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Memorandum
Confidential Page 2 09/05/2014
o REC Silicon is caught in the crosshairs of a messy trade war between China and the US In response to the US Department of Commerces imposition of duties on Chinese
manufactured solar panels earlier this year,Chinas Ministry of Commerce (MOFCOM)has just removed an import loophole on US polysilicon and imposed a 57% import tariff
on REC Silicon (US-based manufacturing despite trading in Oslo) and the other US-based polysilicon manufacturers Stated bluntly, this 57% tariff level renders REC Silicons completely uneconomic in the
Chinese marketo We believe that at least 80% of REC Silicons polysilicon volume is sold into China and that no
sufficient sources of demand exist outside of China Ex-China solar polysilicon demand cannot possibly absorb the excess supply as it
represents a tiny fraction of global demand We estimate that China consumes 80-90% of global polysilicon demand
REC Silicons polysilicon is disqualified from the electronics industry (largelysemiconductor wafer manufacturers), the only other consumer of polysilicon albeit on adramatically smaller scale than solar
The vast majority of REC Silicons production does not meet the high puritystandards of the electronics industry
As such, REC Silicon will be extremely challenged to find ex-China off-takers for itsoutput at almost any selling price
We believe REC Silicons revenues will collapse as they are forced to both lower sellingprices and capacity utilization as global polysilicon supply dwarfs ex-China polysilicondemand
81%
75%
82%
0%
25%
50%
75%
100%
Shipment Volume Revenue EBITDA
REC Silicon Estimated China Contribution
Silane Gas (ex-China)
Ex-China Polysilicon
China Polysilicon at Risk
Source: Esplanade Capital Analysis, REC Silicon
0
1,000
2,000
3,000
4,000
5,000
6,000
Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014E Q4 2014E
REC Silicon Silicon Prodction by End Market
Solar Grade Polysilicon (lowest purity)
Electronics Grade Polysilicon (highest purity)
Source: Esplanade Capital Analysis, REC Silicon
S
A
O
O
S
O
C
U
T
O
M
E
R
http://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttps://www.sumzero.com/https://www.sumzero.com/https://www.sumzero.com/http://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtmlhttp://www.mofcom.gov.cn/article/b/c/201408/20140800698490.shtml8/11/2019 short anlysis
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Memorandum
Confidential Page 3 09/05/2014
Moreover, given the high fixed cost structure of REC Siliconsmanufacturingoperations, production costs are likely to skyrocket as capacity utilization wanes
Consequently, we believe that REC Silicons EBITDA could collapse by 50 (perhaps
more) from Q3 2014 levels versus Street expectations for increasing revenue and
EBITDA as far as the eye can see
o Yet, REC Silicons shares have barely budged since the MOFCOM announcement suggesting themarket is not appreciating the dire implications of this trade restriction
o In addition, Street price targets, revenue, and EBITDA estimates keep levitating higher in theface of Chinese sanctions confirming that analysts do not anticipate a major disruption to RECSilicons operations
0
100
200
300
400
500
600
0
20
40
60
80
100
120
140
160
Q2 14 Q3 14 Q1 15 Esplanade Street
Actual Results Peak 2014 Revenue Prices Fall and
Shipments Collapse
Due to China Market
Restriction
2015E
REC NO Revenue Erosion Trajectory
Revenue
Collapses
~20%
from
Q3 14
Esplanade
Forecasts 2015
Revenue ~20%
Below Street
0
20
40
60
80
100
120
140
160
180
0
10
20
30
40
50
Q2 14 Q3 14 Q1 15 Esplanade Street
Actual Results Peak 2014 Utilization
& EBITDA
Prices Fall, Utilization
Collapses, Costs Leap
Due to China Market
Restriction
2015E
REC NO EBITDA Erosion Trajectory
EBITDA
Collapses
~50%
from
Q3 14
Esplanade
Forecasts 2015
EBITDA50% Below
Street
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
8/1/2014 8/8/2014 8/15/2014 8/22/2014 8/29/2014 9/5/2014
REC NO Share Price Performance (NOK)
08/01/2014 - 09/05/2014
MOFCOM
Announcement
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Memorandum
Confidential Page 4 09/05/2014
o Finally, our confidence is further buttressed by the fact that REC Silicon trades at a ~15%premium EV/EBITDA multiple to its global polysilicon peer group despite the devastatingheadwinds faced
TEV/EBITDA STREET
GLOBAL POLYSILICON PEERS: 14Y 15Y
REC Silicon (REC NO) 10.3x 8.1x
GCL Poly (3800 HK) 9.3x 7.8xDaqo New Energy (DQ) 8.7x 4.8x
OCI (010060 KS) 9.2x 7.6x
Tokuyama (4043 JP) 8.3x 7.5x
Wacker Chemie (WCH GR) 6.1x 6.2x
Mean 8.3x 6.8x
Median 8.7x 7.5x
Source: Bloomberg
Background on REC Silicono REC Silicon (REC) generates the preponderance of its revenues and EBITDA from the
manufacture of polysilicon (a key raw material) for the solar industry
REC Silicon also derives ~20% of its sales volumes from polysilicon and silane gas salesto the electronics industry which, for the purposes of this thesis, we assume remain stableat current levels despite years of underperformance
o REC Silicon operates two polysilicon (and related gases) production facilities in Moses Lake,Washington and Butte, Montana (despite the Oslo (Norway) share listing, REC Siliconheadquarters in operations in the United States
o REC ranks as the 5thlargest producer of polysilicon globally with approximately 21,000 metrictons (MT) of capacity or about 7% market share
2014 POLYSILICON CAPACITY AND SHARE
MT %
GCL Poly (3800 HK) 65,000 21.6%
Wacker Chemie (WCH GR) 52,000 17.3%
OCI (010060 KS) 48,000 15.9%Hemlock (JV w/Dow Corning and Shin-Etsu) 44,000 14.6%
REC Silicon (REC NO) 21,000 7.0%
TBEA (600089 CH) 15,000 5.0%
Tokuyama (4043 JP) 13,000 4.3%
Daqo New Energy (DQ) 12,150 4.0%
Remaining Manufacturers 30,850 10.2%
Total 301,000 100.0%
400.5
531.5
532.8
539.9
77.0
152.7 162.2 167.7
0
100
200
300
400
500
600
3.50
3.60
3.70
3.80
3.90
4.00
4.10
4.20
4.30
4.40
4.50
2013 Actual 6/30/2014 8/14/2014
MOFCOM
ANNOUNCEMENT
9/5/2014
REC Silicon Consensus Price Target (NOK), 2015E Revenue (USD),
& 2015E EBITDA (USD)
Consensus Revenue 2015E Consensus EBITDA 2015E Consensus Price Target
Source: Bloomberg
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Memorandum
Confidential Page 5 09/05/2014
o REC Silicon differentiates itself by employing Fluid Bed Reactor technology (FBR) to producepolysilicon rather than the tradition Siemens method utilized by >90% of the global polysiliconproducers
FBR consumes less electricity in the manufacturing process and should produce at amuch lower cost than the traditional Siemens method
As a tradeoff, FBR produces granular and lower purity polysilicon versus chunk and
higher purity Siemens polysilicon Granular FBR polysilicon sells at a discount to Siemens polysilicon because it generally
has to be mixed with higher-purity chunk Siemens polysilicon to achieve purity levelsrequired in the solar manufacturing process (blending in lower-cost FBR usually reducesthe total cost of polysilicon thats why many solar manufacturers utilize it)
However, in the years since REC Silicon built out their FBR plant, Siemens-basedproducers have reduced their production costs to below RECs levels
Daqo New Energy(DQ), a traditional Siemens method polysilicon producer,has achieved lower production costs thanREC Siliconin recent quarters
Therefore, REC Silicon has squandered its technology-enabled cost advantages yet stillsuffers from discounted selling prices due to lower purity and granular format of theirproduction
o
REC also used to control fully integrated solar module manufacturing operations in Asia (andformerly Norway) butspun-out those manufacturing assets in October 2013 through a publicoffering(REC Solar - RECSOL NO) to cap off a massive balance sheet and operationalrestructuring
As such, REC Silicon exists as a pure-play polysilicon producer todayo REC Silicon sells the vast majority of its output to Chinese solar manufacturers
We believe that REC sells 80%+ of its solar polysilicon to China
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Stated Near-Term Targets
REC Silicon (FBR) vs. Daqo New Energy (Siemens)
Cash Production Costs
REC Silicon (REC NO)
Daqo New Energy (DQ)
Source: Esplanade Capital Analysis, REC Silicon, Daqo New Energy
81%
75%
82%
0%
25%
50%
75%
100%
Shipment Volume Revenue EBITDA
REC Silicon Estimated China Contribution
Silane Gas (ex-China)
Ex-China Polysilicon
China Polysilicon at Risk
Source: Esplanade Capital Analysis, REC Silicon
http://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/DAQO%20NEW%20ENERGY%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/DAQO%20NEW%20ENERGY%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/REC%20SILICON%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/REC%20SILICON%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/REC%20SILICON%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttp://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttp://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttp://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttps://www.sumzero.com/https://www.sumzero.com/https://www.sumzero.com/http://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttp://www.recsilicon.com/media/newsroom/newshandler/?feed=/R/136555/PR/201310/1738073.xmlhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/REC%20SILICON%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNGhttp://c/Users/paul/Dropbox/Esplanade%20Capital/Research%20and%20Analysis/REC/DAQO%20NEW%20ENERGY%20REPORTED%20COST%20STRUCTURE_Q2%202014.PNG8/11/2019 short anlysis
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Memorandum
Confidential Page 7 09/05/2014
Whereas in 2014, 80% of the ~75,000 metric tons of US capacity owned byREC Silicon and its even larger US peer Hemlock (which cannot be shorted as aprivate company) was shipped into China
In 2015, 100% of US polysilicon capacity will be rendered uneconomic for
China buyers with a 57% import tariff How much solar polysilicon demand exists outside of China?
By our estimates, ex-China solar polysilicon buyers require ~40,000 metric tons2014E Polysilicon Demand (1) 2015E Polysilicon Demand (1)
China Ex-China Total China Ex-China Total
Silicon Solar Wafer Production(Gigawatts) 38 7 45 44 7 52
Polysilicon Consumed per Watt of Production 5.5 5.5 5.5 5.5 5.5 5.5
Polysilicon Required (MT) 211,613 35,750 247,363 244,145 39,188 283,333
REC Silicon Polysilicon Capacity (MT) 16,800 4,200 21,000 0 21,000 21,000
REC Capacity Share 7.9% 11.7% 8.5% 0.0% 53.6% 7.4%
Total US Polysilicon Capacity (MT) 60,000 15,000 75,000 0 75,000 75,000
Total US Capacity Share 28.4% 42.0% 30.3% 0.0% 191.4% 26.5%
Source: Esplanade Capital Analysis, PHOTON Consulting, REC Silicon(1) Excludes First Solar and other thin film production which do not consume polysilicon
REC Silicon faces several issues attempting to redeploy 80% of its production toex-China solar markets
1. While REC Silicon and other US producers cannot export into China in2015, German, Korean, Chinese, and all ex-US producers can shippolysilicon to any market in the world in addition to China
REC Silicon and other US suppliers will still face the sameglobal competition in all the ex-China markets
ORIGIN OF SUPPLY
China USA Korea EU Japan Otherhina USA Korea EU Japan Other
2015E
Map of Solar Polysilicon
Supply and Demand
2014E
Map of Solar Polysilicon
Supply and Demand
ORIGIN OF SUPPLY
Source: Esplanade Capital Analysis, PHOTON Consulting, and company reports
Total Total
C
n
B
d
P
y
c
o
D
m
n
Ex-China
Demand
C
n
B
d
P
y
c
o
D
m
n
Ex-China
Demand
P
R
N
O
S
H
I
P
M
E
N
B
G
O
H
0%
100%
U
S
U
P
R
B
T
D
I
N
C
H
I
N
U
S
U
A
O
W
E
D
I
N
C
H
I
N
V
A
L
O
H
US SUPPLIERS SHIP
80%
OF PRODUCTION INTO CHINA
US SUPPLIERS SHIP 0%
OF PRODUCTION INTO CHINA
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Memorandum
Confidential Page 8 09/05/2014
We expect competition to ratchet up in ex-China markets as thecombination of desperate US polysilicon makers and limitedex-China polysilicon demand drive ex-China poly pricingsharply downward
We estimate that US polysilicon producers alone could supply
almost 2X ex-China polysilicon demand
For REC Silicon to maintain full capacity utilization shipping
exclusively to ex-China customers, we estimate that they would
have to command 53% market share outside of China versus
historical share of ~10%
They would have to achieve that unprecedented
market share while larger and higher purity US
supplier Hemlock also tries to unload their volumes at
the same time with the same restrictions from China
2. As noted above, REC Silicons granular polysilicon is viewed lessfavorably by solar polysilicon consumers as it requires blending withhigher purity chunk polysilicon
3. REC Silicon would have to nurture new ex-China customerrelationships across the globe (often in countries where it doesntoperate today), an expensive and logistically challenging task
Can REC Silicon redeploy some of its volumes to the electronics industry (largelysemiconductor wafer manufacturers), the only other consumer of polysilicon albeit on amuch smaller scale than solar?
In short, 95% of REC Silicons production capacity does not meet the exactingpurity requirements of the electronics sector
Hemlock, the largest US polysilicon producer, on the hand, could mitigate aportion of the China crater through increased shipments to the electronicsindustry as nearly 100% of its capacity meets the purity standards of theelectronics industry
o
Moreover, Hemlock has been supplying the semiconductor industrysince its founding in the 1950s
How do the above translate into capacity utilization? While we dont model this scenario, we recognize that it is possible that REC
Silicon cannot replace any of its China business as Hemlock beats REC Siliconto the punch on the ex-China and electronics polysilicon markets
0%
25%
50%
75%
100%
Hemlock REC Silicon
REC Silicon Versus Hemlock
Electronics Grade Polysilicon (highest purity)
Solar Grade Polysilicon (lowest purity)
Source: Esplanade Capital Analysis, REC Silicon
CANNOT BE
REDEPLOYED
TO
ELECTRONICS
INDUSTRY
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Confidential Page 9 09/05/2014
o In this extreme but not impossible scenario, REC Silicons utilizationdrops to 20% (versus current levels of ~95%), EBITDA becomes arelic of the past, and debt covenants are tripped on the way to anotherrestructuring
In our very conservative Base case, we assume that utilization drops to 70%suggesting that REC Silicon manages to recover 60% of lost China shipments
o
Our Upside case forecasts utilization plummeting to 60% as only 50%of China shipments are redeployed
We admit that our Base and Upside cases represent likely very conservativeoutlooks as we cannot figure any reasonable path for REC Silicon to restoremuch of their lost China business
In reality, it may be near impossible to maintain the 60-70% utilizationsdescribed in our Base and Upside cases
oAverage Selling Prices (ASP)
REC Silicon is about to confront an untenable situation whereby ex-China polysilicondemand cannot possibly absorb stranded US polysilicon supply at almost any price
Polysilicon makers will stop producing when selling prices fall below cash productioncosts, which we witnessed in the solar industry shakeout in 2011/12
Today, REC Silicon produces their lowest cost FBR silicon at $14.30 per kgand targets cash production costs of $11.20 in Q4 14 (we discuss productioncosts in detail in the next section); however, when utilization drops, fixed costunder absorption drives up unit cash production costs
In our Base case (predicated on unrealistically high utilization rates), weconservatively forecast cash production costs to jump to $13.50 per kg in 2015
0%
25%
50%
75%
100%
Q2 14 Q3 14 Q4 14 Q1 15
REC NO Capacity Utilization Trajectory
Replaces
0%
Replaces
50%
Replaces
60%
0%
25%
50%
75%
100%
125%
Q2 14 Q3 14 Q4 14 Q1 15
REC NO Shipment Trajectory
(Percent of Q2 2014 Levels)
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Memorandum
Confidential Page 10 09/05/2014
Needless to explain, with Q2 2014 selling prices hovering around $21.50 perkg, there is a long way down on ASPs to cash costs for REC Silicon
Like utilization, we really cannot justify selling prices anywhere close to current levels forREC Silicon, but for conservatism, we assume 2015 ASPs decrease only 7% fromcurrent levels (and decrease 12% for our Upside case)
o
Production Costs
As noted above, REC Silicon (and all polysilicon manufacturers) carry sizeable fixedcosts which enable margin expansion during increasing ASP and high utilizationscenarios but crush profitability in declining ASP and low utilization periods
In our Base case, we expect unit production costs to jump as decreased utilization
overwhelms REC Silicons cost structure with fixed cost under absorption
We conservatively forecast Base case cash production costs of ~ 13.50 per kg
for REC Silicons FBR production (reported production costs will be higher as
REC Silicons small (but higher cost) Siemens capacity is factored in
We consider this assumption our most conservative given our lack of faith that
REC Silicon can maintain any semblance of our forecasted utilizations
In a very realistic scenario, cash production costs could easily breach 15 per kg
At cash costs north of ~ 18 (~40% utilization), REC Silicon would lose money on
every kg sold
Below we illustrate sensitivity of cash production costs to utilization rates
0
5
10
15
20
25
Q2 14 Q3 14 Q4 14 Q1 15
REC NO ASP Trajectory
Cash
Cost
(Floor)
Upside
Case
Base
Q1 15 PR ODUCTION CASH COS T AND EBITDA SENSITIVITY TO CAPACITY UTILIZATION
Q4 14 Target
100% 90% 80% 70% 60% 50% 40% 30%
10.99 11.51 12.16 12.99 14.11 15.66 17.99 21.88
10.99 11.51 12.16 12.99 14.11 15.66 17.99 21.88
22.00 9.48 8.79 7.93 6.83 5.36 3.29 0.20 ( 4.96)
Q2 14 ASP 21.50 8.98 8.29 7.43 6.33 4.86 2.79 ( 0.30) ( 5.46)
21.00 8.48 7.79 6.93 5.83 4.36 2.29 ( 0.80) ( 5.96)
20.50 7.98 7.29 6.43 5.33 3.86 1.79 ( 1.30) ( 6.46)
20.00 7.48 6.79 5.93 4.83 3.36 1.29 ( 1.80) ( 6.96)
19.50 6.98 6.29 5.43 4.33 2.86 0.79 ( 2.30) ( 7.46)
19.00 6.48 5.79 4.93 3.83 2.36 0.29 ( 2.80) ( 7.96)
18.50 5.98 5.29 4.43 3.33 1.86 ( 0.21) ( 3.30) ( 8.46)
18.00 5.48 4.79 3.93 2.83 1.36 ( 0.71) ( 3.80) ( 8.96)
17.50 4.98 4.29 3.43 2.33 0.86 ( 1.21) ( 4.30) ( 9.46)
17.00 4.48 3.79 2.93 1.83 0.36 ( 1.71) ( 4.80) ( 9.96)
(1) EBITDA includes ~$8M per quarter in cash SG&A
SELLING PRICE
EBITDA PER KG (1)
CASH COST
CAPACITY UTILIZATION RATE
CASH COST
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Memorandum
Confidential Page 11 09/05/2014
We admit that these 2015 production cost forecasts likely present a best case scenario forREC Silicon (i.e., cash costs are likely to exceed the ~$13.50 per kg forecast)
o Revenue
Piecing together our conservative utilization and ASP assumptions, we forecast 2015
revenues ~20% below the Street
o EBITDA
Taking all of the above into consideration, we forecast 2015 EBITDA at least 50%
below the Street
Catalysts
0
5
10
15
20
25
Street Estimate Esplanade Capital
Q2 14A Q4 14 Company
Target
Q1 2015
ILLUSTRATIVE:
Trajectory of EBITDA per KG of Polysilicon Produced
Q2 14A to Q1 15E
EBITDA
Cash SG&A
Cash Cost
ASP
Source: Esplanade Capital Analysis, Bloomberg, REC Silicon
0
100
200
300
400
500
600
0
20
40
60
80
100
120
140
160
Q2 14 Q3 14 Q1 15 Esplanade Street
Actual Results Peak 2014 Revenue Prices Fall and
Shipments Collapse
Due to China Market
Restriction
2015E
REC NO Revenue Erosion Trajectory
Revenue
Collapses
~20%
from
Q3 14
Esplanade
Forecasts 2015
Revenue ~20%
Below Street
0
20
40
60
80
100
120
140
160
180
0
10
20
30
40
50
Q2 14 Q3 14 Q1 15 Esplanade Street
Actual Results Peak 2014 Utilization
& EBITDA
Prices Fall, Utilization
Collapses, Costs Leap
Due to China Market
Restriction
2015E
REC NO EBITDA Erosion Trajectory
EBITDA
Collapses
~50%
from
Q3 14
Esplanade
Forecasts 2015
EBITDA 50% Below
Street
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Confidential Page 13 09/05/2014
assume that REC is able to claw back ~60% of lost volumesthrough lower prices and aggressive tactics in ex-China markets
DOWNSIDE Trade war settlement reached before year-end 2014, and RECSilicon is allowed to import into China uninterrupted
o In the case that a settlement is negotiated by China andthe US, it is highly likely that a settlement is reachedwell after the December 31stdeadline facing RECSilicon given that neither the US or China has officiallylaunched any sort of negotiations to date
o REC Silicons core business could still be disruptedmeaningfully even with a settlement
REC Silicon achieves Consensus revenue and EBITDAestimates for 2015
REC Silicon shares still suffer a modest pullback as its multiplecompresses to global polysilicon peer multiples
NOK2.60-3.00
UPSIDE China import restrictions impact Q4 14 utilizations, shipments,and production costs as REC Silicon winds down productionahead of the December 31stdeadline to avoid buildinginventory in the face of a very uncertain 2015
REC Silicon forced to lower selling prices more aggressively(~12%) from ~$21.50 to ~$19 per KG in response and todecrease utilization due to limited ex-China polysilicon demand(and to avoid consuming working capital through inventorybuild)
Decreased utilization drives up production costs due fixed costunder-absorption
Despite 80% of shipment volumes at risk, we generouslyassume that REC is able to claw back ~50% of lost volumesthrough lower prices and aggressive tactics in ex-China markets
NOK0.70-0.90
UNLIKELYBUT POSSIBLEUPSIDE CASE
REC Silicon only replaces a small fraction of lost Chinabusiness Utilization crash to sub-50% or ASP crash to cash cost levels Debt covenants are tripped REC Silicon could face another restructuring
~NOK0.00
o We derive our price targets by applying the median 2015 peer EV/EBITDA multiple (based onConsensus) to our views on 2015 EBITDA as detailed below
BASE DOWNSIDE UPSIDE
2015E EBITDA $86.0 $167.7 $65.2
Median Peer Multiple 7.5x 7.5x 7.5x
Enterprise Value $646.8 $1,262.1 $490.7
Q2 2014 Gross Debt $261.0 $261.0 $261.0
Q2 2014 Cash $82.0 $82.0 $82.0
Equity Value $467.8 $1,083.1 $311.7
Share O/S 2,314 2,314 2,314
Equity Value per Share $0.20 $0.47 $0.13
NOK per USD 6.37 6.37 6.37
NOK Price Target 1.30 3.00 0.86
Upside / (Downside) 60.3% 8.0% 73.5%
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Memorandum
Confidential Page 14 09/05/2014
o We outline our valuation ranges in the Base, Downside, and Upside cases below As the results show, we believe the downside is limited from a valuation perspective
DISCLOSURE: Esplanade Capital LLC and its affiliates hold short positions in REC Silicon and long
positions in Daqo New Energy (DQ US). Esplanade Capital LLC and its affiliates may buy or sell the sharesat any time.
TEV/EBITDA STREET
GLOBAL POLYSILICON PEERS: 14Y 15Y
REC Silicon (REC NO)
10.3x 8.1x
GCL Poly (3800 HK)
9.3x 7.8x
Daqo New Energy (DQ) 8.7x 4.8x
OCI (010060 KS) 9.2x 7.6x
Tokuyama (4043 JP) 8.3x 7.5x
Wacker Chemie (WCH GR) 6.1x 6.2x
Mean 8.3x 6.8x
Median 8.7x 7.5x
Source: Bloomberg
PEER MULTIPLE
VALUATION RANGE
X
BASE DOWNSIDE UPSIDE
86.0 167.7 65.2
2 0 15 R E C ESTIMATED EB ITDA
RESULTS IN
IMPLYING
BASE DOWNSIDE UPSIDE
MEAN 65.6% 18.5% 77.6%
MEDIAN 60.3% 8.0% 73.5%
UPS IDE / DOWNSIDE)
6,000
Solar Gra
BASE DOWNSIDE UPSIDE
MEAN 1.12 2.66 0.73
MEDIAN 1.30 3.00 0.86
REC S ILICON EQU ITY VA LUE PER S HAR E
6,000
Solar Gra
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