Solar's Growth and Challenges in Latin America
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world's core countries are experiencing many challenges while many parts of Latin America are plowing ahead. Solar continues to come down in cost and the growth of unsubsidized solar in Europe appears to be right around the corner. Latin America does not get a great amount of attention due to its relatively small market and lack of purchasing power. Regardless, Central and South America should be ignored. Chile has over 6000 MW in their pipeline while Brazil is second with a little more than 2000 MW. In 2011 the CIA estimated that Brazil had a GDP of $2.3 trillion and Mexico had a GDP of $1.7 trillion. These nations have large and growing economies which need dependable energy sources. Developing countries are forced to carefully watch their balance of trade and the ability to substitute solar for expensive LNG or coal imports is a convincing sales pitch.
One of the main impediments for the development of solar in Latin America is the constrained capital markets. The banking system is highly oligopolized and borrowers are forced to pay very high interest rates. A complete solar system is a significant capital investment. If a Brazilian borrows 50% of the system's cost at an interest rate of 44% then it will be difficult to get an attractive ROI. The chart below says that Chile's and Mexico's lending rates are much lower than Brazil's but these numbers are severely underestimated. Santander Chile offers personal loans with interest rates from 12% to 30% and Santander Mexico offers similar loans from 20% to 39%. These interest rates show just how precious capital is for Latin American consumers.
Chile Lending Interest Rate data by YCharts
Potential investments
First Solar (NASDAQ: FSLR) is active in Chile with their 2011 partnership to help develop facilities to serve Chile's mining interests. They recently bought Solar Chile which has a 1.5 gigawatt pipeline. These mines are close to deserts which receive little cloud cover and a large amount of sunshine. The nation needs more power and imports large amounts of LNG which is very expensive. The country's electricity grid is privatized and fragmented which makes locally generated solar more attractive. First Solar has a very low total debt to equity ratio of .15 and a healthy gross margin of 32.8%. Insiders own 26.9 million shares which is 30.9% of shares outstanding. This is a positive aspect of the firm and helps to signal that investors' interests will not be forgotten. First Solar is expected to be profitable in 2013 with estimated EPS earnings around $4.02. This company is a good way to play the growth of solar energy in Latin America.
SunPower (NASDAQ: SPWR) has a facility in Mexico with a total future manufacturing capacity of 500 MW. The company specializes in fully integrated systems and leasing arrangements. Their focus is mainly on the United States, Germany, Italy, and France with developments in China and India. The company may be profitable in 2013, but it is still unclear with analysts' EPS estimates varying from $-.34 to $.14. SunPower doesn't use First Solar's thin film technology but instead focuses on lower margin and higher efficiency systems. Their gross margin of 15.6% isn't as strong as First Solar's, but it is still respectable. For the time being Latin America is not a major part of SunPower's growth, but over the coming decade this may change.
Risky investments
Trina Solar Limited (NYSE: TSL) is another company with a sales office in Santiago, Chile. It is still unknown just how much revenue Latin America will create as Germany, China, and the United States received the majority of shipments in 2012. As a company Trina Solar leaves much to be desired. Their gross margin of 5.2% is very low, their total debt to equity ratio of 1.25 is high, and they are expected to post an EPS loss of $-1.97 in 2013. These numbers and the geopolitical risk of investing in a Chinese company make Trina very risky for the time being.
Canadian Solar (NASDAQ: CSIQ) is not focused on Latin America though they recently did announce a small 26 MW project in Puerto Rico. Based on sales from 3Q 2012, Europe is their main market with 47.8% of revenue, Asia and others are second with 27.2%, and North America third with 25.0%. They have a total debt to equity ratio of 2.85 and a small gross margin of 7.9%. 2013 EPS estimates come in at $.15, but this based on one analyst so the number should be taken with a grain of salt. Canadian Solar has a quick ratio of .4 which is low compared to their peers. Currently Canadian Solar is best avoided due to their high debt load, low margin, and lack of Latin American presence.
Conclusion
The cost of solar continues to fall and Latin America continues to grow. Recently South and Central America have turned to LNG imports but this is expensive and drains precious foreign exchange reserves. Solar manufactures have focused on Europe, the United States, and Asia but, little by little, Latin America will open up. The number of projects in Chile show that industry and government can come together to provide domestically produced energy at relatively low costs. First Solar is a good investment to consider with their strong financials and presence in Santiago, Chile.
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