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RBC Capital Markets identifies four key investment strategies


Demand for photovoltaic solar power, which directly converts the sun’s radiation into electricity, is expected to grow by 40 per cent per year by 2011, offering opportunities for investors who can ride out near-term bumps, according to a new report from RBC Capital Markets, “Investing in Solar Now.”

“Solar industry profits are here to stay, since both public and government support are likely to remain strong until solar can compete on a cost basis with grid electricity,” said Stuart Bush, lead alternative energy equity analyst for RBC Capital Markets. “Today, solar energy costs nearly double what would be economical without subsidies, but solar energy companies are aggressively pursuing their Holy Grail: Organic competitiveness with grid electricity.”

Rising fossil fuel costs, environmental concerns, geopolitical factors and growing energy demand have swelled interest in alternative energy globally; and with more government subsidies for technologies such as solar power, profitable companies are on the rise in this sector. The solar industry is already seeing profits throughout the supply chain. Silicon cell photovoltaic solar technology installations, which currently account for almost 95 per cent of the market, will book gross profits of about $7.7 billion in 2007, growing to $11.5 billion in 2011, according to RBC. This estimate does not include profits from the alternative thin-film photovoltaic technology, which is projected to grow from 6.5 per cent of the market in 2007 to 19 per cent in 2011, and excludes equipment makers and derivative industries.

The solar industry is implementing technology improvements that will further drive down costs. RBC estimates that the total industry average installed cost for photovoltaic solar will decline from about $7.37 per kilowatt in 2007 to about $4.40 in 2011, and achieve organic competitiveness with grid electricity at about $3.50 per kilowatt, without incentives and depending on the region in 2012-2014.

Although the long-term outlook for solar power is positive, sector stocks are likely to remain volatile in the near term. A proprietary supply and demand forecast model developed by RBC Capital Markets projects that solar companies are likely to experience tightening margins over the next few years, driving vertical integration and capacity consolidation, particularly among new silicon producers, smaller cell and module producers and independent installers.

Given the industry’s evolution, Bush said investors should consider four key investment strategies for the emerging global solar industry:

Play the Supply Chain: Solar companies that focus on high value-added elements of the solar supply chain, such as silicon, wafer and cell producers will generate higher margins than the labor-heavy and low barrier-to-entry module and installation segments.

Play Tech Differentiation: As the majority of the solar industry is dominated by standard solar products, companies with higher efficiency products or lower-cost thin-film designs are better suited to command superior profits long term.

Play Globally: As additional silicon supplies drive raw material costs down over the next 24 months, a company’s operating cost structure will emerge as the long-term driver of profit margins. Asian producers, most notably in China, stand to benefit. An investment strategy that seeks to pair Asian producers long versus European producers will benefit in the long term.

Play within a Geography: Investing among companies located in particular regions, such as Germany or China, will limit exposure to cross-border macro trends and highlight comparably strong regional producers.
About RBC Capital Markets
RBC Capital Markets is the corporate and investment banking arm of RBC, the masterbrand used by Royal Bank of Canada (RY on the TSX and NYSE), and is active globally in debt origination, sales and trading, foreign exchange, infrastructure finance, structured products, metals and mining and energy. Its North American equity underwriting, sales, trading and research business leads the Canadian market and supports a significant and growing franchise in the U.S. middle market. Bloomberg ranks the firm as one of the Top 20 investment banks globally.


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