Renesola - Chinese Solar Panel/Silicon Recycling

EVO china note issued 20th november 2006

ReneSola, SOLA LN, GBp224.5, BUY (initiate), Target Price GBp410.0
(initiate)

Right place, right time

· Rating and valuation. We initiate coverage of ReneSola with a BUY rating and a GBp410 price target. Equal to 12.5x FY07e earnings, this values ReneSola at the low end among key comparables trading at 12x to 21x consensus FY07e earnings. At GBp410 ReneSola is arguably still undervalued in view of its FY07e 72.3% average ROE.

· At the heart of the value chain. Expansion of the solar energy industry faces a key bottleneck owing to the shortage of silicon. In contrast to most competitors which use raw silicon, ReneSola processes scrap silicon to produce polyvoltaic (PV) wafers. While placing ReneSola at the high-margin end of the value chain, it also means competition to secure an adequate silicon supply is less keen than for raw silicon.

· Sales growth to accelerate from 2Q07. We estimate 4Q06 sales will rise 38% qoq, but that growth should slow prior to the planned 2Q07 commissioning of 50MW capacity. On the basis of ReneSola's capacity expansion programme, we forecast FY07 sales and net income will rise over 160% and 140%, respectively. This growth rate is slightly higher than the expansion in installed capacity from 80MW to 180MW.

· Two concerns. Our first concern is the potential for narrower margins on flat shipments but rising scrap prices. The second is execution risk, as ReneSola's FY07 growth hinges on the smooth commissioning of new capacity.
However, with ReneSola having met its targets to date, we are more concerned that equipment suppliers fail to meet delivery schedules than of Renesola's ability to inaugurate new capacity.