memc. agenda introduction company overview stock market macroeconomics & industry review...
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MEMC
Agenda
• Introduction• Company Overview• Stock Market• Macroeconomics & Industry Review• Financial Analysis & Projection• Recommendation
Current Holding
March 2008 Acquired 200 shares @ $78.15December 2008 Acquired 200 shares @ $14.43October 2010 Sold 200 shares @ $12.41repurchased 200 shares @ $12.02 in DecemberOctober 31, 2012 Current holdings 600 shares @ 2.2/share Market value $1320 1.05% of total portfolio
Company Overview
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
MEMC INC.
Four general categories: prime, epitaxial, test/monitor and silicon-on-insulator (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 OverviewSolar Materials Segment
Solar Energy Segment( SunEdison)
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
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
Source: Bloomberg
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
Macroeconomic Overview
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
The price of semiconductors moves in response to global demand and supply trends
-57.69% negative growth in 2003-2017 Price decrease of both semiconductor and
silicon, which benefit solar power producers
Semiconductor
Revenue growth highlight 2009: -20.2% 2010: 35.6% 2012-2018: -0.16%
Source: IBIS World- semiconductor &circuit manufacturing in the US
Electric Power Consumption
Industry Overview
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 OverviewSolar 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
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 Source: IBIS-solar power in the US
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
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%
Industry OverviewCompetitors
Source: yahoo finance
Unit: Dollar in million
Industry OverviewFive Force Analysis
High Moderate:Capital Intensive: costly equipment requiredGrowing market in solar power industry
High:Competition for government subsidies among other renewable energy High cost compared to other types of electricity
Low:Decreasing price of solar componentsVertical integration in the supply chain
High:Solar power supply exceeds demand before year 2016 Global price competition
High:Global price competition
Strength Weakness Leading global solar energy services
provider Diversified geographic presence Focus on research and
development
High dependence on limited number of customers
Legal proceedings
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
Company OverviewSWOT Analysis
Source: Datamonitor 360http://advantage.marketline.com.proxy2.library.illinois.edu/Product?pid=01E4E29B-3E1F-4C86-A389-E73B154AF4F4&view=SWOTAnalysis
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
Company Overview
Recent events-2011 Global Plan
Source: 2011 MEMC Annual Report
Revenue Growth• Average Growth Rate = 5.22% Quarterly for 10 years
Source: MEMC 10K, 10Q
Revenue Breakdown -by geography
-by segment
Company Overview
2009 20112010
Key Observations 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, …)
Source: MEMC 2011 10K, 10Q
Sources of Cash Outflow of Cash
Key Observations
Business Risks Downturn in industry and market condition
– Might be unable to generate sufficient cash inflows or outside financing
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
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 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
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)
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– Increased Debt (cost of firm debt nearly doubled
in a year’s time)– Stock Holders demand compensation for risk– Unclear management strategy/market outlook
See Excel
Multiple approach Significant Difficulties - government owned companies - numerous negative multiples - unreliable “definitions of revenue sources”
Valuation Judgments used Significant predicted drop in value See Excel
Recommendation
Sell 600 Shares @ Market Price– Poor macroeconomic outlook– Questionable management decisions
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
What we learned…