
Depreciation & amortisation -99.9 -109.3 -115.8 -121.8 P/Book value 0.5 0.5 0.5 0.5
Operating profit/EBIT 82.3 61.7 104.3 120.2 FCF yield (%) 15.2 3.8 -0.3 4.8
Net interest -27.9 -30.6 -30.7 -30.8 Dividend yield (%) 0.0 0.0 0.0 0.0
PBT 112.3 31.1 73.6 89.3
HSBC PBT 114.4 31.1 73.6 89.3 Note: * = Based on HSBC EPS (fully diluted)
Taxation -21.4 -9.3 -22.1 -26.8
Net profit 18.9 21.8 51.5 62.5
HSBC net profit 21.0 21.8 51.5 62.5 Issuer information

Cash flow summary (EURm) Share price (EUR) 3.17 Target price (EUR) 3.00 Potent'l rtn (%) -5.2

Cash flow from operations 48.5 130.2 105.0 184.7 Reuters (Equity) QCEG.DE Bloomberg (Equity) QCE GR
Capex -114.2 -110.0 -118.8 -163.9 Market cap (USDm) 963.8 Market cap (EURm) 679.5
Cash flow from investment 16.6 -114.4 -123.9 -169.4 Free float (%) 77 Enterprise value (EURm) 930.6
Dividends 0.0 -0.8 0.0 0.0 Country Germany Sector Energy Equipment
Change in net debt -173.0 -15.0 18.9 -15.4 Analyst Christian Rath Contact +49 211 910 3049
FCF equity 93.6 23.6 -1.7 29.6
Balance sheet summary (EURm) Price relative
Intangible fixed assets 14.2 13.3 13.1 13.2 8 8
Tangible fixed assets 934.0 940.0 948.3 995.7
Current assets 1096.2 1098.1 1169.7 1184.1 7 7
Cash & others 473.9 473.9 473.9 473.9 6 6
Total assets 2179.4 2186.4 2266.1 2328.0 5 5
Operating liabilities 392.5 390.6 396.4 407.6 4 4
Gross debt 804.6 789.6 808.5 793.1
3 3
Net debt 330.7 315.7 334.6 319.2
Shareholders’ funds 882.7 903.7 955.2 1017.7 2 2
Invested capital 1178.0 1186.9 1260.7 1311.5 1 1
Mar-10 Sep -10 Mar-11
Q -Ce lls Rel to DAX-100
Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 68.9 8.5 15.6 7.3
EBITDA -6.1 28.7 9.9
Operating profit -25.0 69.0 15.2
PBT -72.3 136.7 21.4
HSBC EPS -16.1 136.7 21.4
Ratios (%)
Revenue/IC (x) 1.1 1.2 1.4 1.4
ROIC 5.6 3.7 6.0 6.5
ROE 2.6 2.4 5.5 6.3
ROA 6.4 2.6 3.8 4.2
EBITDA margin 13.5 11.6 13.0 13.3
Operating profit margin 6.1 4.2 6.1 6.6
EBITDA/net interest (x) 6.5 5.6 7.2 7.8
Net debt/equity 37.5 34.9 35.0 31.4
Net debt/EBITDA (x) 1.8 1.8 1.5 1.3
CF from operations/net debt 14.7 41.2 31.4 57.9
Per share data (EUR)
EPS reported (fully diluted) 0.13 0.12 0.28 0.34
HSBC EPS (fully diluted) 0.14 0.12 0.28 0.34
DPS 0.00 0.00 0.00 0.00
Book value 6.26 6.05 6.39 6.81

53
 Mid cap
Energy equipment abc
30 March 2011

REC
 Focus on cost reduction continues
 Margins likely to be under pressure in H2 2011 and 2012
 We reiterate our Neutral (V) rating but increase our price target to
NOK20 from NOK17.5

Investment summary cost reductions across value chain. Although REC Christian Rath*
Analyst
reported improved operating performance in H2 HSBC Trinkaus & Burkhardt AG
As a fully integrated player with good upstream +49 211 910 3049
2010, driven by higher capacity utilisation of its
presence REC will benefit from continuing strong christian.rath@hsbc.de
facilities and stronger than expected demand and
demand for polysilicon, especially in H1 2011, Robert Clover*
prices, the cost reduction targets have not yet been Analyst
and higher margins for the product. However, we HSBC Bank Plc
achieved, and so have yet to have an impact on + 44 20 7991 3464
forecast margins to come under pressure in H2, as
the bottom line. We therefore continue to be robert.clover@hsbcib.com
we estimate a 15-20% decline in average prices
cautious and will analyse the operating Charanjit Singh*
during 2011, given the oversupply in solar market Analyst
performance when company reports its Q1 2011 HSBC Bank Plc
across the value chain especially in the second + 91 80 3001 3776
numbers in April. charanjit2singh@hsbc.co.in
half of 2011 as demand decreases.

REC has taken steps to defend itself against

Outlook for 2011 * Employed by a non-US
affiliate of HSBC Securities
(USA) Inc, and is not
increasing price competition from low cost For 2011, REC’s guidance is for silicon registered/qualified pursuant to
producers in Asia (particularly China) by opening production of 17000MT (up from 16000MT in FINRA regulations

a facility in Singapore and adopting new
technology (FBR) which promises a lower cost of
production for polysilicon than the conventional
(Siemens) process. In its Q4 results conference
call in February 2011 the company reiterated its
focus on operational improvements, increased
capacity utilisation, improved product quality and
2010), wafer production of 1650MW (vs1210MW
in 2010) and module production of 750MW (vs
502MW in 2010). Management in its full year
results conference call mentioned that it is
experiencing better than expected pricing in Q1
2011 (5% decline in prices over Q4 2010 versus
c13% anticipated earlier), however the

Financial summary (NOKm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC REC.OL
Revenue 13,776 16,174 16,271 17,084 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg REC NO
EBITDA 3,254 4,771 4,963 5,347 EV/EBITDA 6.5 4.1 4.5 4.5 Rating Neutral (V)
EBIT margin (%) 5.4% 12.1% 12.5% 11.9% EV/IC 0.7 0.6 0.7 0.7 Share (NOK) 19.17
HSBC net profit 989 991 1,015 914 HSBC PE 31.4 20.4 20.0 22.2 Target (NOK) 20.00
HSBC EPS (NOK) 0.61 0.94 0.96 0.86 ROIC (%) 1.5 4.5 4.4 4.0 Market cap (NOKm) 12,744
HSBC EPS growth (%) n.m. 53.8 2.3 -9.9 HSBC REP 3.8 1.2 1.3 1.4 Free float (%) 100

Source: HSBC estimates Source: HSBC estimates

54
 Mid cap
Energy equipment abc
30 March 2011

management believes that 15-20% decline in Under our research model, for stocks with a
prices H2 is likely, which is in line with our volatility indicator, the volatile Neutral band is
model assumptions. 10ppt above and below the hurdle rate of 10.0%
for Norwegian stocks. Our 12-month target price
HSBCe vs consensus
of NOK20 implies a potential return of 4.3%
We have made changes to our forecasts for 2011 which is within the 0% to 20% Neutral band for
onwards after incorporating 2010 actual numbers volatile Norwegian stocks under HSBC’s research
in our model. Our forecasts factor in the company model; thus, we reiterate our Neutral (V) rating.
guidance for 2011.
Risks
REC: HSBCe vs consensus The downside risks to our view include:
(NOKm) 2011e 2012e 2013e
 REC failing to achieve its expected reduction
Sales HSBCe 16,174 16,271 17,084
Consensus 16,677 15,859 14,491 in production cost from technology
Difference -3% 3% 18%
improvements.
EBIT HSBCe 1,962 2,031 2,036
Consensus 2,204 2,044 1,810  a greater-than-expected decline in ASPs due
Difference -11% -1% 12%
to oversupply across the solar value chain,
EPS (NOK, HSBCe 0.94 0.96 0.86 leading to lower-than-expected margins.
fully Consensus 1.24 1.20 1.37
diluted) Difference -24% -20% -37%
The upside risks to our valuation include:
Note: Limited consensus available for 2013
Source: Bloomberg consensus, HSBC estimates
 stronger-than-expected global demand
Valuation and risks leading to improved product pricing.

Valuation  a rebound in oil and coal prices forcing

We value REC using our two different DCF governments across the world to bring in
methodologies – the HSBC four-stage ROIC-based more regulations supporting renewable
DCF and a ‘classic’ FCF-based DCF. We use a generation.
WACC of 8.50%, a beta of 1.0 (previously 1.30), an
 an increase in M&A activity that could have a
EMRP of 6.5% (previously 4.50%) and a risk-free
favourable impact on REC.
rate of 3.50% (previously 4.0%), we get an average
value of NOK22.30, to which we apply a 10%
discount, due to uncertainty about the cost-
competitive position of FBR and margin recovery
due to pressure on pricing from the oversupply of
polysilicon, to arrive at our new target price of
NOK20 (rounded) ( previously NOK17.50).

55
 Mid cap
Energy equipment abc
30 March 2011

REC at a glance
Sales by division (2011e) Sales and EBIT margin (2009-13e)

20,000 15%
10%
15,000
REC Solar REC 5%
37% Silicon 10,000 0%
29%
-5%
5,000
-10%
0 -15%
REC Wafer
2009 2010 2011e 2012e 2013e
34%
Sales (NOKm) EBIT margin (%)

Source: HSBC estimates Source: Company data, HSBC estimates

Working capital (NOKm) (2009-13e) Capex (NOKm) (2009-13e)

4,000 25% 12,000 140%

3,500 10,000 120%
20%
3,000
100%
2,500 8,000
15% 80%
2,000 6,000
1,500 10% 60%
4,000
1,000 40%
5%
500 2,000 20%
0 0% 0 0%
2009 2010 2011e 2012e 2013e 2009 2010 2011e 2012e 2013e
Working capital (NOKm) Working capital (%of sales) Capex (NOKm) Capex (%of sales)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Balance sheet ratios (2009-13e) Shareholder structure (March 2011)

10% 70% Hafslund

Others
5% 60% Venture
46%
50% 9%
0%
40% Folketry gdf
-5% 2009 2010 2011e 2012e 2013e
30% ondet
-10% 5%
20%
-15% 10%
-20% 0% Orkla
RoIC (%) RoE (%) Gearing (%) (RHS) 40%

Source: Company data, HSBC estimates Source: Company data

56
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: Renewable Energy Corp As Neutral (V)

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (NOKm) EV/sales 1.5 1.2 1.4 1.4
EV/EBITDA 6.5 4.1 4.5 4.5
Revenue 13,776 16,174 16,271 17,084 EV/IC 0.7 0.6 0.7 0.7
EBITDA 3,254 4,771 4,963 5,347 PE* 31.4 20.4 20.0 22.2
Depreciation & amortisation -2,514 -2,809 -2,932 -3,311
P/Book value 0.9 0.8 0.8 0.8
Operating profit/EBIT 740 1,962 2,031 2,036
FCF yield (%) -38.3 12.1 -20.4 -14.4
Net interest -1,099 -546 -582 -731 Dividend yield (%) 0.0 0.0 0.0 0.0
PBT 1,919 1,416 1,449 1,305
HSBC PBT 1,919 1,416 1,449 1,305 Note: * = Based on HSBC EPS (fully diluted)
Taxation -930 -425 -435 -392
Net profit 989 991 1,015 914
HSBC net profit 989 991 1,015 914 Issuer information

Cash flow summary (NOKm) Share price (NOK) 19.17 Target price (NOK) 20.00 Potent'l return (%) 4.3

Cash flow from operations -502 2,913 4,078 4,045 Reuters (Equity) REC.OL Bloomberg (Equity) REC NO
Capex -4,300 -1,400 -6,631 -5,857 Market cap (USDm) 2,291 Market cap (NOKm) 12,744
Cash flow from investment -4,142 -1,400 -6,631 -5,857 Free float (%) 100 Enterprise value (NOKm) 19575
Dividends 0 0 0 0 Country Norway Sector Independent Power Producers
Change in net debt -2,288 -1,513 2,554 1,812 Analyst Christian Rath Contact 44 20 7991 6741
FCF equity -4,802 1,513 -2,554 -1,812
Balance sheet summary (NOKm) Price relative
Intangible fixed assets 1,123 1,123 1,123 1,123 62 62
Tangible fixed assets 26,586 25,177 28,877 31,423
Current assets 7,208 7,838 7,670 7,932 52 52
Cash & others 849 849 849 849 42 42
Total assets 36,865 36,086 39,618 42,426 32 32
Operating liabilities 3,232 2,975 2,938 3,021
Gross debt 9,390 7,877 10,431 12,243 22 22
Net debt 8,541 7,028 9,582 11,394 12 12
Shareholders funds 22,151 23,142 24,157 25,071
2 2
Invested capital 30,836 30,314 33,883 36,608
2009 2010 2011 2012
Renewable Energy Corp As Rel to OBX INDEX

Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 56.0 17.4 0.6 5.0
EBITDA 80.5 46.6 4.0 7.8
Operating profit 165.2 3.5 0.3
PBT -26.2 2.3 -9.9
HSBC EPS 53.8 2.3 -9.9
Ratios (%)
Revenue/IC (x) 0.5 0.5 0.5 0.5
ROIC 1.5 4.5 4.4 4.0
ROE 5.1 4.4 4.3 3.7
ROA 4.4 3.8 3.8 3.5
EBITDA margin 23.6 29.5 30.5 31.3
Operating profit margin 5.4 12.1 12.5 11.9
EBITDA/net interest (x) 3.0 8.7 8.5 7.3
Net debt/equity 38.6 30.4 39.7 45.4
Net debt/EBITDA (x) 2.6 1.5 1.9 2.1
CF from operations/net debt 41.4 42.6 35.5
Per share data (NOK)
EPS reported (fully diluted) 0.61 0.94 0.96 0.86
HSBC EPS (fully diluted) 0.61 0.94 0.96 0.86
DPS 0.00 0.00 0.00 0.00
Book value 22.21 23.21 24.23 25.14

57
 Mid cap
Energy equipment abc
30 March 2011

SMA Solar
 A strong balance sheet and solid cash generation capacity, but we
think the inverter industry is facing a structural decline in margins
 2011 will be challenging, as the inverter industry faces higher price
pressure, rising international competition and product mix changes
 We maintain our Underweight (V) rating and EUR58 target price

Investment summary
Price pressure, regulatory changes and
inventory overhang to weigh on earnings
We like SMA’s flexible business model and strong
free cash flow generation but we also believe the
inverter industry is facing a structural decline in
margins owing to a further increase in competition
as well as continuous price reductions and a more
regionally diversified market, which requires a
broader sales and service network. Given normalised
lead-times of around two to three weeks for string
inverters and six to eight weeks for central inverters,
and the inventory build-up at end-2010, we believe
SMA is more exposed to slowing demand growth
than players operating in other parts of the solar
value chain. In light of the stability of inverter prices
in the past few quarters and regulatory changes such
as tariff-cuts, we believe price pressure will become
more intense in 2011 and see some risk of a decline
in the price premium for SMA’s inverters. Phoenix Christian Rath*
Analyst
Solar, for example, indicated in its Q4 2010 HSBC Trinkaus & Burkhardt
conference call, that it still has high inverter AG, Germany
+ 49 211 910 3049
inventories (50-90 MW compared to 313 MW christian.rath@hsbc.de
modules sold in 2010), which it expects to sell down * Employed by a non-US
affiliate of HSBC Securities
to more reasonable levels in Q2. In addition, it has (USA) Inc, and is not
received a cash payment from one inverter supplier registered/qualified pursuant to
FINRA regulations
to compensate for inventory writedowns. In our
view, this is a sign of increasing price competition.
We expect inverter ASPs to fall 20% in 2011e and,
with large-scale installations gaining share outside
Europe, we assume a medium-term product mix
shift towards lower-ASP central inverters.
Owing to normal seasonality and inventory effects,
we forecast a q-o-q sales and earnings drop in Q1
2011. We believe earnings peaked in 2010 and
forecast a -25% 2010-12e EPS CAGR; we expect
ROIC to drop from 115% in 2010e to 34% in 2012e.

Financial summary (EURm) Valuation summary (x) Key data

Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e RIC S92G.DE
Revenue 934.3 1871.9 1440.2 1465.4 Dividend yield (%) 1.6 3.5 2.5 2.7 Bloomberg S92 GR
EBITDA 244.7 529.9 343.1 345.9 EV/EBITDA 10.1 4.5 6.8 6.4 Rating Underweight (V)
EBIT margin (%) 24.4 26.7 20.0 19.5 EV/IC 16.0 5.2 4.2 3.6 Share (EUR) 81.10
HSBC net profit 161.1 350.5 202.8 202.5 HSBC PE 17.5 8.0 13.9 13.9 Target (EUR) 58.00
HSBC EPS (EUR) 4.64 10.10 5.84 5.84 ROIC (%) 123.0 115.4 40.1 34.2 Market cap (EURm) 2814.2
HSBC EPS growth (%) 34.8 117.6 -42.2 -0.1 HSBC REP 1.4 0.5 1.2 1.2 Free float (%) 27

Source: HSBC estimates Source: HSBC estimates

58
 Mid cap
Energy equipment abc
30 March 2011

Outlook for 2010-12e Valuation and risks

For 2011, management forecasts a market volume
of 15-20 GW. SMA continues to expect 2011
sales of EUR1.5-1.9bn driven by strong
international growth (especially in the US and
India) and a trend towards larger applications. We
expect the revenue contribution from the high-
power segment to increase from 18% in 2010 to
nearly 30% in 2011e but assume a much lower
ASP for this market segment.
Management expects the EBIT margin to reach
21-25%, which would imply EBIT of EUR315-
475m. Given the recent, unexpected regulatory
changes in key markets like Italy, France and
Germany, we see downside risks to the guidance.
Our EBIT forecast of EUR288m (-42% y-o-y) is
more cautious owing to our conservative
assumptions about demand and market share, as
well as assumed price pressure on inverters.
HSBCe vs consensus
We expect SMA to post a 2010-12 sales CAGR of
-12% and an EPS CAGR of -24%, whereas
consensus forecasts a -5% CAGR for sales and an
EPS CAGR of -16%, which is much more
optimistic. We believe consensus is assuming higher
global solar demand than we are and envisages
better pricing power for SMA. It may also be more
optimistic about SMA’s market share.
SMA Solar: HSBCe vs consensus
(EURm) 2010e
Sales HSBCe 1,871.9
Consensus 1,885.2
Difference -1%
EBIT HSBCe 500.0
Consensus 508.0
Difference -2%
EPS (EUR) HSBCe 10.10
Consensus 10.36
Difference -2%
Source: FactSet consensus, HSBC estimates
On our estimates, the stock is currently trading on
2011e EV/EBITDA of 6.8x and 2011e PE of 14x.
In our view, this is not attractive given that both
we and consensus believe earnings peaked in
2010, and that margins and RoE will decline
thereafter. Given the low capital intensity as well
as the entry into the market of new players from
related industries and low-cost countries, margins
may drop faster than we and the market currently
expect. We believe disappointing Q1 results and
negative news flow from the inverter industry
could trigger further cuts in consensus EPS.
We use a DCF-model to value SMA Solar. Our
model is based on an explicit forecast period until
2013, a semi-explicit forecast period until 2018
thereafter and a fade-period of 25 years. We
forecast the long-term EBIT margin to decline to
11% owing to increasing competition. We assume
that neither excess returns nor value destruction is
feasible in the long run, so we adjust our ROIC
forecast (calculated on the beginning-of- year
invested capital) during the fade period on a
straight-line basis to our WACC of 11% (risk-free
rate of 3.5%, equity risk premium of 5.0%, and
sector asset beta of 1.5). Incorporating our minor
estimate changes our DCF model yields an
unchanged target price of EUR58. Under our
research model, for stocks with a volatility
indicator, the Neutral band is 10 percentage points
above and below our hurdle rate for European ex-
2011e 2012e
UK stocks of 8.5%, or -1.5% to +18.5% relative
1,440.2 1,465.4
1,691.8 1,709.1 to the current share price. Our EUR58 target price
-15% -14%
suggests a potential return of -29%, which is
288.0 285.9 below the Neutral band; we therefore maintain our
386.7 361.5
-26% -21% Underweight (V) rating on the stock.
5.84 5.84 In our view, the upside risks include market share
7.75 7.24
-25% -19% gains and stronger-than-expected market demand
in 2011 and beyond, caused, for example, by
positive regulatory changes and a favourable
interest rate development.

59
 Mid cap
Energy equipment abc
30 March 2011

SMA Solar at a glance

Sales by division (2011e) Sales and EBIT margin (2008-12e)
2,000 30%
Railway Electronics
1,800
Technology Manufacturing 25%
0% 1,600
2%
1,400
20%
1,200
High Power
1,000 15%
Solutions
29% 800
600 10%
400
5%
Medium 200
Power 0 0%
Solutions 2008 2009 2010e 2011e 2012e
69%
Sale s (EURm) EBIT margin (%, RHS)
Source: HSBC estimates Source: Company data, HSBC estimates

Working capital (2008-12e) Capex (2008-12e)

200 12%
400 25% 180
350 10%
160
20%
300 140
8%
250 15% 120
200 100 6%
150 10% 80
4%
100 60
5% 40
50 2%
20
0 0%
0 0%
2008 2009 2010e 2011e 2012e
2008 2009 2010e 2011e 2012e
Working capital (EURm) Working capital (% of sales, RHS)
Capex (EURm) C apex (% of sales, RH S)

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Balance sheet ratios (2008-12e) Shareholder structure (March 2011)

180% 0% Mr Cramer
160% -10% 13%
Free float
140% -20% 27%
120% -30% Mr Drews
100% -40% 13%
80% -50%
60% -60%
40% -70% Mr Wettlaufer
20% -80% 13%
0% -90%
Pool SMA
2008 2009 2010e 2011e 2012e Mr Kleinkauf
25%
9%
RoIC (%) RoE (%) Gearing (%, RHS)

Source: Company data, HSBC estimates Source: Company data

60
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: SMA Solar Underweight (V)

Financial statements Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (EURm) EV/Sales 2.6 1.3 1.6 1.5
EV/EBITDA 10.1 4.5 6.8 6.4
Revenue 934.3 1871.9 1440.2 1465.4 EV/IC 16.0 5.2 4.2 3.6
EBITDA 244.7 529.9 343.1 345.9 PE* 17.5 8.0 13.9 13.9
Depreciation & amortisation -16.3 -30.0 -55.0 -60.0 P/Book value 6.9 3.9 3.4 3.0
Operating profit/EBIT 228.4 500.0 288.0 285.9 FCF yield (%) 3.1 -1.6 6.3 5.7
Net interest 5.3 2.6 3.5 5.4 Dividend yield (%) 1.6 3.5 2.5 2.7
PBT 232.2 500.8 289.6 289.3
HSBC PBT 232.2 500.8 289.6 289.3 Note: * = Based on HSBC EPS (fully diluted)
Taxation -71.1 -150.2 -86.9 -86.8
Net profit 161.1 350.5 202.8 202.5
HSBC net profit 161.1 350.5 202.8 202.5 Issuer information

Cash flow summary (EURm) Share price (EUR) 81.10 Target price (EUR) 58.00 Potent’l rtn (%) -28.5

Cash flow from operations 221.5 213.9 353.2 310.5 Reuters (Equity) S92G.DE Bloomberg (Equity) S92 GR
Capex -70.2 -180.0 -140.0 -100.0 Market cap (USDm) 3991.4 Market cap (EURm) 2814.2
Cash flow from investment -118.6 -329.1 -160.0 -120.0 Free float (%) 27 Enterprise value (EURm) 2372.4
Dividends -34.7 -45.1 -97.2 -69.4 Country Germany Sector ENERGY EQUIPMENT
Change in net debt -105.1 -93.3 -38.0 -119.1 Analyst Christian Rath Contact +49 211 910 3049
FCF equity 88.2 -45.2 177.9 159.4
Balance sheet summary (EURm) Price relative
Intangible fixed assets 15.4 29.6 39.5 48.1 108 108
Tangible fixed assets 149.1 304.9 400.0 451.5
Current assets 543.4 930.6 875.4 992.5 98 98
Cash & others 365.0 460.4 492.0 602.4 88 88
Total assets 718.6 1288.4 1329.9 1507.0
Operating liabilities 189.1 351.9 270.8 272.2 78 78
Gross debt 20.2 22.3 15.9 7.2 68 68
Net debt -344.8 -438.2 -476.2 -595.2
58 58
Shareholders funds 407.6 713.0 818.6 951.7
Invested capital 153.8 452.8 552.1 617.4 48 48
Mar-10 Sep-10 Mar-11
SMA Solar Rel to DAX -100
Ratio, growth and per share analysis Source: HSBC

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 37.1 100.4 -23.1 1.8
EBITDA 38.9 116.6 -35.3 0.8
Operating profit 36.4 118.9 -42.4 -0.7
PBT 35.7 115.7 -42.2 -0.1
HSBC EPS 34.8 117.6 -42.2 -0.1
Ratios (%)
Revenue/IC (x) 7.3 6.2 2.9 2.5
ROIC 123.0 115.4 40.1 34.2
ROE 46.8 62.6 26.5 22.9
ROA 27.1 34.9 15.5 14.3
EBITDA margin 26.2 28.3 23.8 23.6
Operating profit margin 24.4 26.7 20.0 19.5
EBITDA/net interest (x)
Net debt/equity -84.6 -61.4 -58.2 -62.5
Net debt/EBITDA (x) -1.4 -0.8 -1.4 -1.7
CF from operations/net debt
Per share data (EUR)
EPS reported (fully diluted) 4.64 10.10 5.84 5.84
HSBC EPS (fully diluted) 4.64 10.10 5.84 5.84
DPS 1.30 2.80 2.00 2.20
Book value 11.75 20.55 23.59 27.43

61
 Mid cap
Energy equipment abc
30 March 2011

SolarWorld
 Good US demand, earnings turnaround in the US production and
wafer price hikes during Q1 should drive H1 results
 Strong brand positioning in German and access to the US roof-top
market should mitigate ASP pressure in 2011
 Maintain EUR12.5 target price and Overweight (V) rating

Investment summary
Solid 2010 results with good cash generation
SolarWorld’s 2010 sales grew 29% y-o-y to
EUR1.305m and shipments rose 42% y-o-y to 819
MWp. Compared to 2009, the product mix was
more skewed towards modules and complete
systems (Sunkits) which carry a higher ASP than
wafers. From a regional perspective, Germany was
the company’s most important market, accounting
for 41% of shipments and 53% of group sales. The
Americas accounted for 12% of 2010 shipments
and revenues but shipments grew from 8 MWp in
Q1 to 50 MWp in Q4 (2010: 101 MWp).
EBIT came in at EUR193m (+26% y-o-y) which
provides an EBIT margin of 14.8%. Given the still
unfavourable balance sheet structure (EUR713m
cash, EUR1.1bn gross debt, net financial result of
minus EUR44m) and an artificially high tax rate of
41%, net income reached only EUR87m.
Operating cash flow improved from minus Christian Rath*
Analyst
EUR33m in 2009 to EUR254m (FCF EUR24m) HSBC Trinkaus & Burkhardt
due to tighter working capital control (33% of AG, Germany
+ 49 211 910 3049
sales vs 44% in 2009) and management proposed a christian.rath@hsbc.de
dividend of EUR0.19 per share (yield 2%). * Employed by a non-US
affiliate of HSBC Securities
Expansion of the US business should improve (USA) Inc, and is not
registered/qualified pursuant to
earnings and working capital FINRA regulations
SolarWorld’s US business was still loss making in
2010 (EBIT loss EUR10m) but the ramp-up was
completed in Q1 2011 and management’s target is
to sell the full-year production of 450 MW in the
US with a strong focus on the residential and
commercial roof-top markets. While the US market
is more competitive and ASPs are lower, this will
be partly compensated by avoiding transportation
costs (c3 euro cents per Wp to export from the US
to the European markets). We also assume a
positive effect on working capital in 2011.

Financial summary (EURm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC SWVG.DE
Revenue 1304.7 1525.0 1675.0 1850.0 Dividend yield (%) 1.8 2.2 2.6 3.2 Bloomberg SWV GR
EBITDA 281.3 281.6 316.8 359.7 EV/EBITDA 5.4 5.9 5.4 4.6 Rating Overweight (V)
EBIT margin (%) 14.8 11.5 12.0 12.9 EV/IC 1.2 1.1 1.0 0.9 Share (EUR) 10.38
HSBC net profit 87.4 102.6 120.4 148.6 HSBC PE 12.9 11.3 9.6 7.8 Target (EUR) 12.50
HSBC EPS (EUR) 0.80 0.92 1.08 1.34 ROIC (%) 9.3 9.3 9.3 10.5 Market cap (EURm) 1160.2
HSBC EPS growth (%) 51.5 14.9 17.3 23.4 HSBC REP 1.3 1.2 1.1 0.9 Free float (%) 64

Source: HSBC estimates Source: HSBC estimates

62
 Mid cap
Energy equipment
30 March 2011
Outlook for 2011-13e
Going into 2011, we expect SolarWorld to benefit
from tight wafer supply and good demand from the
US market. Management expects 30% volume
growth in 2011. It has not provided a sales or
earnings guidance for 2011 although it has stated
that Q1 sales will decline sequentially due to normal
seasonality but will be above the Q1 2010 level.
We assume 17% y-o-y sales growth and an EBIT
margin drop to 11.5% from 14.8% in 2010 due to
ASP pressure. However, we believe a higher
utilisation rate in the US facility (EUR27m EBIT
vs a EUR10m loss in 2010) as well as the current
tight wafer supply and the company’s strong
position in roof-top markets should offset some of
the expected price pressure. In addition,
SolarWorld has hedged a large part of its silver
requirements for 2011 and its diversified silicon
sourcing (mainly from producers in the US, Korea
and Germany) via attractively priced long-term
contracts leaves it with limited exposure to
increasing polysilicon spot prices.
HSBCe vs consensus
SolarWorld: HSBCe vs consensus
(EURm) 2011e
Sales HSBCe 1,525.0 1,675.0
Consensus 1,516.0 1,650.0
Difference 1%
EBIT HSBCe 175.6
Consensus 166.5
Difference 5%
EPS (EUR) HSBCe 0.92
Consensus 0.71
Difference 30%
Source: HSBC estimates, FactSet consensus
We forecast SolarWorld to grow with a 12% 2010-
13e sales CAGR and 19% EPS CAGR, respectively.
We are broadly in line with consensus on
SolarWorld’s top-line development over the next
three years but we are significantly more optimistic
on the company’s EBIT margin trend and EPS
growth. We believe consensus assumes a
abc
significantly higher tax rate (HSBCe 25%) and also
assumes higher interest costs. Also, SolarWorld has
recently restructured its debt (cEUR200m replaced
with a five-year revolving credit facility) which
should save about EUR5m-10m interest costs.
Valuation and risks
We have made only minor changes to our 2011e
and 2012e forecasts and introduce our new 2013e
assumptions. We used a three-phase DCF-model to
value SolarWorld. Our model comprises an explicit
forecast until 2013, a semi-explicit period until 2018
and a fade period of 25 years. Based on our
forecasts and unchanged assumptions (WACC of
10% based on a beta of 1.5, risk-free rate of 3.5%,
and equity risk premium of 5.0%) or DCF-model
continues to yield a target price of EUR12.50 per
share. Under our research model, for stocks with a
volatility indicator, the Neutral band is 10
percentage points above and below the hurdle rate
for German stocks of 8.5%, or -1.5% to +18.5%
relative to the current share price. For SolarWorld,
our 12-month target price of EUR12.50 implies a
potential return of c20%, which is above the Neutral
band; therefore, we remain Overweight (V).
2012e 2013e
Downside risks to our rating and target price
include: execution problems in building new
1,850.0
1,798.0 capacity; rising costs for energy and raw
2% 3%
materials, as well as increasing interest rates; the
201.2 239.1 company’s continued high dependency on
169.0 193.5
19% 24% favourable legislation; continuous price erosion
1.08 1.34 for solar wafers and modules as well as intensified
0.68 0.99 competition; and client defaults. Furthermore,
59% 35%
breakthroughs in alternative technologies and
adverse regulatory changes (such as in Spain and
the Czech Republic) could burden the company’s
growth prospects. As its key markets are still in
Europe, SolarWorld is also exposed to FX
movements. However, the US facility, polysilicon
sourcing in the US and a stronger local demand
should provide a natural hedge.
63
 Mid cap
Energy equipment abc
30 March 2011

SolarWorld at a glance
Sales by region (2010) Sales and EBIT margin (2009-13e)

ROW 2,000 20%

USA
2%
12%
1,500 15%

Asia
10% 1,000 10%

Germany 500 5%
53%
0 0%
Rest of Europe 2009 2010 2011e 2012e 2013e
23% Sales (EURm) EBIT margin (%, RHS)

Source: Company data Source: HSBC estimates, company data

Working capital (2009-13e) Capex (2009-13e)

500 50%
450 45% 350 35%
400 40% 300 30%
350 35% 250 25%
300 30% 200 20%
250 25%
150 15%
200 20%
100 10%
150 15%
100 10%
50 5%
50 5% 0 0%
0 0% 2009 2010 2011e 2012e 2013e
2009 2010 2011e 2012e 2013e Capex (EURm) Capex (% of s ales, RHS)
Working capital (EURm) Working capital (% of sales , RHS)

Source: HSBC estimates, company data Source: HSBC estimates, company data

Balance sheet ratios (2009-13e) Shareholder structure (March 2011)

Own shares
15% 75%
1%
Frank H.
12% 60% Asbeck
28%
9% 45%
6% 30%
3% 15%
0% 0%
2009 2010 2011e 2012e 2013e Freefloat
71%
RoIC (%) RoE (%) Gearing (%, RHS)

Source: HSBC estimates, company data Source: Company data

64
 Mid cap
Energy equipment abc
30 March 2011

Financials & valuation: SolarWorld Overweight (V)

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (EURm) EV/Sales 1.2 1.1 1.0 0.9
EV/EBITDA 5.4 5.9 5.4 4.6
Revenue 1304.7 1525.0 1675.0 1850.0 EV/IC 1.2 1.1 1.0 0.9
EBITDA 281.3 281.6 316.8 359.7 PE* 12.9 11.3 9.6 7.8
Depreciation & amortisation -88.5 -106.1 -115.6 -120.6 P/Book value 1.2 1.1 1.0 0.9
Operating profit/EBIT 192.8 175.6 201.2 239.1 FCF yield (%) -7.2 -2.7 -3.1 5.1
Net interest -58.8 -46.8 -47.5 -47.0 Dividend yield (%) 1.8 2.2 2.6 3.2
PBT 148.6 136.8 160.5 198.1
HSBC PBT 148.7 136.8 160.5 198.1 Note: * = Based on HSBC EPS (fully diluted)
Taxation -61.3 -34.2 -40.1 -49.5
Net profit 87.3 102.6 120.4 148.6
HSBC net profit 87.4 102.6 120.4 148.6 Issuer information

Cash flow summary (EURm) Share price (EUR) 10.38 Target price (EUR) 12.50 Potent'l rtn (%) 20.4

Cash flow from operations 254.2 181.5 225.4 245.7 Reuters (Equity) SWVG.DE Bloomberg (Equity) SWV GR
Capex -241.9 -200.0 -250.0 -185.0 Market cap (USDm) 1645.6 Market cap (EURm) 1160.2
Cash flow from investment -272.0 -346.3 -234.2 -169.2 Free float 71 Enterprise value (EURm) 1668.8
Dividends -17.7 -20.7 -25.6 -30.0 Country Germany Sector Energy Equipment
Change in net debt 149.2 137.5 28.3 -51.5 Analyst Christian Rath Contact +49 211 910 3049
FCF equity -78.4 -29.9 -33.7 55.9
Balance sheet summary (EURm) Price relative
Intangible fixed assets 39.6 42.9 45.9 48.8 13 13
Tangible fixed assets 1284.8 1521.3 1636.1 1681.8 12 12
Current assets 1240.2 1281.1 1302.0 1335.3 11 11
Cash & others 712.6 712.6 712.6 712.6
10 10
Total assets 2635.3 2916.2 3055.4 3137.4
9 9
Operating liabilities 562.9 577.0 588.2 602.5
8 8
Gross debt 1149.7 1287.1 1315.5 1264.0
Net debt 437.1 574.5 602.9 551.4 7 7
Shareholders funds 922.9 1045.4 1140.2 1258.7 6 6
Invested capital 1289.2 1555.7 1683.2 1750.9 5 5
Mar-10 Sep-10 Mar-11
SolarWorld Rel to DAX-100

Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 28.8 16.9 9.8 10.4
EBITDA 29.9 0.1 12.5 13.6
Operating profit 26.1 -8.9 14.6 18.8
PBT 12.8 -8.0 17.3 23.4
HSBC EPS 51.5 14.9 17.3 23.4
Ratios (%)
Revenue/IC (x) 1.1 1.1 1.0 1.1
ROIC 9.3 9.3 9.3 10.5
ROE 9.8 10.4 11.0 12.4
ROA 5.2 5.2 5.5 6.2
EBITDA margin 21.6 18.5 18.9 19.4
Operating profit margin 14.8 11.5 12.0 12.9
EBITDA/net interest (x) 4.8 6.0 6.7 7.7
Net debt/equity 47.4 55.0 52.9 43.8
Net debt/EBITDA (x) 1.6 2.0 1.9 1.5
CF from operations/net debt 58.2 31.6 37.4 44.6
Per share data (EUR)
EPS reported (fully diluted) 0.80 0.92 1.08 1.34
HSBC EPS (fully diluted) 0.80 0.92 1.08 1.34
DPS 0.19 0.23 0.27 0.33
Book value 8.48 9.40 10.26 11.32

65
 Mid cap
Energy equipment abc
30 March 2011

Suntech
 We expect input cost pressure, oversupply and a lack of
differentiation to result in 34% y-o-y EPS fall in 2011
 Cost reduction to be outpaced by ASP decline in 2011 but partial
wafer integration would help; high debt is a cause of concern
 We have an Underweight (V) rating with target price of USD6.60

High debt a cause of concern
STP’s 2010 diluted reported EPS of USD1.45was
193% higher than its USD0.49 in 2009. STP
benefited from the 140% y-o-y growth in solar
demand during 2010. Its sales grew 71% y-o-y,
failing to match the growth in demand only
because of lack of capacity. Strong demand
growth in 2010, however, also depleted solar
subsidies and caused electricity bills to rise,
clouding the prospects of both the sector and STP.
Suntech benefited from a doubling its cell and
module capacity to over 2GW in the past five
quarter. But the recent build-up of in-house wafer
capacity came as demand deteriorated, while the
consensus assumes another strong year for STP,
in which it would outperform the market to raise
its EPS (excluding one-offs) by 10% y-o-y, to
USD1.23 in 2011 from USD1.03 in 2010a. We
believe consensus fails to factor in regulatory
changes and lack of differentiation across the Shishir Singh*
Analyst
value chain. We also believe consensus The Hongkong and Shanghai
Banking Corporation (HK)
overestimates the reliability of Suntech’s 2011
Limited
guidance for shipments of 2.2GW, based on its + 852 2822 4292
shishirkumarsingh@hsbc.com.hk
framework contracts with its customers. Most
* Employed by a non-US
have negligible prepayments – 2% to 3% of the affiliate of HSBC Securities
contract value – as well as flexible pricing and (USA) Inc, and is not
registered/qualified pursuant to
volume. In the down cycle of 2008-09, most FINRA regulations
contracts were renegotiated. We believe that will
happen again.
Low brand loyalty and lack of product
differentiation are likely to turn oversupply into
another price war. Contrary to consensus, we
factor this scenario into our estimates and expect a
34% y-o-y decline in 2011e reported EPS. We
expect Suntech’s ASP to fall to USD1.46 in Q4
2011e from USD1.82/W in Q4 2010. Margin
pressure is likely to be compounded by a rising
renminbi and a higher cost of commodities,

Financial summary (USDm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC STP.N
Revenue 2,902 2,444 2,600 3,029 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg STP US
EBITDA 362 389 388 439 EV/EBITDA 7.4 7.3 5.3 3.9 Rating Underweight (V)
EBIT margin (%) 9.5 11.5 10.5 10.7 EV/IC 1.3 1.3 1.3 1.2 Share (USD) 8.80
HSBC net profit 186 134 151 203 HSBC PE 8.6 11.9 10.6 7.9 Target (USD) 6.60
HSBC EPS (USD) 1.03 0.74 0.83 1.12 ROIC (%) 10.7 6.8 7.0 8.8 Market cap (USDm) 1,548
HSBC EPS growth (%) 119.9 -28.3 12.5 34.7 HSBC REP 0.7 1.0 1.0 0.6 Free float 66

Source: HSBC estimates Source: HSBC estimates

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including silver, glass and aluminium. The Valuation and risks

increased non-silicon costs will be partly offset by
Valuation
lower silicon costs as well as higher vertical
We apply a PE of 9x to our 2011 estimates
integration at lower utilisation levels in H2 2011.
(excluding one-offs) to value Suntech, which
But that probably won’t be enough to keep
represents the sector PE at its trough following the
operating margins from falling to single digits in
start of the credit crisis in March 2009; this gives
2011 as costs rise and ASPs fall.
us a target price of USD6.60 and implies a
Outlook for 2011 potential loss of 25%. Under HSBC’s research
model, the Neutral band for volatile China
We believe significant oversupply has not been
equities is a potential return of 0-20%. Since
averted, just postponed to H2 2011. We expect
Suntech’s potential return is below this band, we
prices to fall and a decline in shipments in 2011.
reiterate our Underweight (V) rating.
As a result, revenue is likely to contract
sequentially, although market share gains should Upside risks
partly offset the decline in 2011. Upside risks are represented by continued robust
demand, euro appreciation, higher-than-expected
At the same time, cost per watt is unlikely to
market share gains, and better cost control.
change significantly, because the renminbi will
Downstream acquisitions at reasonable valuations
rise against the US dollar and commodity costs
to boost order pipeline and protect ASPs can also
will increase. This would also have a negative
provide upside, in our view.
impact on profitability. With ASP declining more
quickly than costs, we expect STP’s EPS to
decline by 34% y-o-y in 2011.

HSBCe vs consensus
Our 2011 EPS estimate is 22% below consensus,
as we model a 5% y-o-y decline in shipments and
11% y-o-y decline in ASP.

Suntech: HSBCe vs consensus

(USDm) 2011e 2012e 2013e
Sales HSBCe 2,444 2,600 3,029
Consensus 3,395 3,649 3,915
Difference -28% -29% -23%

EBIT HSBCe 280 274 325

Consensus 343 340 341
Difference -18% -20% -5%

EPS HSBCe 0.96 0.83 1.12

(USD, fully Consensus 1.23 1.16 1.13
diluted) Difference -22% -28% -1%
Source: FactSet consensus, HSBC estimates

67
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Suntech at a glance
Planned shipments by shipping destination (2011e) Sales and EBIT margin (2008-12e)
RoW
GR 12.0% 3,000
7% 11. 5%
Asia 20% 2,500
15% 11.0%
10.3% 2,000
10.0% 10.5% 1,500
9.9%
1,000
9.0% 9.5%
500
8.0% 0
NA
RoE 2008a 2009a 2010a 2011e 2012e
25%
33%
Sales (USD m, RHS) EBIT Margin

Source: Company Source: Company, HSBC estimates

Working capital (USDm) (2008-12e) Capex (USDm) (2008-12e)

2,000.0 400
350
1,500.0
300
1,000.0 250
200
500.0
150
0.0 100
2008a 2009a 2010a 2011e 2012e 50
0
A/c Rec Inv A/c Pay 2008a 2009a 2010a 2011e 2012e

Source: Company, HSBC estimates Source: Company, HSBC estimates

Net Debt/EBITDA (2008-12e) Shareholder structure (2010a)

4.0x
3.5x Chairman
3.0x 30%
2.5x
2.0x 3. 8x
3.0x 3.3x
1.5x
1.0x 2. 1x
1.3x
0.5x Public
0.0x 70%
2008a 2009a 2010a 2011e 2012e

Source: Company, HSBC estimates Source: Company

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Financials & valuation: Suntech Power Holdings Underweight (V)

Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (USDm) Module Capacity (MW) 1,800 2,400 2,500 2,500
Module shipments (MW) 1,572 1,486 1,844 2,250
Revenue 2,902 2,444 2,600 3,029 Utilisation (%) 108.4 70.8 75.3 90.0
EBITDA 362 389 388 439 ASP (USD/W) 1.8 1.6 1.4 1.3
Depreciation & amortisation -85 -109 -115 -114 Unit CoGS (USD/W) 1.5 1.3 1.1 1.1
Operating profit/EBIT 277 280 274 325 Unit profit Spread ($/W) 0.3 0.3 0.3 0.2
Net interest -92 -112 -93 -83
PBT 261 208 180 242
HSBC PBT 435 208 180 242
Taxation 2 -31 -27 -36 Valuation data
Net profit 262 174 151 203 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 186 134 151 203
EV/sales 0.9 1.2 0.8 0.6
Cash flow summary (USDm) EV/EBITDA 7.4 7.3 5.3 3.9
Cash flow from operations 126 216 912 431 EV/IC 1.3 1.3 1.3 1.2
Capex -353 -216 -114 -100 PE* 8.6 11.9 10.6 7.9
Cash flow from investment -480 -410 -114 -100 P/NAV 0.8 0.8 0.7 0.7
Dividends 0 0 0 0 FCF yield (%) -15.0 -0.8 50.3 20.3
Change in net debt 603 194 -799 -331 Dividend yield (%) 0.0 0.0 0.0 0.0
FCF -234 -12 787 319 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (USDm)

Intangible fixed assets 466 466 466 466 Issuer information
Tangible fixed assets 1,326 1,433 1,432 1,418 Share price (USD) 8.80 Target price (USD) 6.60 Potent'l rtn (%) -25.0
Current assets 2,414 1,909 1,801 2,110
Cash & others 1,015 743 1,105 1,436 Reuters (Equity) STP.N Bloomberg (Equity) STP US
Total assets 5,214 5,019 4,882 5,154 Market cap (USDm) 1,548 Market cap (USDm) 1,548
Operating liabilities 1,194 900 1,046 1,113 Free float (%) 66 Enterprise value (USDm) 2857
Gross debt 2,115 2,037 1,601 1,601 Country China Sector Electrical Equipment
Net debt 1,100 1,295 496 165 Analyst Shishir Singh Contact +852 2822 4292
Shareholders funds 1,893 2,067 2,218 2,421
Invested capital 1,998 2,166 1,547 1,446
Price relative
22 22
Ratio, growth and per share analysis
Year to 12/2010a 12/2011e 12/2012e 12/2013e 17 17

Y-o-y % change 12 12
Revenue 71.4 -15.8 6.3 16.5
EBITDA 50.5 7.7 -0.3 13.2 7 7
Operating profit 59.1 1.2 -2.3 18.8
PBT 195.8 -20.4 -13.2 34.1 2 2
HSBC EPS 119.9 -28.3 12.5 34.7 2009 2010 2011 2012
Suntech Power Holdings Rel to SSE COMPOSITE INDEX
Ratios (%)
Source: HSBC
Revenue/IC (x) 1.9 1.2 1.4 2.0
ROIC 18.0 11.4 12.5 18.5
ROE 10.7 6.8 7.0 8.8 Note: price at close of 21 Mar 2011
ROA 8.1 5.5 4.9 5.7
EBITDA margin 12.5 15.9 14.9 14.5
Operating profit margin 9.5 11.5 10.5 10.7
EBITDA/net interest (x) 3.9 3.5 4.2 5.3
Net debt/equity 57.7 62.2 22.2 6.8
Net debt/EBITDA (x) 3.0 3.3 1.3 0.4
CF from operations/net debt 11.4 16.7 183.9 261.1
Per share data (USD)
EPS reported (fully diluted) 1.45 0.96 0.83 1.12
HSBC EPS (fully diluted) 1.03 0.74 0.83 1.12
DPS 0.00 0.00 0.00 0.00
NAV 10.54 11.51 12.35 13.48

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Trina Solar
 We expect input cost pressure, oversupply and a lack of
differentiation to result in 26% y-o-y EPS fall in 2011
 Cost reduction is likely to be outpaced by a decline in ASP in
2011, but lower upstream integration would help in downcycle
 We have an Underweight (V) rating with target price of USD27

Marginally better than the rest
TSL’s 2010 diluted EPS of USD4.06 was 161%
higher than its USD1.55 in 2009. Much like its
peers, TSL benefited from the 140% y-o-y growth
in solar demand during 2010, which helped it
increase sales by 120% y-o-y. Only lack of
capacity kept sales below the market growth rate.
Strong demand growth in 2010, however, also
drained generous solar subsidies and increasing
electricity bills. That has clouded the future
prospects of the sector and TSL.
While Trina is increasing nameplate wafer, cell
and module capacity by around 60% to 1.2GW for
wafers and 1.7GW for cell and modules in 2011,
demand is deteriorating. Consensus, however,
assumes another strong year for TSL, in which it
would outperform the market to increase EPS by
4% y-o-y. We believe that consensus fails to
factor in regulatory changes as well as a chronic
lack of differentiation across the value chain. We Shishir Singh*
Analyst
also believe consensus overestimates the The Hongkong and Shanghai
Banking Corporation (HK)
reliability of 1.2GW of framework contracts
Limited
signed by Trina with its customers for deliveries + 852 2822 4292
shishirkumarsingh@hsbc.com.hk
in 2011 (100% of Q1, 80% of Q2 and 50% of Q3
* Employed by a non-US
and Q4 2011 volumes). Trina’s management says affiliate of HSBC Securities
many of its contracts have provisions to accept (USA) Inc, and is not
registered/qualified pursuant to
10% to 25% above contract-based volumes, FINRA regulations
helping it to achieve the 2011 shipments of 1.75-
1.8GW it has guided for. But we believe contracts
are rarely anything more than an announcement of
land-grab. Most have prepayments of just 2% to
3% of the contract value as well as flexible
pricing and volume. In the 2008-2009 down cycle,
most contracts ended up being renegotiated, and
we believe history will repeat itself.
Low brand loyalty and a lack of product
differentiation are likely to turn oversupply into a
price war yet again. Contrary to consensus, we

Financial summary (USDm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC TSL.N
Revenue 1,858 1,783 1,836 2,141 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg TSL US
EBITDA 487 375 374 345 EV/EBITDA 4.0 4.6 4.4 4.5 Rating Underweight (V)
EBIT margin (%) 22.5 16.7 14.8 11.1 EV/IC 2.0 1.5 1.3 1.2 Share (USD) 27.45
HSBC net profit 338 238 207 169 HSBC PE 6.2 9.1 10.5 12.8 Target (USD) 27.0
HSBC EPS (USD) 4.40 3.02 2.62 2.14 ROIC (%) 41.1 24.0 18.4 13.9 Market cap (USDm) 2,135
HSBC EPS growth (%) 162.0 -31.5 -13.0 -18.4 HSBC REP 0.44 0.58 0.65 0.76 Free float 85

Source: HSBC estimates Source: HSBC estimates

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factor that into our estimates and expect a 26% y- HSBCe vs consensus
o-y decline in 2011e EPS. We expect Trina’s ASP
Our 2011 EPS estimate is 29% below consensus.
to fall to USD1.35 in Q4 2011e from USD1.83/W
We model an 8% y-o-y increase in shipments and
in Q4 2010. Margin pressure is likely to be
a 11% y-o-y decline in ASP.
compounded by a rising renminbi and higher cost
of commodities including silver, glass and Trina Solar: HSBCe vs consensus

aluminium. Higher non-silicon costs will be partly (USDm) 2011e 2012e 2013e

offset by lower silicon costs and greater vertical Sales HSBCe 1,783 1,836 2,141
Consensus 2,484 2,774 2,862
integration at lower utilisation levels in H2 2011. Difference -28% -34% -25%
But that is unlikely to be enough to prevent a
EBIT HSBCe 298 271 238
decline to single-digit operating margins in 2011 Consensus 410 406 295
Difference -27% -33% -20%
because of the falling ASP and higher costs.
EPS HSBCe 3.02 2.62 2.14
Outlook for 2011 (USD, fully Consensus 4.23 4.42 4.26
diluted) Difference -29% -41% -50%
We believe serious oversupply has not been Source: FactSet consensus, HSBC estimates

averted but only pushed to H2 2011. We expect

prices to fall and shipments to decline in 2011. As
a result, revenue is likely to contract sequentially
even though market share gains would partly
offset the decline in 2011.
At the same time, cost per watt is not likely to
change significantly as the renminbi rises against
the US dollar and the cost of commodities like
silver, glass and aluminium increase. This would
also have a negative impact on profitability. With
ASP declining more quickly than costs, we expect
TSL’s EPS to decline by 26% y-o-y in 2011.
Valuation and risks
Valuation
We apply a PE of 9x to our 2011 estimates to
value Trina, which represents the sector PE at its
trough after the credit crisis began in March 2009.
That gives us a target price of USD27 and implies
a potential loss of 2%.
Under HSBC’s research model, the Neutral band
for volatile China equities is a potential return of
0-20%. Since Trina’s potential return is below this
band, we reiterate our Underweight (V) rating.

Upside risks
Upside risks are continued robust demand, euro
appreciation, higher-than-expected market share
gains, and better cost control. Downstream
acquisitions at reasonable valuations to expand
the order pipeline and protect ASPs can also
provide upside, in our view.

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Trina Solar at a glance

Planned shipments by shipping destination (2011e) Sales and EBIT margin (2008-12e)
RoW GR 25.0% 2,000
22.5%
21% 21%
20.0%
1,500
16.0%
15.0%
12.0% 16. 7% 1,000
14.8%
10.0%
SP 500
5.0%
US 16%
20% 0.0% 0

BE FR 2008a 2009a 2010a 2011e 2012e

IT Sales (USD m , RHS) EBIT Margin
4% 8%
10%
Source: Company Source: Company, HSBC estimates

Working capital (USDm) (2008-12e) Capex (USDm) (2008-12e)

800 400
350
600 300
250
400
200
200 150
100
0 50
2008a 2009a 2010a 2011e 2012e 0

A/c Rec. Inv . A/c Pay . 2008a 2009a 2010a 2011e 2012e

Source: Company, HSBC estimates Source: Company, HSBC estimates

Net Debt/EBITDA (2008-12e) Shareholder structure (2010a)

Chairman
2.5x
12%
2.0x
1.5x
1.0x 2.2x
0.5x
0.6x
0.0x
-0. 4x
-0.5x -1.2x -1.4x
-1.0x
-1.5x
-2.0x
Public
2008a 2009a 2010a 2011e 2012e
88%
Source: Company, HSBC estimates Source: Company

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Financials & valuation: Trina Solar Underweight (V)

Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (USDm) Module Capacity (MW) 1,200 1,900 2,100 2,300
Module shipments (MW) 1,057 1,136 1,392 1,760
Revenue 1,858 1,783 1,836 2,141 Utilisation (%) 117 73 70 80
EBITDA 487 375 374 345 ASP (US Cents/W) 175 156 131 121
Depreciation & amortisation -69 -76 -103 -107 Unit CoGS (US Cents/W) 112 109 98 94
Operating profit/EBIT 417 298 271 238 Non-Si unit cost (US Cents/W) 68 69 67 65
Net interest -31 -15 -12 -12
PBT 360 284 259 225
HSBC PBT 386 284 259 225
Taxation -48 -46 -52 -56 Valuation data
Net profit 311 238 207 169 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 338 238 207 169
EV/sales 1.0 1.0 0.9 0.7
Cash flow summary (USDm) EV/EBITDA 4.0 4.5 4.3 4.4
Cash flow from operations 238 452 215 245 EV/IC 2.0 1.5 1.3 1.2
Capex -190 -349 -139 -144 PE* 6.2 9.1 10.5 12.8
Cash flow from investment -190 -349 -139 -144 P/NAV 1.6 1.4 1.2 1.1
Dividends 0 0 0 0 FCF yield (%) 6.2 4.8 3.5 4.7
Change in net debt -299 -240 -75 -101 Dividend yield (%) 0.0 0.0 0.0 0.0
FCF 132 102 75 101 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (USDm)

Intangible fixed assets 145 145 145 145 Issuer information
Tangible fixed assets 571 845 881 918 Share price (USD) 27.45 Target price (USD) 27.00 Potent'l rtn (%) -1.6
Current assets 1,415 1,176 1,442 1,605
Cash & others 791 745 820 921 Reuters (Equity) TSL.N Bloomberg (Equity) TSL US
Total assets 2,132 2,166 2,469 2,669 Market cap (USDm) 2,135 Market cap (USDm) 2,135
Operating liabilities 364 308 403 434 Free float (%) 85 Enterprise value (USDm) 1698
Gross debt 595 309 309 309 Country China Sector Independent Power Producers
Net debt -196 -436 -512 -613 Analyst Shishir Singh Contact +852 2822 4292
Shareholders funds 1,174 1,550 1,757 1,926
Invested capital 977 1,113 1,245 1,313
Price relative
35 35
Ratio, growth and per share analysis
30 30
Year to 12/2010a 12/2011e 12/2012e 12/2013e 25 25
Y-o-y % change 20 20
15 15
Revenue 119.8 -4.0 3.0 16.6 10 10
EBITDA 187.3 -23.0 -0.2 -7.8
5 5
Operating profit 208.4 -28.5 -9.2 -12.3
PBT 194.3 -21.1 -8.7 -13.0 0 0
HSBC EPS 162.0 -31.5 -13.0 -18.4 2009 2010 2011 2012
Trina Solar Rel to SSE COMPOSITE INDEX
Ratios (%)
Source: HSBC
Revenue/IC (x) 2.1 1.7 1.6 1.7
ROIC 41.1 24.0 18.4 13.9
ROE 36.5 17.5 12.5 9.2 Note: price at close of 21 Mar 2011
ROA 18.5 11.8 9.5 7.1
EBITDA margin 26.2 21.0 20.4 16.1
Operating profit margin 22.5 16.7 14.8 11.1
EBITDA/net interest (x) 15.5 25.3 30.6 27.8
Net debt/equity -16.7 -28.2 -29.1 -31.8
Net debt/EBITDA (x) -0.4 -1.2 -1.4 -1.8
CF from operations/net debt
Per share data (USD)
EPS reported (fully diluted) 4.06 3.02 2.62 2.14
HSBC EPS (fully diluted) 4.40 3.02 2.62 2.14
DPS 0.00 0.00 0.00 0.00
NAV 16.72 19.79 22.43 24.59

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Wacker Chemie
 Wacker continues to benefit from a flight to quality in polysilicon
and aggressive downstream capacity expansion
 We believe the 2011 guidance is cautious and we forecast 22%
EPS growth, mainly driven by Chemicals and Siltronic
 Reiterate EUR175 target price and Overweight rating

Investment summary
Significant volume growth in polysilicon
At its 2010 results announcement in mid-March,
Wacker raised its Polysilicon production targets and
now guides for at least 33kt in 2011 (previously less
than 33kt) and at least 45kt in 2012 (up from 40kt).
It also provided an initial target of more than 50 kt
for 2013. Most of the 2012 increase is attributable to
FCF neutral debottlenecking activities in 2011
(10,000 tonnes, EUR130m capex). Wacker has sold
the majority of its production to 2014 via long-term
contracts (duration around five years) and continues
to receive prepayments (to total more than
EUR1bn) which provides good visibility.
Further investments in Poly and Siltronic
Although we forecast the polysilicon spot price to
decline to around USD50 per kg by the end of
2011, we expect Wacker’s ASP to decline by only
5% as the majority of Wacker’s output is sold
under long-term contracts which provides much Christian Rath *
Analyst
better visibility than the other solar players have. HSBC Trinkaus & Burkhardt
Given the positive market outlook for high-quality AG, Germany
+ 49 211 910 3049
polysilicon, Wacker will continue to invest christian.rath@hsbc.de
heavily in new capacity (Poly 9, Poly 11 and * Employed by a non-US
affiliate of HSBC Securities
Siltronic JV in Singapore) and guided capex of (USA) Inc, and is not
EUR950m in 2011 and above EUR1bn in 2012e. registered/qualified pursuant to
FINRA regulations
As the majority of the capex will be allocated to
the high-margin polysilicon business, we forecast
22% EPS growth in 2011e and 2012e.
Positive Q1 outlook
Management expects a strong Q1 and guided sales
of more than EUR1.2bn and EBITDA of more
than EUR300m, with sequential sales growth in
Polysilicon and Chemicals and a flattish Siltronic.
The Silicones division will benefit from still
favourable raw-material contracts whereas
Polysilicon will be affected by higher electricity
and ramp-up costs.

Financial summary (EURm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC WCHG.DE
Revenue 4748.4 5200.0 5800.0 6220.0 Dividend yield (%) 2.1 2.3 2.8 2.9 Bloomberg WCH GR
EBITDA 1194.5 1354.2 1623.0 1712.8 EV/EBITDA 6.4 5.7 4.8 4.5 Rating Overweight
EBIT margin (%) 16.1 16.9 18.8 18.1 EV/IC 2.7 2.3 1.9 1.7 Share (EUR) 154.40
HSBC net profit 490.7 596.2 725.2 750.0 HSBC PE 15.6 12.9 10.6 10.2 Target (EUR) 175.00
HSBC EPS (EUR) 9.88 12.00 14.60 15.10 ROIC (%) 18.7 19.5 20.0 17.5 Market cap (EURm) 7668.7
HSBC EPS growth (%) 21.5 21.6 3.4 HSBC REP 1.4 1.2 0.9 0.9 Free float (%) 29

Source: HSBC estimates Source: HSBC estimates

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Outlook for 2011e the potential impact so far, it highlighted that

For 2011, management guides sales of at least
EUR5bn (up 5% y-o-y) whereas EBITDA should
stay at the 2010 level, burdened by raw-material
and electricity price pressure (cEUR100m y-o-y)
and ramp-up costs for Poly 9 (HSBCe EUR45m).
We maintain our more bullish forecasts (13%
EBITDA and 22% EPS growth) given the strong
Q4 (clean EBITDA margin c27%), positive Q1
trends, continued cost reduction potential and
scale effects in polysilicon, and further H2 2011
volume and earnings growth in Siltronic.
HSBCe vs consensus
We are about 7% ahead of consensus for 2012,
but believe consensus has not fully incorporated
the higher polysilicon production targets. Like in
Siltronic expects increased volume demand in Q2.
Valuation and risks
Our rounded 12-month target price of EUR175 is
based on the rounded average of our DCF model and
our SOTP valuation analysis. Our DCF model is
based on an explicit forecast period until 2013, a
semi-explicit forecast period until 2018 thereafter, a
fade-period of 25 years and a WACC of 9.9% (risk-
free rate 3.5%, equity risk premium 5.0%, beta 1.3)
and generates a fair value of EUR170. Our SOTP
analysis, using 2011e estimates and through-the-
cycle multiples, yields a fair value of EUR187.
Wacker Chemie: SOTP
(EURm) Sales EBITDA EBITDA EV/EBITDA Implied
margin multiple EV

2010, we believe Siltronic will be the most Silicones 1,733 260 15.0% 6.0x 1,560
Polymers 901 126 14.0% 6.0x 757
important driver of Wacker’s EBITDA in 2011. Biosolutions 149 26 17.5% 5.5x 144
Polysilicon 1,482 755 51.0% 7.5x 5,663
Wacker Chemie: HSBCe vs consensus Siltronic 1,123 190 16.9% 7.0x 1,332
Others -189 -4 - 6.6x -24
(EURm) 2011e 2012e 2013e Total 5,200 1,354 26.0% 9,433
Sales HSBCe 5,200.0 5,800.0 6,220.0 less: net debt, minorities; plus: long-term investments -140
Consensus 5,133.8 5,648.5 5,964.0 Implied market value of equity 9,293
Difference 1% 3% 4% Fair value per share (EUR) 187
EBITDA HSBCe 1,354.2 1,623.0 1,712.8 Source: HSBC estimates, FactSet consensus
Consensus 1,344.0 1,515.2 1,594.8
Difference 1% 7% 7%
Under our research model, for stocks without a
EPS (EUR) HSBCe 12.00 14.60 15.10
Consensus 11.64 13.52 14.04
volatility indicator, the Neutral band is 5ppts above
Difference 3% 8% 8% and below our hurdle rate for developed Europe ex-
Source: HSBC estimates, FactSet consensus UK stocks of 8.5%, or 3.5% to 13.5% around the
current share price. At the time we set our target
While we previously expected no major effects on price of EUR175, this implied a potential return
the 300mm wafer price and volumes for Siltronic
above the Neutral band.
in H1 2011, the supply/demand balance in the
global wafer market might change in Q2 due to the Key downside risks, in our view, include: a slowing
current situation in Japan. Because of some damage growth rate in the global economy and the
to its plant and a lack of electricity, the Japanese semiconductor wafer market; cost savings below
semi wafer supplier Shin-Etsu had to shut down its expectations; increased volatility in semiconductor
main plant for 300mm wafers which accounts for industry cycles; rising costs for energy and raw
about 20-25% of global wafer production. Smaller materials; negative FX effects (mainly USD); and
sites belonging to Wacker’s competitors MEMC oversupply as well by competitors in the polysilicon
and Sumco were also affected by the earthquake. and semiconductor wafer market, with a consequent
While management has not been able to quantify reduction in prices and margins.

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Wacker Chemie at a glance

Sales by division (2011e, before consolidation) Sales and EBIT margin (2009-13e)

Biosolutions Other 7,000 30%

3% 3%
Polysilicon 6,000 25%
Polymers 27% 5,000
16% 20%
4,000
15%
3,000
2,000 10%

1,000 5%
0 0%
Siltronic 2009 2010 2011e 2012e 2013e
Silicones
31% 20%
Sales (EURm) EBITDA margin (%, RHS)

Source: HSBC estimates Source: HSBC estimates, company data

Working capital (2009-13e) Capex (2009-13e)

100 2.0% 1200 25.0%
50 1.0%
0 1000 20.0%
0.0%
-50 2009 2010 2011e 2012e 2013e
-1.0% 800
-100 15.0%
-2.0%
600
-150 -3.0% 10.0%
-200 -4.0% 400
-250 -5.0% 5.0%
200
-300 -6.0%
-350 0 0.0%
-7.0%
2009 2010 2011e 2012e 2013e
Net working capital (EURm)
Net working capital (% of sales) Capex (EURm) Capex (% of sales, RHS)

Source: HSBC estimates, company data Source: HSBC estimates, company data

Balance sheet ratios (2009-13e) Shareholder structure (March 2011)

30% 30%

20% 25% Free float

29%
10% 20%

0% 15%
2009 2010 2011e 2012e 2013e Wacker family
Treasury
-10% 10% 55%
shares
5%
-20% 5%
Blue Elephant
-30% 0% 11%

RoIC (%) RoE (% ) Gearing (%, RHS)

Source: HSBC estimates, company data Source: Company data

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Financials & valuation: Wacker Chemie Overweight

Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (EURm) EV/Sales 1.6 1.5 1.3 1.3
EV/EBITDA 6.4 5.7 4.8 4.5
Revenue 4748.4 5200.0 5800.0 6220.0 EV/IC 2.7 2.3 1.9 1.7
EBITDA 1194.5 1354.2 1623.0 1712.8 PE* 15.6 12.9 10.6 10.2
Depreciation & amortisation -429.9 -474.2 -533.4 -584.6 P/Book value 3.2 2.7 2.2 1.9
Operating profit/EBIT 764.6 880.0 1089.6 1128.1 FCF yield (%) 3.6 2.3 0.1 2.9
Net interest -24.7 -16.6 -20.5 -23.5 Dividend yield (%) 2.1 2.3 2.8 2.9
PBT 732.3 860.4 1067.2 1103.7
HSBC PBT 732.3 860.4 1067.2 1103.7 Note: * = Based on HSBC EPS (fully diluted)
Taxation -235.3 -266.7 -341.5 -353.2
Net profit 490.7 596.2 725.2 750.0
HSBC net profit 490.7 596.2 725.2 750.0 Issuer information

Cash flow summary (EURm) Share price (EUR) 154.40 Target price (EUR) 175.00 Potent'l rtn (%) 13.3

Cash flow from operations 1103.1 1205.2 1157.6 1251.2 Reuters (Equity) WCHG.DE Bloomberg (Equity) WCH GR
Capex -695.1 -950.0 -1050.0 -950.0 Market cap (USDm) 10876.9 Market cap (EURm) 7668.7
Cash flow from investment -681.5 -1005.8 -1108.2 -1009.9 Free float (%) 29 Enterprise value (EURm) 7662.1
Dividends -59.6 -159.0 -178.8 -218.6 Country Germany Sector CHEMICALS
Change in net debt -309.8 6.9 166.8 49.0 Analyst Christian Rath Contact +49 211 910 3049
FCF equity 269.9 174.3 8.6 214.4
Balance sheet summary (EURm) Price relative
Intangible fixed assets 33.2 38.9 44.7 50.1 156 156
Tangible fixed assets 3075.5 3566.4 4100.4 4485.2 146 146
Current assets 2164.4 2283.5 2455.0 2575.1
136 136
Cash & others 797.4 797.4 797.4 797.4
Total assets 5501.2 6152.6 6899.6 7445.6 126 126
Operating liabilities 1591.8 1754.2 1720.2 1647.5 116 116
Gross debt 1008.8 1015.7 1182.5 1231.6 106 106
Net debt 211.4 218.3 385.1 434.2
96 96
Shareholders funds 2422.1 2862.4 3412.3 3943.7
Invested capital 2883.9 3337.2 4082.5 4665.5 86 86
Mar-10 Sep-10 Mar-11
Wacker Chemie Rel to DAX-100

Ratio, growth and per share analysis Source: HSBC

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Note: price at close of 21 Mar 2011
Y-o-y % change
Revenue 27.7 9.5 11.5 7.2
EBITDA 96.9 13.4 19.8 5.5
Operating profit 2753.0 15.1 23.8 3.5
PBT 22090.9 17.5 24.0 3.4
HSBC EPS 21.5 21.6 3.4
Ratios (%)
Revenue/IC (x) 1.7 1.7 1.6 1.4
ROIC 18.7 19.5 20.0 17.5
ROE 22.6 22.6 23.1 20.4
ROA 10.3 10.6 11.5 10.8
EBITDA margin 25.2 26.0 28.0 27.5
Operating profit margin 16.1 16.9 18.8 18.1
EBITDA/net interest (x) 48.4 81.6 79.3 73.0
Net debt/equity 8.6 7.6 11.2 10.9
Net debt/EBITDA (x) 0.2 0.2 0.2 0.3
CF from operations/net debt 521.8 552.1 300.6 288.2
Per share data (EUR)
EPS reported (fully diluted) 9.88 12.00 14.60 15.10
HSBC EPS (fully diluted) 9.88 12.00 14.60 15.10
DPS 3.20 3.60 4.40 4.50
Book value 48.76 57.62 68.69 79.38

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Yingli Green
 We expect input cost pressure, oversupply and a lack of
differentiation to result in 20% y-o-y EPS fall in 2011
 Consensus overestimating reliability of 1.4GW of 2011 contracts
 We have an Underweight (V) rating with target price of USD8.90

Peak in past, weak in future
YGE’s 2010 diluted EPS of USD1.35 was in
sharp contrast to its USD0.60 loss per share in
2009. Much like its peers, YGE benefited from
the 140% y-o-y growth in solar demand during
2010 which helped it grow sales by 75% y-o-y,
with the below market growth rate only due to
lack of capacity. Strong demand growth in 2010,
however, also had the adverse effect of draining
generous solar subsidies and increasing electricity
bills globally. This has clouded the future
prospects of the sector and YGE.
While Yingli is increasing nameplate capacity by
70% to 1.7GW in 2011, demand is deteriorating.
Consensus, however, assumes another strong year
for YGE, in which it would outperform the market
to increase EPS by 20% y-o-y. We believe that
consensus fails to factor in the negative impact of
regulatory changes as well as a chronic lack of
differentiation across the value chain. We also
believe consensus overestimates the reliability of Shishir Singh*
Analyst
1.4GW of framework contracts signed by Yingli The Hongkong and Shanghai
Banking Corporation (HK)
with its customers for deliveries in 2011. We
Limited
believe contracts are rarely anything more than an + 852 2822 4292
shishirkumarsingh@hsbc.com.hk
announcement of land-grab. Most have negligible
* Employed by a non-US
prepayments (2-3%) relative to the contract value affiliate of HSBC Securities
as well as flexible pricing and volume. As (USA) Inc, and is not
registered/qualified pursuant to
witnessed in last downcycle (2008-09), most FINRA regulations
contracts ended up being renegotiated and, we
believe, history will repeat itself.
Low brand loyalty and a lack of product
differentiation are likely to turn oversupply into a
price-war yet again. Contrary to consensus, we
factor this scenario into our estimates and expect a
20% y-o-y decline in 2011e EPS. We expect
Yingli’s ASP to fall to USD1.35 in Q4 2011e
from USD1.71/W in Q4 2010. Margin pressure is
also likely to be compounded by rising RMB,
higher cost of commodities including silver,
aluminium and copper as well as higher

Financial summary (USDm) Valuation summary (x) Key data

Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e RIC YGE.N
Revenue 1,864 1,741 1,891 2,151 Dividend yield (%) 0.0 0.0 0.0 0.0 Bloomberg YGE US
EBITDA 519 433 428 423 EV/EBITDA 4.7 5.7 5.7 5.5 Rating Underweight (V)
EBIT margin (%) 22.3 16.9 13.8 11.4 EV/IC 1.3 1.2 1.2 1.1 Share (USD) 11.88
HSBC net profit 268 158 122 114 HSBC PE 7.0 12.1 15.7 16.7 Target (USD) 8.90
HSBC EPS (USD) 1.71 0.98 0.76 0.71 ROIC (%) 22.3 13.0 10.0 9.3 Market cap (USDm) 1,729
HSBC EPS growth (%) NM -42.3 -22.9 -6.5 HSBC REP 0.5 0.8 1.0 1.1 Free float 67

Source: HSBC estimates Source: HSBC estimates

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polysilicon depreciation. A single-digit operating Valuation and risks

margin likely within 2011 due to the falling ASP
and higher costs.
Outlook for 2011
We believe that a strong oversupply scenario has
not been averted but only pushed to H2 2011. We
expect prices to fall and a decline in shipments in
2011. As a result, revenue is likely to contract
sequentially even though market share gains
would partly offset the decline in 2011.
At the same time, cost per watt is likely to not to
change significantly due to the RMB appreciating
versus the US dollar, increase in depreciation of
polysilicon facility and rising commodity costs
(silver, glass and aluminium). This would also
have a negative impact on profitability. With ASP
declining more quickly than costs, we expect
YGE’s EPS to decline by 20% y-o-y in 2011.
HSBCe vs consensus
Our 2011 EPS estimate is 34% below consensus
as we model an 8% y-o-y increase in shipments
along with a 12% y-o-y decline in ASP.
Valuation
We apply a PE of 9x to our 2011 estimates to
value Yingli, which represents the sector PE at its
trough following the start of the credit crisis in
March 2009; this gives us a target price of
USD8.90 and implies a potential negative return
of 23%.
Under HSBC’s research model, the Neutral band for
volatile China equities is a potential return of 0-20%.
Since Yingli’s potential return is below this band, we
reiterate our Underweight (V) rating.
Upside risks
Upside risks are represented by continued robust
demand, euro appreciation, higher-than-expected
market share gains, and better cost control.
Downstream acquisitions at reasonable valuations
to boost order pipeline and protect ASPs can also
provide upside, in our view.

Yingli Green: HSBCe vs consensus

(USDm) 2011e 2012e 2013e
Sales HSBCe 1,741 1,891 2,151
Consensus 2,521 2,758 2,752
Difference -31% -31% -22%

EBIT HSBCe 295 260 246

Consensus 442 438 351
Difference -33% -41% -30%

EPS HSBCe 1.08 1.08 1.08

(USD, fully Consensus 1.63 1.57 1.13
diluted) Difference -34% -31% -5%
Source: FactSet consensus, HSBC estimates

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Yingli Green at a glance

Planned shipments by shipping destination (2011e) Sales and EBIT margin (2008-12e)
RoW
25% 22.3% 2,000
China 4%
14% 20%
1,500
Germany 15% 15.3%
16.9%
36% 13. 8% 1,000
US 10%
14% 5.8% 500
5%

0% 0
2008a 2009a 2010e 2011e 2012e
RoE Italy
Rev enue (USD m, RHS) EBIT margin
21% 11%
Source: Company Source: Company, HSBC estimates

Working capital (USDm) (2008-12e) Capex (USDm) (2008-12e)

1,200.0 500
413.0
1,000.0 372. 0
400
800.0 285.9 290.0
278.0
600.0 300

400.0 200
200.0
100
0.0
2008a 2009a 2010e 2011e 2012e 0

A/c rec. Inv . A/c pay . 2008a 2009a 2010e 2011e 2012e

Source: Company, HSBC estimates Source: Company, HSBC estimates

Net Debt/EBITDA (2008-12e) Shareholder structure (2010a)

2.5x
2. 0x 1. 9x
2.0x Chairman
33%
1.5x
1.0x
1.0x 0. 8x 0.7x

0.5x Public
67%
0.0x
2008a 2009a 2010e 2011e 2012e

Source: Company, HSBC estimates Source: Company

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Financials & valuation: Yingli Underweight (V)

Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (USDm) Module Capacity (MW) 1,000 1,700 2,100 2,300
Utilisation (%) 133 85 76 82
Revenue 1,864 1,741 1,891 2,151 Module Shipments (MW) 1,062 1,143 1,440 1,802
EBITDA 519 433 428 423 ASP (USD/W) 1.7 1.5 1.3 1.2
Depreciation & amortisation -104 -138 -167 -177 Unit CoGS (USD/W) 1.2 1.1 1.0 0.9
Operating profit/EBIT 415 295 260 246 Unit Gross Profit Spread (USD/ 0.6 0.4 0.3 0.2
Net interest -55 -59 -57 -56
PBT 304 251 203 190
HSBC PBT 359 236 203 190
Taxation -45 -38 -41 -38 Valuation data
Net profit 212 173 122 114 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 268 158 122 114
EV/sales 1.3 1.4 1.3 1.1
Cash flow summary (USDm) EV/EBITDA 4.7 5.7 5.7 5.5
Cash flow from operations 163 399 388 330 EV/IC 1.3 1.2 1.1 1.1
Capex -278 -413 -290 -201 PE* 7.0 12.1 15.7 16.7
Cash flow from investment -257 -413 -290 -201 P/NAV 1.5 1.3 1.2 1.1
Dividends 0 0 0 0 FCF yield (%) -2.6 -1.4 4.7 6.0
Change in net debt 81 14 -98 -129 Dividend yield (%) 0.0 0.0 0.0 0.0
FCF -53 -29 98 129 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (USDm)

Intangible fixed assets 66 66 66 66 Issuer information
Tangible fixed assets 1,505 1,780 1,903 1,927 Share price (USD) 11.88 Target price (USD) 8.90 Potent'l tot rtn (%) -25.1
Current assets 1,956 1,614 1,468 1,594
Cash & others 985 746 725 855 Reuters (Equity) YGE.N Bloomberg (Equity) YGE US
Total assets 3,670 3,603 3,579 3,729 Market cap (USDm) 1,730 Market cap (USDm) 1,730
Operating liabilities 722 668 600 599 Free float (%) 48 Enterprise value (USDm) 2476
Gross debt 1,386 1,161 1,042 1,042 Country China Sector Electrical Equipment
Net debt 401 415 317 187 Analyst Shishir Singh Contact +852 2822 4292
Shareholders funds 1,270 1,443 1,565 1,679
Invested capital 1,819 2,046 2,110 2,133
Price relative
21 21
Ratio, growth and per share analysis 19 19
17 17
Year to 12/2010a 12/2011e 12/2012e 12/2013e 15 15
13 13
Y-o-y % change 11 11
9 9
Revenue 75.4 -6.6 8.6 13.7 7 7
EBITDA 212.5 -16.7 -1.1 -1.1 5 5
Operating profit 285.5 -29.0 -11.6 -5.5 3 3
PBT -17.4 -19.0 -6.5 1 1
HSBC EPS 3351.2 -42.3 -22.9 -6.5 2009 2010 2011 2012
Yingli Rel to SSE COMPOSITE INDEX
Ratios (%)
Source: HSBC
Revenue/IC (x) 1.2 0.9 0.9 1.0
ROIC 22.3 13.0 10.0 9.3
ROE 23.7 11.6 8.1 7.0 Note: price at close of 21 Mar 2011
ROA 10.2 7.4 6.0 5.6
EBITDA margin 27.9 24.9 22.6 19.7
Operating profit margin 22.3 16.9 13.8 11.4
EBITDA/net interest (x) 9.4 7.3 7.4 7.5
Net debt/equity 25.7 23.4 16.3 9.0
Net debt/EBITDA (x) 0.8 1.0 0.7 0.4
CF from operations/net debt 40.6 96.1 122.7 176.2
Per share data (USD)
EPS Rep (fully diluted) 1.35 1.08 0.76 0.71
HSBC EPS (fully diluted) 1.71 0.98 0.76 0.71
DPS 0.00 0.00 0.00 0.00
NAV 7.92 8.99 9.75 10.46

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Notes

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Notes

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Notes

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Christian Rath, Robert Clover, Shishir Singh, Keith Hwang and
Charanjit Singh

Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its
required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as
Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 29 March 2011, the distribution of all ratings published is as follows:
Overweight (Buy) 51% (23% of these provided with Investment Banking Services)
Neutral (Hold) 36% (20% of these provided with Investment Banking Services)
Underweight (Sell) 13% (19% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-
term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price Date Disclosure
GCL POLY ENERGY HOLDINGS 3800.HK 4.37 28-Mar-2011 5, 11
Q-CELLS QCEG.DE 3.40 28-Mar-2011 4
SOLARWORLD SWVG.DE 11.20 28-Mar-2011 4
TRINA SOLAR TSL.N 28.60 29-Mar-2011 4
WACKER CHEMIE WCHG.DE 160.70 28-Mar-2011 6, 11
Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 28 February 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 28 February 2011, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services.
6 As of 28 February 2011, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 28 February 2011, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

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Additional disclosures
1 This report is dated as at 30 March 2011.
2 All market data included in this report are dated as at close 21 March 2011, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
4 As of 28 February 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities
managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of,
1% or more of the total capital of the subject companies securities in the market for the following Company(ies):
SOLARWORLD , Q-CELLS , TRINA SOLAR
5 HSBC Trinkaus & Burkhardt acts as a designated sponsor to the following companies, and as such has an agreement with
such companies to engage in market making activities and/or to publish research in connection with the securities of the
following company(ies): WACKER CHEMIE

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Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation
HSBC Trinkaus and Burkhardt AG
Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada)
Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; Königsallee 21/23
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; D-40212 Düsseldorf
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HSBC Trinkaus and Burkhardt AG. MICA (P) 142/06/2010 and MICA (P) 193/04/2010

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