Analyst downgrades semi wafer outlook; still “balancing” solar industry, biz growth

Mar. 12, 2008 – A report from FBR Research says wafer sales to the semiconductor industry should decline about 6%-7% in 1Q08, but that will be cancelled out by strength in the spot market and by solar wafer demand, and that MEMC’s strategy of signing long-term solar contracts over currently surging spot market prices is still an attractive model.

Analyst Mehdi Hosseini dismisses “headlines” about substantial increases in poly supplies coming out of China this year that would bury the spot market for polysilicon, or a collapse of the supply chain due to evaporating profits. “A 10-year contract, which would lead to more stable revenue streams, in our opinion, is more attractive/favorable to a $500/kg spot poly market,” he writes.

He notes that 200mm semi wafer prices are down 3%-5% this quarter, followed right behind by sliding 300mm wafer ASPs (down 2%-4%). Added to an anticipated 3%-5% sequential decline in unit shipments, that equals a 6%-7% decline in sales — vs. initial expectations of just a 2% decline. This means FBR has rewritten its outlook for semi wafer sales for all of 2008, now down 5% instead of flat vs. 2007.

Spot prices are seen at $375-$400/kg in 1Q08, and increased solar wafer shipments should boost non-semi wafer revenues (spot prices plus solar) to >$200M, up from $130M-$150M/quarter last year. Hosseini thinks spot poly prices could keep climbing above $400/kg, with shortages stretching into 2010 due to a lack of standards and limited supply of silane/TCGS gases. That means polysilicon alone will represent an unsustainable >40% of the total cost of solar power systems (~$3.20/W).

In his analysis, Hosseini adds up what all this means for one of the top wafer suppliers, MEMC. The company “is in a ‘balancing act’ of capitalizing on high spot prices but encouraging spot customers to sign 10-year solar wafer contracts that are based on a much lower poly cost,” he writes. He reiterates his “Outperform” rating on the stock, with CY09 revenue/pro forma/GAAP EPS estimates of $3B/$5.36/$5.06, based on 5% growth in semi revenues and 35%-40% growth for nonsemi, with the mix of spot poly “declining to 10%-ish.”

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