ReneSola Ltd Company Overview
ReneSola Ltd is a global solar project developer and operator. The company is headquartered in Stamford CT, however it is organized in the British Virgin Islands. The American Depositary Shares (ADS) is listed on NYSE, ticker symbol: SOL, and each ADS represents 10 underlying shares.
The company operates in three segments: Solar power project development, Electricity generation revenue, and EPC (engineering, procurement, and construction) services.
The majority of its revenue comes from its Project development segment.
The company’s geographical segments are China, United States, Canada, Romania, England, Turkey, France, Poland, and Hungary.
The company underwent significant restructuring in 2017 and exited most of its power generation business. They are still in the process of exiting several assets in China and ultimately transitioning to an asset light model where they build and develop power generation plants that are eventually transitioned to the clients. There are 2 distinct business models in their Project Development Business line:
- Build-transfer: the company builds and develops solar power projects. These are then connected to the grid and then sold to the clients.
- Project Rights Sale: the company secures lands/roofs with interconnection capacity and sell project rights.
The restructuring helped the company to rapidly deleverage and bring their capital structure under control. Net debt has declined form $809 million in 2012 to $75 million in 2020. At the same time, the change in the business model from asset heavy to asset light by restructuring and disposing of there owned assets has resulted in a decline in revenues over the year. Net earnings has also declined although profitability has been improving in the recent years. Whenever you have a significant change in the business model, the comparisons of the financial numbers become irrelevant. Therefore many opportunities may arise but they may fly under the radar of the most investors. Let’s see if SOL offers one such opportunity.
SOL Fundamentals and Stocks Data
As of this writing (June 7, 2021), the company sports a market cap of $636 million. TTM Revenues are $75 million with $8 million hitting the bottom line. EPS is $0.16 and at the current market price of $9.13/share, the stock has a p/e ratio of 57.
Sales growth next year is expected to be about 31%, the 5 year growth closer to 15%. The sales and profits tends to be lumpy for the company as it is still a small player in the industry. It is safe to say the ReneSola at this point does not seem likely to deliver growth in the near future that will justify its exorbitant p/e ratio.
So why is the stock priced so high? Or is it?
Let’s look at the balance sheet.
As of quarter ending Mar 2021, the company had $301 million in cash and cash equivalents. The company is currently profitable and to continue to run the operations we can expect the company to need about 2% – 5% of the annual revenue as cash reserves. A conservative estimate would be about $4 million considering the ttm revenues is about $75 million. Therefore, one can reasonably expect that the company is able to distribute $297 million to the shareholders with no adverse effect on their business.
In reality, given the capital intensive nature of the business, let’s take this number down to $275 million.
Removing this from the current market cap of $636 million gives us a ex-cash p/e ratio of 57 * (636-275)/636 = 32.35.
Much better, but still quite high. However, it can make sense if you take the next year sales growth estimate of 31% into account.
On the p/e ratio basis, the ReneSola stock appears to be expensive, but not overly so. Not enough value here to make us reach for the buy button, but certainly not so expensive that we may consider taking the short side of the trade.
The ReneSola stock trades at 1.5 times the book value. This sounds reasonable as the company is teetering on the brink of being a service company. If it were still making wafers like it was doing years ago, we may require the book multiple to be south of 1.
Solar Market Outlook and ReneSola Ltd Positioning
Investors in the solar stocks may be feeling optimistic as the future of solar appears to be bright. To wit, this excerpt from the ReneSola’s 2020 Annual Report:
The global solar power project development business is large and yet continues to grow. Industry market research estimates that by 2040, the share of renewables in the energy market will increase to around 30% and globally will become the single largest source of power generation. Europe continues to lead the way in terms of penetration of renewables. Renewable energy is expected to account for more than 50% of the European energy market by 2040. Europe, the U.S. and China are expected to be the three key markets driving the growth of renewables in the next several years due to favorable regulatory policies and incentives.
• The European Commission unveiled the “European Green Deal”, a set of policy initiatives intended to make Europe carbon neutral by 2050. This includes a proposal to toughen the EU’s 2030 greenhouse gas emission reductions target. They intend to reduce GHG to 50% of 1990 levels, a more aggressive target than the former 55% target.
• In the U.S., the Biden administration intends to make the U.S. a 100% clean energy economy with net-zero emissions by 2050, and intends to decarbonize the U.S. power sector by 2035 by adopting renewable energy sources and technologies that can be deployed at scale and compete with fossil fuels on cost.
• In China, the Central Government initiated the policy to reduce the country’s carbon dioxide emissions by at least 65 percent from 2005 levels by 2030 and to achieve carbon neutrality by 2060.
Additionally, the sharp uptake of electric vehicles in the United States and around the world also bodes well for widening acceptance of renewable energy sources. It is now already more cost effective to build a new solar power plant than to build a non-renewable electric generation plant in many parts of the world. So the trend is clear and irreversible at this point. The Solar industry is growing and will continue to grow. It follows that market players in this industry will likely do well going forward as well.
There are 2 headwinds to keep in mind.
- With the growth in the solar market comes increasing levels of competition. Competition is forcing down prices for all the market participants
- Most countries are winding down their incentives for renewable energy
Also keep in mind that there does not exist any durable set of competitive advantage in the industry for any player. Economies of scale can come into play, in which case ReneSola is at a disadvantage due to their small size as compared to other players in the market.
Is SOL Stock a Good Buy?
Despite the excitement generated by their latest earnings report, I would suggest that ReneSola stock currently does not represent attractive value. The company also does not display any moat. Generally utilities eventually acquire a protected market by the virtue of being awarded monopoly rights in local markets. ReneSola on the other hand has decided to migrate away from the utility model and focus on engineering and project management model. I would consider this to be a major risk. It might become an attractive target for a larger company to acquire, however we cannot build our investment thesis on this possibility (given that the shares are not even priced attractively today).