Download Industry Overview

MEMC
Agenda
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Introduction
Company Overview
Stock Market
Macroeconomics & Industry Review
Financial Analysis & Projection
Recommendation
Current Holding
WFR
1%
WAG
March 2008
PETM
12%
Acquired 200 shares @ $78.15
5%
MOS
December 2008
8%
Acquired 200 shares @ $14.43
MCD
October 2010
13%
Sold 200 shares @ $12.41
repurchased 200 shares @ $12.02 in December
October 31, 2012
 Current holdings 600 shares @ 2.2/share
 Market value $1320
 1.05% of total portfolio
ABT
15%
ZIXI
4%
AEO
23%
JKHY
12%
DO
7%
Company Overview
MEMC INC.
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Found in 1959
1995 Initial Public Offering on NYSE
Design, manufacture and sell silicon wafers for semiconductor and solar
applications manufacturers
The company has operations in China, France, Germany, Italy, Japan, Malaysia,
Singapore, South Korea, Taiwan and the US.
Acquisition of SunEdison in 2009, a major developer and seller of photovoltaic
energy solution
Recent Change of CFO, Directors
Semiconductor Materials Segment
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Four general categories: prime, epitaxial, test/monitor and silicon-oninsulator (SOI)wafers
Size ranges from 100 millimeters to 300 millimeters
Sell products to almost all major semiconductor device manufacturers
including the major memory and microprocessor
Source: MEMC, 2011 10K
Company Overview
Solar Materials Segment
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Starting material for crystalline solar cells in solar applications
Major solar wafers are typically multicrystalline 156 millimeter square wafers
Utilize subcontractors to convert its polysilicon into wafers for solar
applications
Manufacture monocrystalline wafers for solar applications internally
Solar Energy Segment( SunEdison)
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Provides solar energy services that integrate the design, installation, financing,
monitoring, operations and maintenance portions of the downstream solar
market
As of December 2010, SunEdison interconnected over 393 solar power system
representing 267 megawatts (MW) of solar energy generating capacity
SunEdison has a project pipeline of approximately 2.9 gigawatts ("GW") and
116.8MW of solar projects under constructions of September 30, 2012
Source: MEMC, 2011 10K
Stock Market
Source: Bloomberg
Stock Market
The stock price movement is highly correlated to the price of polysilicon, the main
input of solar power energy and the product of MEMC Solar Materials Segment
Source: Bloomberg
Macroeconomic Overview
GDP growth % Annual
4.0
2.0
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
-2.0
2003
0.0
GDP growth
-4.0
 The economy of US is slowly recovering from recession. General economic
conditions are anticipated to strengthen as consumer income and business
investment increases.
 Projected the GDP growth rate will increase to pre-crisis level by year 2016
Source: World Bank, The global outlook in summary
Industry Overview
Semiconductor
 Revenue growth highlight
 The price of semiconductors moves in
response to global demand and supply trends  2009: -20.2%
 2010: 35.6%
 -57.69% negative growth in 2003-2017
 2012-2018: -0.16%
 Price decrease of both semiconductor and
silicon, which benefit solar power producers
Source: IBIS World- semiconductor &circuit manufacturing in the US
Industry Overview
Electric Power Consumption
 4076 Billion kWh expected consumption in 2012 and 4431 Billion kWh in 2017
 0.9% Compound Growth in 2007-2012
 1.7% Compounded Growth through 2012-2017
Source: IBIS World -electric power consumption
Industry Overview
Solar Power
 The growth rate of Solar Power
Industry remains stable over the next
five years
 Through 2017, the price of silicon will
continue to decrease, lowering panel
cost and driving growth
Source: IBIS-solar power in the US
 Utility customers tend to buy large amount of
energy, lowering the marginal cost of the solar
power plant
 The revenue from Commercial Sector has
increased over the past five years
 High costs of solar energy relative to other
types of electricity have deterred many
industrial users over the past five years
Industry Overview
 Concentrating solar power
• Concentrating solar power (CSP)
devices use direct heat from the sun,
concentrating it on a surface to
produce heat. This heat is then
converted into electricity
• On a large scale, CSP technology
converts energy from sunlight more
efficiently per kilowatt-hour than
photovoltaic devices
 Photovoltaic power
• Photovoltaic devices (traditionally referred to as solar panels) use
semiconducting materials to convert sunlight directly into electricity
• Photovoltaic panels are used more for individual and commercial use because
they are easily attached to buildings and offices
• The price of silicon has dropped over the past five years, decreasing the
production cost of solar panels. Nonetheless, photovoltaic power is still more
expensive than CSP on a per-kilowatt-hour basis
Source: IBIS-solar power in the US
Industry Overview
Pricing for polysilicon and PV components continued to exhibit softness in Q2 2012 due to
the persistence of the global oversupply environment that the industry has faced since early
2011.
Source:SEIA/GTM Research-US solar market insight 2012
Industry Overview
 As the price of solar components and systems continue to fall significantly,
the demand of solar power and the volume of PV installations are
predicted to grow in the next four years
 From 2012-2016, the forecast annual growth rate is 25% -30%
Source:SEIA/GTM Research-US solar market insight 2012
Industry Overview
 The global PV installations increased from 29.2 GW(2011) to 33.2 GW(2012)
 Germany accounts 23% installation in 2012, which is the highest in the world
 The installations in China grew from 7% in 2011 to 21% in 2012
 The installations in Italy decreased from 32% in 2011 to 10% in 2012
Source: EnergyTrend-Global Photovoltaic Market Overview
Industry Overview
Competitors
Unit: Dollar in million
Company
Industry
Revenue(2011) R&D Cost
%Revenue
MEMC
Semiconductor/Solar
2715.5
87.5
3.22%
Shin-Etsu
Semiconductor
13278.7
452.77
3.4%
Sumco
Semiconductor
3123.1
73.3
2.35%
First Solar
Solar
2,766.2
140.5
5.08%
Suntech
Solar
3,146.6
38.6
1.23%
LDK
Solar
2,157.8
46.5
2.16%
Source: yahoo finance
Industry Overview
Five Force Analysis
High Moderate:
Capital Intensive:
costly equipment
required
Growing market in
solar power industry
High:
Solar power supply
exceeds demand
before year 2016
 Global price
competition
Low:
Decreasing price of
solar components
Vertical integration in
the supply chain
High:
Global price competition
High:
Competition for
government subsidies
among other renewable
energy
High cost compared to
other types of electricity
Company Overview
SWOT Analysis
Strength
Weakness
 Leading global solar energy services  High dependence on limited
provider
number of customers
 Diversified geographic presence
 Legal proceedings
 Focus on research and
development
Opportunity
Threat
 Expansion into solar energy
business
 Recovering semiconductor industry
 Increasing electricity consumption
 Intense competition
 Dependence on limited source
suppliers and subcontractors
 Long term supply agreements
 Weather Condition
Source: Datamonitor 360
http://advantage.marketline.com.proxy2.library.illinois.edu/Product?pid=01E4E29B-3E1F-4C86A389-E73B154AF4F4&view=SWOTAnalysis
Company Overview
Recent events-2011 Global Plan
 Reducing the company's total workforce
 Shuttering the company's Merano, Italy polysilicon facility, reducing production capacity at
Portland, Oregon facility and Kuching, Malaysia wafering facility
 Reducing activity with joint venture partners, resulting in impairments of some of the
investments
 Scaling back future purchase requirements of raw materials to lower future capacity
 Supply wafers for internal consumption by SunEdison
 Consolidating the operations of Solar Materials segment and Solar Energy segment into a
single Solar Energy business unit, effective January 1, 2012
Source: 2011 MEMC Annual Report
Sept. 30, 2012
30-Jun-12
31-Mar-12
Dec. 31, 2011
Sept. 30, 2011
30-Jun-11
31-Mar-11
Dec. 31, 2010
Sept. 30, 2010
30-Jun-10
31-Mar-10
Dec. 31, 2009
Sept. 30, 2009
30-Jun-09
31-Mar-09
Dec. 31, 2008
Sept. 30, 2008
30-Jun-08
31-Mar-08
Dec. 31, 2007
Sept. 30, 2007
30-Jun-07
31-Mar-07
Dec. 31, 2006
Sept. 30, 2006
30-Jun-06
31-Mar-06
Dec. 31, 2005
Sept. 30, 2005
30-Jun-05
31-Mar-05
Dec. 31, 2004
Sept. 30, 2004
30-Jun-04
31-Mar-04
Dec. 31, 2003
Sept. 30, 2003
30-Jun-03
31-Mar-03
Dec. 31, 2002
Revenue Growth
• Average Growth Rate = 5.22% Quarterly for 10 years
WFR Quarterly Revenue Growth (DEC 2002 - SEP 2012)
900
800
700
600
500
400
300
200
100
0
Source: MEMC 10K, 10Q
Company Overview
Revenue Breakdown -by geography
2009
Italy
2%
2010
United
States
Other foreign 11%
countries
21%
United
States
Other foreign
13%
countries
23%
China
25%
Taiwan
29%
-by segment
Italy
17%
Korea
8%
2011
China
19%
Korea
8%
Taiwan
24%
Other
foreign
countries
19%
United
States
16%
Italy
14%
China
22%
Taiwan
20%
Korea
9%
Solar Energy,
0.3%
Solar Energy
19%
Solar
Materials,
49.3%
Semiconductor
Materials,
50.4%
Solar
Materials
37%
Semiconductor
Materials
44%
Solar Energy
27%
Solar
Materials
35%
Semiconductor
Materials
38%
Key Observations
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Decreased in Profit Margin Due to:
– Operating Inefficiency
– Unfavorable Environments (Japanese earthquake, foreign currency
effects, inventory charges related to suppliers, early termination fees
related to customer contracts, …)
Operating Profit Breakdown
Semiconductor Materials
Solar Materials
Solar Energy
400.0
200.0
0
(200.0)
(400.0)
(600.0)
(800.0)
(1,000.0)
(1,200.0)
(1,400.0)
2009
2010
2011
Source: MEMC 2011 10K, 10Q
Key Observations
Sources of Cash
Main Cash Inflow
SaleLeaseback
65%
Outflow of Cash
Return of
Equity
Method
Investments
3%
Issuance of
Long Term
Debt (2019)
32%
Main Cash Outflow Repaid Refunde
Acquisition
s
10%
Capital
Expenditur
es
68%
Leases Deposit
17%
4%
Operations
1%
Business Risks
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Downturn in industry and market condition
– Might be unable to generate sufficient cash inflows or outside
financing
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High initial costs for solar energy, yet uncertainty of
generating revenue
Weak position in the supply chain
– Few suppliers
– Long term contracts with customers
– Several customers account for 12-13% of revenue
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Subject to numerous environmental laws and regulations
Rapid Technology Change
Downsizing cannot mitigate the business risks in long run
Source: MEMC 10K, 10Q
Key Observations
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Significant Restructuring Charges (2011)
Significant Goodwill/long-lived Assets Impairments (2011)
Significant Investments in Solar Energy
– Mergers and Acquisitions
• FRV, a developer of solar power project, 100% voting shares for $54.2 M on
Sep 2012
• Solaicx, 100% Equity for $101.7 M on July, 2010
– Capital Expenditures
• Construction of solar energy system, $425 M
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Investigation being undertaken for tax return by IRS
Withdrawn Contracts
– July 5: Wafer supply to SunTech Power (400 Million)
– Sept 25: Wafer supply to Conenergy AG Power (600 Million)
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Significant incentives form “Green” Power
- California (Performance based incentives/Renewable Energy Credits)
Source: MEMC 2011 10K, 10Q
Discounted Cash Flow
Significantly High Discount Rate
 Logic
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– Increased Debt (cost of firm debt nearly doubled
in a year’s time)
– Stock Holders demand compensation for risk
– Unclear management strategy/market outlook
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See Excel
Multiple approach
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Significant Difficulties
- government owned companies
- numerous negative multiples
- unreliable “definitions of revenue sources”
Valuation
Judgments used
 Significant predicted drop in value
 See Excel
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Recommendation
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Sell 600 Shares @ Market Price
– Poor macroeconomic outlook
– Questionable management decisions
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In Regards to Portfolio
– Transaction costs must be factored (It is not in the best
interest to maintain a small position)
– Sale Will Create Tax loss
– Further Exposure into energy possible
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What we learned…