MEMC Electronic Materials (NYSE Ticker: WFR)

Greg Bruno | Patrick Quirke | Charles Chen | Richard Wang

Thursday, March 3, 2010

Presentation Outline

Company Analysis

Solar Energy Industry

Semiconductor Material Industry

Performance Analysis and Stock Valuation

Company OverviewOverviewNet Sales by categoriesAcquisition ActivitiesSWOT AnalysisCompetitorsManagement assessment

WFR Historical Holdings March 2008: 200 shares were bought @ $78.15

December 2008: 400 shares were bought @ $14.43 Total Cost basis =$35.67 per share

Nov. 4 2011, 200 shares were sold @ $12.41. Realized loss: $4,652

Dec. 6 2010, 200 shares were purchased @ $12.02 

Mar. 2 2011 (current portion): Closed price: $13.15 Portfolio: 2.32% Unrealized gain: 3.64%

Company Overview Main business: Manufacturer and seller of wafer Sector: Technology Industry: Semiconductor - Integrated Circuits , and Solar industry Products:

◦ wafers in sizes from 100 millimerters (4 inch) to 300 millimeters (12 inch)

◦ Intermediate product : polysilicon, silane gas, ingots and scrap wafers

◦ Solar Energy Panels

Business segments: Semiconductor Materials, Solar Materials and Solar Energy.

Market covering: Manufacturing and research and development facilities in the United States, Europe and Asia pacific.

Customers: semiconductor device and solar cell (device) manufacturers

S&P 500 stock traded on New York Stock Exchange.

Data provided by www.memc.com as of October 10, 2010

Acquisition Activities Acquisition of Sun Edison

November 23, 2009 MEMC completed acquisition of privately held Sun Edison, a developer of solar power projects and North America’s largest solar energy service provider. (Paid with $314 million, 70% cash, 30% MEMC stocks)

Acquisition of Solaicx

July 2, 2010 MEMC completed acquisition of privately held Solaicx. (Paid with $66 million cash, and plus $10 cash equivalent of investment in Solaicx.) The acquisition expected to be accretive to earnings per share in 2011

Acquisition outlook Based on the MEMC’s recent frequent acquisition activities, we expect more acquisition activities will be initiated in the near future

Information provided by www.sunedison.com & www.memc.com as of October 10, 2010

WFR Stock Performance 2010

WFR Historical Stock Performance

Image provided by www.memc.com as of October 10, 2010

Net Sales by Region, Business Segment

SWOT Analysis Strengths

◦ Vertical integration

◦ Horizontal diversification

◦ Strong technology base supported by strategic and efficient R&D

◦ Strategic Long Term contracts

Weaknesses◦ Overcapitalization

◦ Highly Leveraged

◦ Accumulated inventory from 3rd and 4th at 2010

SWOT Analysis Opportunities

◦ Further diversification and gain share of renewable energy market

◦ Reductions to COGS

◦ Government support

◦ Increasing market demand for renewable energy nationwide

Threats◦ Price competition in three segments

◦ Short-term over supply of polysilicon

◦ Imbalanced tax, regulatory, and trade policies

Competitors

Semiconductor Materials Shin−Etsu Handotai : market shares: 25%, revenue:9,8B in 2010 Sumco: market shares: 15%, revenue: 2.4 B in 2010

Solar Materials LDK Solar: Cap: 1.88B revenue: 1.89B ReneSola: Cap: 0.8B revenue: 1B

Solar Energy First Solar Inc. Cap: 12.5B revenue:2.56B SunPower Corp. Cap: 1.66B revenue: 2.2 B

Management Assessment

Extended trend of steady improvement

SunEdison delivered strongest quarter to date

Semiconductor and solar end markets remain dynamic ◦ Increased market share in an environment of rising prices

Management expects GAAP sales in the range of $2.8 - $3.1 billion and EPS of $0.25 to $0.55◦ Improve execution

◦ Continue strategic initiatives

Solar Energy Industry AnalysisOverviewPerformance in 2009 Performance in 2010 Drivers for industrial growthPorter’s Five Forces

Solar energy products include Photovoltaics (PV), concentrating solar power (CSP), and solar heating and cooling (SHC)

U.S. PV market has grown at an average annual rate of 69% over the past ten years, rising from just 3.9 megawatts (MW) in 2000 to 435 MW in 2009

U.S. constituted only 6.5% of global PV demand in 2009, placing fourth in national installations behind Germany, Italy, and Japan. However, with continued pricing reductions and strong incentives, the U.S. could become the next major PV growth market

Solar Energy Industry Overview

Solar Energy Industry - Performance in 2009

The U.S. was a net exporter of solar energy products in 2009, with $723 million in net exports

2009 U.S. solar installations created $3.6 billion in direct value, with 74% accruing to the U.S

Polysilicon was the largest solar product export, with $1.1 billion in exports in 2009

The U.S. ranked fourth in the world for new solar electric installations (Germany was first, Italy second, and Japan third)

Solar energy Industries Association 2009 reporthttp://seia.org/galleries/default-file/Trade_Balance_Factsheet.pdf

Solar Energy Industry - Performance in 2010

U.S. commercial solar customers added 103 megawatts of capacity in the third quarter of 2010, which represents a 38% jump over the third quarter of 2009

Cost per installed watt fell under $6 (before tax breaks), with federal stimulus programs and state and local tax breaks

Worldwide, demand for just photovoltaic solar power grew 196% to 10.6 gigawatts in the first  nine months of 2010

Definite signs pointing to a strong year in 2011, in light of the solar energy tax legislation - Treasury Section 1603 Program

Solar energy Industries Association 2009 reporthttp://seia.org/galleries/default-file/Trade_Balance_Factsheet.pdf

Federal, state, and local policy incentives Market volatility, especially with respect to natural gas and oil Climate change and likely carbon regulations Energy security issues Need for increased energy production to meet growing

demand (China, India, etc.) Interest from financial community in “next big thing”

Solar Energy Industry – Growth Drivers

Solar Energy Industry – Growth Drivers

• November 23, 2009 MEMC completed acquisition of privately held Sun Edison• Sun Edison LLC owns and operates power plants in North America and

provides solar-generated energy to commercial, government, and utility customers

• Provides solar energy services, which include renewable power, monitoring, marketing, renewable portfolio standards, and solar tariff services

• As of 2010, it has more than 390 solar deployments worldwide • In 2010 it deployed more than 160 Megawatts of solar throughout the world• Including 28 MW of ground-mount and rooftop solar projects in Ontario

• In Feb 2011, Sun Edison was awarded 31 Megawatts (MW) AC of solar photovoltaic (PV) projects by The Ontario Power Authority (OPA) as part of the province's landmark Feed-in Tariff (FIT*) program

Bargaining Power of Suppliers – Low but increasing◦ No any significant power given ready alternatives to solar energy in the market◦ US government support – At least 30 states require that public utilities generate at

least 10% - 20% of power using clean energy.

Threat of New Entrants/Barriers to Entry – Medium to high◦ High capital commitment◦ Competitive industry

Bargaining Power of Buyers – High A wide variety of energy sources leaves consumers with the ability to choose

Competitive Industry Rivalry – Medium to high◦ Little product differentiation ◦ Go Green campaign by US government◦ High exit barriers due to high capital commitment◦ Growing economy – increasing demand for poly-silicon to rooftop panels

Threat of Substitutes – High Coal (>50%), oil, other fossil fuels, wind, hydrogen, hydropower, nuclear and bio-

energy Cost of electricity low using coal However increasing awareness of the Green House Effect makes people to prefer

clean energy

Porter’s Five Forces Analysis - Solar

Semiconductor Industry Analysis

CharacteristicsPorter’s Five Forces AnalysisIndustry Performance IndicatorsBook to Bill Ratio AnalysisGrowth Expectations

Semiconductor Industry Characteristics & Performance Highly cyclical

◦ Reflects erratic, short-term oriented nature of the primary end market

Streamline operations and outsource production

2010 global semiconductors sales grew 31.8% to $226.3 billion and beat analyst forecasts of $219.7 billion

◦ Superior inventory management

◦ New product launches

◦ Strength in the consumer and computing markets

Data provided by www.sia-online.org as of March 2, 2011

Porter’s Five Forces – Semiconductor Industry Bargaining Power of Suppliers – Medium

◦ Diffusion of risk over hundreds of companies minimizes individual supplier power

◦ Increasing dependence on “foundries” for cutting-edge equipment and production skills increases bargaining power

Threat of New Entrants/Barriers to Entry – Medium, Decreasing

◦ Chip fabrication asset (capital) intensive and technologically advanced business that requires billions of dollars in investment

◦ Alliances formed among semiconductor companies to spread manufacturing costs

◦ Success of “fabless” chip makers suggests that factory ownership may no longer bar entrants from industry participation

Bargaining Power of Buyers – Low

Industry segments dominated by small number of large players

Competitive Industry Rivalry – Very High, Increasing

◦ Intense price rivalries between individual companies◦ Push for better, faster, and cheaper products creates short product life

Availability of Substitute Products – Low

Fundamental building blocks of semiconductor devices

Semiconductor Industry Performance Indicators

Two main indicators of semiconductor equipment manufacturer performance:

◦ Order trends

◦ Relationship between current orders and sales, known as the book-to-bill ratio A ratio above 1.00 indicates expansion, and one below 1.00 reflects a slowdown.

North America-based manufacturers of semiconductor equipment posted a book-to-bill ratio of 0.85 in January 2011 compared to 0.90 in December 2010 and 0.97 in November

The January 2011 billings averaged US$1.80 billion, 2.5% more than the final December 2010 level of and 88% higher than billings posted in January 2010

Slowing of the semiconductor manufacturing equipment market indicates slower growth in IC capacity in 2011

◦ IC production should continue to increase in 2011 as IC demand remains healthy

◦ Semiconductor Intelligence believe IC capacity utilization will remain above 90% through the end of 2011

Data provided by www.sia-online.org as of October 10, 2010

Book to Bill Ratio Analysis

Industry Growth Expectations Semiconductor Intelligence forecasts 9% growth in 2011 and 8%

growth in 2012 Growth driven by:

◦ Underlying strength of electronic equipment production

◦ Continued moderate recovery from a deep recession

Unlikely to move into excess capacity for at least 1-2 years Equipment billings should grow in 2011 by about 10% to 20% IC and wafer demand will continue to grow as IC capacity grows in

2011 IC wafer starts should grow about 10% in 2011 over 2010

◦ Growth in IC capacity should be slightly higher than growth in wafer starts

◦ IC capacity utilization will remain above 90% throughout 2011

Data provided by HIS iSuppli Forecasts as of February 17, 2011 http://www.digitimes.com/news/a20110217PR201.html

ValuationDuPont AnalysisFCF AnalysisDCF ValuationPublic Comparables – Multiples

ValuationTriangulated ValuationRecommendation

DuPont Analysis

DuPont Analysis            

For the Fiscal Period Ending2005 2006 2007 2008 2009 2010

Gross Profit Margin 33.1% 44.7% 52.1% 50.1% 11.0% 15.1%

Assets Turnover 96.4% 87.2% 66.6% 68.2% 32.6% 48.5%

Equity Multiplier 151.9% 146.5% 139.4% 138.8% 161.6% 200.9%

ROE 48.5% 57.2% 48.3% 47.5% 5.8% 14.7%

DuPont Analysis            

For the Fiscal Period Ending2005 2006 2007 2008 2009 2010

GPM YoY Change   35.1% 16.4% -3.7% -78.0% 36.7%

Asset Turnover YoY Change   -9.5% -23.7% 2.5% -52.2% 48.8%

Equity Multiplier YoY Change   -3.6% -4.8% -0.5% 16.5% 24.3%

ROE YoY Change   -104.0% -1.9% -97.6% -5373.3% 11.4%

FCF AnalysisCash Flows ($ Million) Forecast

2011 2012 2013 2014 2015 2016 2017

Free Cash Flow

Net Income 312.10 311.26 263.25 196.71 268.29 338.54 336.95

Depreciation & Amortization 183.75 200.12 213.12 225.24 238.10 249.74 263.30

Gross Cash Flow $495.85 $511.38 $476.37 $421.95 $506.40 $588.28 $600.25

Changes in Accounts Receivable ($34.04) ($29.40) ($23.35) ($21.77) ($23.09) ($20.91) ($24.35)

Changes in Inventories ($51.03) ($67.87) ($96.79) ($142.53) ($223.59) ($239.74) ($325.00)

Changes in Prepaid Expense ($122.02) $9.12 $10.14 $12.15 $4.96 ($17.13) $3.85

Changes in Other Current Assets ($41.20) ($72.68) $84.91 ($6.00) $3.38 ($24.64) $6.16

Changes in Accounts Payable $177.29 $235.76 $336.24 $495.14 $776.73 $832.82 $1,129.02

Changes in Accrued Expenses $6.52 $4.53 $3.66 $3.44 $3.64 $3.34 $3.84

Changes in Other Current Liabilities $21.40 $14.87 $12.02 $11.30 $11.96 $10.95 $12.61

Total Change in Net Working Capital ($43.09) $94.33 $326.83 $351.73 $553.98 $544.68 $806.13

Operating Cash Flow $452.76 $605.71 $803.21 $773.68 $1,060.38 $1,132.96 $1,406.38

SunEdison Net Financing $543.85 $487.88 $436.76 $383.22 $330.89 $277.95 $225.32

Capital Expenditures (Additions to PP&E) (1000.00) (529.51) (593.39) (659.87) (696.14) (684.63) (738.55)

Free Cash Flow (547.24) 76.20 209.81 113.81 364.24 448.33 667.83

DCF ValuationPresent Value of Free Cash Flows Forecast

2011 2012 2013 2014 2015 2016 2017

Discount factor 1.11 1.22 1.35 1.50 1.65 1.83 2.02

PV of Unlevered Free cash flow (494.9) 62.3 155.2 76.1 220.3 245.2 330.2

Sum of FCF 594.36

Terminal Value  

Discount Rate 13.00%

Terminal Growth/ Perpetuity Rate

4.00%

Free cash flow (2017) 694.5

Terminal value 7,717.1

PV of terminal value 3,816.1

Enterprise value 4,410.4

Equity Value Caculation  

   

Calculation of net debt:  

Current portion of LT and ST debt 72.1

Long term debt 610.6

Convertible debt 0.0

Minority interest 43.9

Convertible preferred stock 0.0

Less: Cash 707.3

Less: short-term Investments 0.1

Net debt 19.2

Total Firm Value 4410.4

Equity Value 3727.7

Shares outstanding 227.9

Equity value / Share 16.36

Risk-Free Rate 3.41%

Market Risk Premium 6.00%

Beta 1.27

CAPM 11.03%

   

Goal-Post k(e) 12.00%

k(d) 6.7600%

   

% Equity 81.4%

% Debt 18.6%

Tax Rate 35.0%

   

WACC 10.58%

Public Comparables – Multiples ValuationPublic Comparables          

Competitor Segment P/S P/B Forward P/E EV/EBITDA

Shin-Etsu Co. Ltd. Semiconductor 1.62 1.39 16.30 8.10

Sumco Corporation Semiconductor 2.28 2.09 - 11.10

ReneSola Ltd. Solar Materials 1.33 1.97 - 4.49

Trina Solar Ltd. Solar Materials 1.15 1.79 6.60 3.90

LDK Solar Co., Ltd. Solar Materials 1.99 2.28 4.90 9.90

Covalent Materials Corporation Solar Materials - - - -

SolarWorld AG Solar Materials 0.99 1.14 14.40 6.90

First Solar, Inc. Solar Energy 4.94 4.42 16.80 13.29

SunPower Corporation Solar Energy 0.88 1.36 8.60 6.76

MEMC Electronic Materials Inc.   1.50 1.78 13.80 16.58

WFR Ratios 2/28/2010

Normalized EPS 0.15

Book Value Per Share 1.40

Revenue 2239.20

Shares Outstanding 226.90

Revenue/ Share 9.87

Multiples Minimum Average Maximum Median

P/S 8.68 19.98 48.75 14.80

P/B 1.60 2.83 6.19 2.51

Forward P/E 0.74 1.74 2.52 2.07

EV/EBITDA 3.90 9.00 16.58 8.10

Triangulated Valuation

Current Stock Price: $13.15

Method Weight Valuation

DCF Valuation 50% $16.36

EV/EBITDA 25% $8.55

Price/Sales 25% $17.39

   

Weighted Valuation: $14.67

-10% $13.20

Valuation $14.67

+10% $16.13

Recommendation

Hold position of 600 shares