1. Solar-power industry
Power up – the sun has come out
September 2006
Pranab Kumar Sarmah, CFA
Tel: (852) 2848 4441
E-mail: pranab@dir.com.hk
Daiwa Securities SMBC Hong Kong Limited Daiwa Institute of Research (H.K.) Ltd

2. Contents
Why the solar industry?
How to reap the benefit from this high growth industry?
What should be the right valuation?
Share-price drivers
Supply-chain timing: likely to provide additional alpha
Secular growth in the renewable-energy industry
Demand drivers for solar-power systems
Supply chain – benefiting from strong demand
Silicon – shortage should be over in 2008
PV cells – cost and new technology is the key
PV modules – advantage of being near to end-market will disappear
Systems assembly – fragmented and close to end market
Materials other than silicon – low risk of tight supply
Capital investment in the supply chain- moderate to low
Market forecast: annual revenue growth to exceed 25%
Highlighted PV-cell companies
Kyocera (6971 JP) – Silicon shortage to limit growth of the solar-energy business
Motech Industries (6224 TT) - Banking on production efficiency
Sanyo Electric (6764 JP) – Concern persists in terms of profitability
Sharp (6753 JP)- Solar-power business will be the next growth pillar
SunPower(SPWR: NASDAQ) – Technological strength in the area of high-efficiency PV cells
Suntech Power (STP; NASDAQ) – Vertical integration to pay off from 2008
Regional top-pick idea
2

3. Why the solar industry?
Sustainable high-growth prospects
PV cells: 2005-2010 volume growth: 5.6x, CAGR of 41%, annual market size 8-9GWp by 2010
PV systems: 2005-2010 revenue growth: 3.4x, CAGR of 28%, revenue to exceed US$25bn in 2010 from US$7.6bn in 2005
PV cells: 2005 to 2010 revenue growth: 3.6x, CAGR 29%, revenue to reach US$11bn by 2010
Solar grade silicon: 2005-2010 revenue growth: 3.8x, CAGR 30%, revenue to reach US$2.6bn by 2010
Ample opportunity for growth beyond 2010 as solar power will account for only 0.25% of electricity production globally by then.
Entry of Asian suppliers may lead to upside surprises for volume growth – potentially faster-than-expected cost reductions.
Investment indicators turning positive for the solar industry, especially for PV-cell makers
sector valuations are approaching an attractive level (a 31x PER on our FY06 forecasts) given the 24% correction in our newly-
introduced ‘Solar Index’ since May 2006 the prospects for improved silicon supply in 2007 are getting better
we expect PV-cell ASPs to remain firm for a few quarters due to large order backlogs
the risk of share-price drivers diminishing has declined as oil prices have fallen already and the interest-rate-hike cycle has slowed
Silicon shortage should be over by 2008 – solar grade silicon production to reach 42,000 tons by 2008, up from 13,000 tons for 2005,
and supply to exceed demand marginally that year. Profit margins for cell makers will remain healthy for the next few quarters.
A portfolio approach is recommended for this high-beta industry – We recommend that investors build up core holdings in
strong PV-cell makers now and shift a portion of their portfolios from silicon makers to equipment makers next year.
We initiate coverage of the largest Taiwanese PV-cell maker, Motech (6244 TT), with a 2 (Outperform) rating. Target price-NT$630
We initiate coverage of Chinese integrated PV-cell maker, Suntech Power (STP US), with a 3 (Hold) rating. Target price-S$27
We reiterate our 2 rating on Kyocera (6971 JP), as we believe the stock is undervalued
We are positive on Sharp (6753 JP)’s PV-cell business, but cautious about others. We have also put crystalline PV-cell technology
leader SunPower (SPWR US) on our watch list.
3

4. Valuations of highlighted stocks
Company Price Local Mkt cap
Ticker Target Net mgn Op mgn ROA ROE PER (X) PBR PSR
CCY (19/9) (US$ m) Rating price (%) '05 (%) '05 (%) '05 (%) '05 05 06F 07F (X)'05 (X)'05
Motech Industries 6244 TT 507 2,174 2 630 26.0 27.9 35.8 46.3 59.1 30.2 15.3 28.1 15.4
Suntech Power STP US 26 3,872 3 27 13.6 18.9 6.4 7.6 84.7 39.8 27.1 6.0 10.7
Sunpower Corp SPWR US 29 2,015 NR n.a (20.1) (16.5) (5.0) (6.1) n.a 66.5 37.5 6.9 8.7
Kyocera Corp 6971 JP 9,990 16,264 2 n.a 5.9 8.7 3.6 5.1 26.9 20.6 19.8 1.5 1.6
Sharp Corp 6753 JP 2,105 19,896 3 2,000 3.2 5.9 3.5 8.1 26.0 23.0 21.1 2.1 0.8
Sanyo Electric 6764 JP 248 3,951 NR NA (26.7) (3.0) (27.3) (87.3) n.m. n.a 28.8 4.1 0.3
Weighted Average 49.2 36.0 24.9 8.1 6.2
Source: Companies, Daiwa
Risk factors to consider
Demand-specific risks
Potential cuts in government subsidies
government-subsidy programmes are difficult to change once implemented
supporting green energy/solar power has become an political issue, as it generates employment
Volatility of oil/coal prices
Rising interest rates
Supply-specific risk
Raw-material shortages
Many new entrants due to low entry barrier in solar-cell production
Production risk due to low inventory is declining
Inventory levels among PV-cell makers have been rising since 1Q06
A sudden surge in demand from the electronics industry may hurt the solar industry
Technology risk – New disruptive technology may change the industry
4

5. How to reap the benefits from this high-
growth industry?
Key solar-power related companies by market cap
A few mid-cap stocks in the solar-power area Kyocera Corp
MEMC Electronic Materials Inc
Introducing Daiwa’s Solar Index Renewable Energy Corp AS
Suntech Power Holdings Co Ltd
Since the beginning of 2005, the index is up Tokuyama Corp
33% and 22% YTD. Q-Cells AG
Solarworld AG
High volatility – a portfolio approach is Motech Industries Inc
Sunpower Corp
recommended. Conergy AG
E-Ton Solar Tech Co Ltd
Evergreen Solar Inc
Solon AG Fuer Solartechnik
US$bn
Sunways AG
0 3 6 9 12 15 18
Source: Bloomberg; Daiwa
Daiwa’s solar index
220
Companies’ includes
220 Comparison with other indices
ConergyAG 200
200
MEMC Electronic Materials Inc
180 Motech Industries Inc 180
Q-Cells AG
160 Renewable Energy Corp AS 160
Solarworld AG
140 Sunpower Corp 140
Suntech Power Holdings
120 Tokuyama Corp
120
100 100
80 80
Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06
Solar Index Nasdaq SOX Global Energy Index Solar Index
Source: Bloomberg; Daiwa Source: Bloomberg; Daiwa 5

6. Share-price drivers
Changes in government policy and Solar index vs. oil price Solar index vs. silicon price
raw-material price/supply trends will 220
(US$)
80 220
(US¢/pound)
83
be key share-price drivers 200 75
70
200 81
79
180 180
Consistent but statistically 160
65
60
160
77
75
insignificant relationship with silicon 140
120
55
140
120
73
71
price increase 100
50
45 100
69
67
Oil prices and interest rates
80 40 80 65
Jan-05
Sep-05
Nov-05
Jan-06
Sep-06
Jan-05
Sep-05
Nov-05
Jan-06
Sep-06
Mar-05
Jul-05
Mar-06
Jul-06
Mar-05
Jul-05
Mar-06
Jul-06
May-05
May-06
May-05
May-06
risk is already known, however, no Solar Index (LHS) Oil Price (RHS) Solar Index (LHS) Silicon spot price (RHS)
correlation with oil price YTD.
No significant correlation with the Solar index vs. Taiwan solar
sales trend for the industry Solar index vs. Fed fund rate
related co’s monthly sales
we expect the correlation to (%) (NT$m)
increase once the industry 220
200
5.5
5.0
1,200
1,000
220
200
increases in size and more 180
4.5
4.0 800 180
160
investors pay attention to the 160
140
3.5
3.0
600
140
400
industry’s fundamentals 120 2.5
2.0 200
120
100
100 1.5 0 80
80 1.0
Apr-05
Apr-06
Jan-05
Feb-05
Mar-05
Jun-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Feb-06
Mar-06
Jun-06
Sep-06
May-05
May-06
Jul-06
Jan-05
Sep-05
Nov-05
Jan-06
Sep-06
Mar-05
Jul-05
Mar-06
Jul-06
May-05
May-06
Taiwanese solar related companies monthly sales (LHS)
Source: Companies, Daiwa Solar Index (LHS) Fed Interest Rate (RHS) Solar index (RHS)
6

7. What should be the right valuation?
We think earnings-based valuation is more appropriate than asset- Valuation comparison with other high-
backed valuation growth sectors
Despite a share-price correction in 2Q06, solar-related companies are trading at an FY06F PER (x) US high growth Cos
average FY06F PER of 29x vs. 14.9x for S&P (based on IBES consensus forecast). 40
Asian high growth Cos
Supply chain is low to moderate capital intensive and high growth expectation, 35
(employee bonus adjusted)
therefore PER and PEG ratios are important. Solar sector
A sum-of-the-parts (SOTP) valuation method may be applied to multi-product 30
companies that derive a portion of total earnings from solar power related Asian high growth
25
business Cos
Comparison with other high-growth companies 20
Discounted cash flows? 40% 45% 50% 55% 60% 65% 70% 75%
EPS CAGR (05-07)
Source: IBES; Daiwa
Required PER
PER (x) Risk-adjusted PER (x) @10% discount rate Risk adjusted PER (x) @ 15%
discount rate
2006F 2007F 2008F 2009F 2010F 2006F 2007F 2008F 2009F 2010F 2006F 2007F 2008F 2009F 2010F
10 8 6 5 4 10 8 8 7 6 10 9 8 8 7 Attractive
20 15 13 10 8 20 17 15 14 12 20 18 17 16 15
30 23 19 15 13 30 25 23 21 18 30 27 25 23 22
40 31 25 21 17 40 34 30 27 24 40 35 33 31 29
50 38 31 26 21 50 42 38 34 31 50 44 42 39 36 Expensive
Forecast:
2005 to 2010 volume growth: 5.6X, CAGR 41%
2005 to 2010 revenue growth: 3.4X, CAGR 28%
2005 to 2010 earnings growth: 3.0X, CAGR 25%
Source: Daiwa
7

8. Supply-chain timing: likely to provide additional alpha
Initial hype cycle 2004-2005 – Any solar-power-related stocks.
Silicon shortage until 2007 – Positive for silicon and established PV-cell makers; negative for new entrants and
panel/system integrators
End of silicon shortage (after 2007) – Positive for equipment makers, panel makers, systems integrators; negative for
silicon makers
From 2010 – Game to start for winners and losers
Investment timing
2006 2007 2008
PV-industry Neutral Positive Long-term positive statnce
Earnings mometum Will continue to grow at approximately 25% CAGR
De-rated due to
Re-rating to a
Valuations Re-rating supply conerns and Re-rating stops- normalized valuation assumptions
normalized valuation
high valuation
Silicon Positive Neutral Cautious
Supply exceed
Balanced demand supply profit
Earnings mometum Companies will continue to enhance profit margins due to price increase demand, ASP ane
margin and ASP stabilizes
margin drops
Valuations Valuation re-rating, backed by earnings surprise No furtther re-rating De-rating
PV-cell/module makers Neutral Positive Long-term positive statnce
Margin to stablise - Earnings will grow due to volume increase.
Margin decline due to raw material price Margin will improve,
Earnings mometum incresaed long-term ASP to declining, margin to stablizes; focus
hike, low upside surprise potential earnings accelerate
supply contracts on new cell technology
De-rated due to
Gradual re-rating in the anticipation of ease
Valuations Re-rating supply conerns and Re-rating stops- normalized valuation assumptions
of materail supply and strong 2007 growth
high valuation
Equipment makers Neutral Positive Neutral
Upside to earnings is low and cell makers are slow to add capacity Eranings will accelerate due to capacity Earnings growth to
Earnings mometum
due to supply shortage increase by cell makers normalize
Re-rating will start in the expectation of Re-rating will stop as forecasted capacity
Valuations No re-rating
capex increase expansion to lose mometum
Source: Daiwa
8

9. Screening of PV-cell makers
Cost competitiveness – Motech and SolarWorld PV-cell makers – operating margins (2Q06)
(%)
have consistently maintained high operating 40
margins, followed by E-Ton and Q-cells. 35
30
Long-term material-supply and PV-cell sale 25
agreements – Established large players such as 20
15
Sharp, Q-cell, Suntech and Motech and vertically 10
integrated companies like REC and ErSol 5
0
Ability to commercialise new technology – Q-cell
SolarWorld
SunPower
E-ton
Kyocera*
Sharp*
ErSol
Motech
SunTech
Sanyo*
Q-Cells
and Sharp are leading the race, followed by
Kyocera, ErSol & Suntech * For solar division
Source: Companies; Daiwa
Valuations at less than a 30x FY07 PER and high
EPS CAGR – Apart from SunPower, all other PV- PV-cell makers – PER and EPS CAGR ranking
cell/module makers are trading at below a 30x (x ) (%)
FY07F PER. Motech, E-Ton, SunPower, SunTech 40
FY07F PER
100
EPS CAGR 05-07F
and Ersol’s forecasted EPS CAGR (by Daiwa and 30
IBES forecast) is above 50%. 20 50
Sharp, Q-cell, Suntech, Motech and SolarWorld 10
meet our selection criteria
0
0
SolarWorld
Suntech
Sharp
Ersol
Qcell
E-Ton*
Motech*
SunPower
Sanyo
SunPower
Suntech
Sanyo
Kyocera
Sharp
Motech
SolarWorld
Ersol
Qcell
E-Ton
* Adjusted with employee bonus
Source: IBES; Daiwa 9

10. Secular growth in the renewable-energy industry
We believe that demand for renewable energy will Breakdown of sources of energy (2004)
continue to increase over next 10 years due to: Natural gas Neuclear Year 2004
6% Wind
increasing environmental problems, 21% Hydro
2%
2%
the need to diversify sources of energy, Waste/combustion
2% Solar
Cude oil
increasing prices of traditional fuel sources, such as oil, 38% 0%
coal, natural gas, etc. Other
7%
falls in the capital intensity of renewable-energy
production equipment through economies of scale and Geothermal
technological advancements, and Biomass
1%
government incentives. Coal 4%
24%
Source: IEA; Daiwa
Renewable energy market share Power-generation cost
(TWh) CAGR 2001-2020 (%)
10,000 Solar PV: 28% 40 (US¢/kWh)
Wind: 22% Marine (tidal/wave/ocean)
9,000 45
Solar thermal: 20% 35 25-40
Geothermal 40
8,000 Geothermal: 10%
30 35
7,000 Biomass: 9% Solar-thermal
6,000 Small hydro: 9% 25 30
Solar PV
Marine: 7% 25
5,000 20
Large hydro: 2% Wind
4,000 20
15 1-15
3,000 Small hydro 15
10 4-10
2,000 10 6-8 5-7 2-7
Large hydro 2-6
5 2-4
1,000 5
Biomass
0 0 0
2001 2010F 2020F Solar Biomass Wind Oil Geothermal Gas Nuclear Coal
Source:EREC; Daiwa Source: IEA; Daiwa
10

11. Demand drivers for solar-power systems
Demand for solar power is accelerated by: Energy production by source (crude oil equivalent)
Risk management WW
Latin America
Energy sources need to be diversified Africa
Ecological considerations EU15
Korea
Reduction of carbon-dioxide missions is a China
long-term issue – ‘Kyoto protocol’ Japan
Between 2008 and 2012, Japan will try to Germany
reduce CO2 emissions by 6%, the EU by USA
8%, and the US by 7%. 0% 20% 40% 60% 80% 100%
Cost reductions Coal Crude Oil Gas Nuclear Hydro Geothermal, Solar, etc. Other
Source: IEA
Current simple payback period is 15 years
in many countries NYMEX price trends for energy resources
Financial incentives 150
130
110
90
70
50
30
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06
Crude Oil Gas Coal
Source: Bloomberg 11

12. Demand driver – break-even cost analysis
Prices of PV-systems have Production cost forecast Average retail electricity
dropped by 40% and 20% over the (€/kWh) for solar energy (US¢/kWh) price
past 10 years and five years, 1.2
Break-even point at high sun shine area
30
25
respectively 0.9
Break-even cost at low sun shine area 20
More cost reductions necessary 0.6 15
With an annual production-cost 0.3
10
reduction target of 5%, solar 5
energy would be cost competitive
0
0
South Korea
Japan
Germany
China
Italy
Taiwan
India
UK
US
1990 2000 2010 2020 2030 2040
for peak power generation in the Utility peak cost 2.5 hr/day 5 hr/day Bulk cost
EU between 2010 and 2020. Source: EC Vision report, Daiwa Source: Compiled by Daiwa
Module prices by region (per watt) Pay back period (Years)
Payback periods (Years)
Payback period
9 45 US$4/W 45
0%
8 40 US$6/W 40 5%
7 35 US$8/W 35 10%
6 30 30
5 25 25
4 20 20
3 15 15
2 10 10
1
5 Financing cost 5% 5
Installation cost= US$6/watt
0
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005P
0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.20 0.25 0.30 0.35 0.40 0.45 0.50
US Japan (100Yen) Germany (€)
Electricity cost (US$/KWHr) Electricity cost (US$/KWHr)
Source: Company materials, compiled by Daiwa Source: Daiwa Sun hours = five hours per day; Service life = 10 years for invertors and five years for battery
12

13. Demand driver – financial incentives
Four types of government incentives 1,800
Annual installed capacity trend (MW)
Monetary grants 1,600
eg, in Japan subsidies of ¥90,000 per 1kW were granted in 1,400
2003, ¥45,000 in 2004, and ¥20,000 in 2005, In Germany, 1,200
schools are granted a maximum of €3,000for installing a 1,000
solar-power system. In California, US$2,800 per 1kW is 800
granted. 600
400
Tax benefits 200
Attractive to corporations and individuals that adopt the self- 0
return system. Types are: interest on loans for installing 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
solar system is tax-deductible, accelerated depreciation for Japan Germany US
investment in solar systems,etc. Source: IEA, compiled by DIRA.
Higher feed-in price for solar-generated energy
This feed-in pricing system is popular in the US and Europe.
Outline of national programmes by country
Feed-in Rebates/ Investment Net
Incentives are offered when solar power is sold to a utility
Soft loans Tax
tariff grants incentives metering
Consumer Enterprise Consumer Enterprise Consumer Enterprise Consumer Enterprise
company. In Germany, utility company pays three times the Germany
Japan
Ο
Ο Ο
Ο Ο Ο Ο Ο Ο Ο
regular price for solar power. USA
Australia
Ο Ο
Ο
Ο
Ο
Ο Ο Ο Ο Ο Ο Ο
Ο
Austria Ο Ο Ο
Low-interest loans Canada
China Ο
Ο Ο
Ο Ο
Ο Ο
Ο
This incentive is not very attractive because the immediate Denmark
Finland
Ο
Ο
Ο
monetary benefit is not evident and interest rates currently
France Ο Ο Ο Ο
India Ο Ο Ο Ο Ο
Ο
are generally low.
Israel
Italy Ο
Republic of Korea Ο Ο Ο
Government incentives historically have had a significant Mexico
Netherlands
Norway
Ο
Ο
Ο Ο Ο
Ο
impact Portugal
Spain
Ο
Ο
Ο
Ο Ο
Ο Ο Ο
Sweden
Government incentives are expanding worldwide Switzerland Ο
13
UK Ο Ο Ο Ο
Source: Various materials, compiled by DIRA

14. Supply chain – benefiting from strong demand
The silicon-based supply chain is the most Silicon based solar energy system supply chain
Silicon W afer Solar Cell M odule System Installations
prominent supply chain this decade Ticker
Silicon-based products accounted for 91% of
total PV market, while thin-film (including a-
Si) based products accounted for just 9%.
(Photo) (Photo) (Photo) (Photo)
Hemlock Private/US
4043 JP
Supply-chain activities involved:
Tokuyama
M itsubishi M aterials 5711 JP
W acker W CH GR
Collection of high-grade silicon M EM C W FR US
SUM CO 3436 JP
Processing of the silicon for actual use, ie, M . Setek Private/ Japan
wafers
PV Crystalox Solar AG Private/ Europe
JFE Private/Japan
REC NO
Adding the functions of the PV cell
REC
ErSol ES6 GR
SolarW orld SW V GR
PV-module making Schott Solar Private/ Germany
BP Solar 5051 JP
Systems makers/installers. Yingli Solar Private/ China (IPO lis
Kyocera 6971 JP
There are over 500 companies globally Q-Cells
M otech
Q CE GR
6244 TT
involved in the various processes throughout E-ton 3452 TT
the supply chain of the PV industry.
SunPow er SPW R US
Suntech STP US
Sharp 6753 JP
Sanyo 6764 JP
M itsubishi 6503 JP
Sunw ays Photovoltaic SW W GR
Evergreen ESLR US
Solon SOO1 GR
Aleo AS1 GR
Tenesol Private/ France
IBC Solar AG Private/ Germany
Concergy CGY GR
SAG Solarstrom SAG GR
Phoenix SonnenStrom AG PS4 GR
Source: Daiwa Sunset Solar Private/ Europe
14

15. Important supply-side trends
Vertical integration versus horizontal-expansion model
We think the vertical-integration model has more long-term merits – Due to the high material content (comparable to TF-LCD
industry), the focus of the PV systems supply chain will be on reducing materials/component use, and vertically integrated
companies will have advantage here.
Industry fragmentation in the mid-stream process
We expect industry fragmentation in mid-stream processes to accelerate from 2008 once sufficient raw materials are available.
The focus after an increase in silicon supply will be supply and demand for materials other than silicon, and demand for
production equipment.
New technologies
The focus is on new PV-cell technology now and new systems design in the long term
Average operating margins Typical cost structure of solar systems
(%) 15% Polysilicon
60 Silicon 30%
Solar 9% Ingot growth
wafer wafer
Solar 4% Sawing
46%
50 Cell Cell
7% Others
Module 66%
Solar
40 Module 16% Others + Labor
Solar
30 System
13% Others
20
7% Packaging
10
20% Installation
0
8% Inverter
2004 2005 2006
15
6% Others
Source: ITRI Source: Daiwa

16. Important supply-side trends
Technology-driven cost-reduction plan and market potential
Increase in system size
Cost of power generation
> 50 US cents/ Shift from standalone to integrated systems
kWh Systems with power
storage capability
System
design Component systems
System development
to improve
independence
26 US cents/KWh
Active network
Appearance of thin-
control
film/compound
semicon solar cells 20 US cents/ kWh
New materials
12 US cents kWh for sharp cost
Focus on Cell design/processto cut cost reduction
Efficiency improvement with
Cell ultra-thin films /multi-junction 6 US cents/ kWh
technology cells
New materials (dyes etc); new cell structures
New material
Thin film/compound semi
Cystalline Silicon
Market potential
Year 2002 2007 2010 2020 2030
Source:NEDO; Daiwa
16

17. Silicon – shortage should be over in 2008
Silicon production was not able to keep pace (MWp) Solar grade silicon supply and demand
with PV-cell production due to: 8,000
7,000
the high process entry barrier to the industry, 6,000
longer production ramp-up times, and 5,000
4,000
the high capital requirement. 3,000
We expect demand and supply to be 2,000
1,000
balanced in 2008, due to: 0
increased capacity, 2003 2004 2005 2006F 2007F 2008F 2009F 2010F
Silicon available (MWp) Average cell processing capacity (MWp)
lower silicon consumption, backed by thinner
Source: Companies, Daiwa
wafers and the higher conversion efficiency
of cells, and Silicon market share (by volume)-2005
declines in double orders and the stocking up Sumitomo
3%
Louyang
on silicon by mid-stream companies. Mitsubishi
9%
1%
Hemlock
By our estimates, at least 60% annual solar- Tokuyama
24%
cell-production growth is needed to maintain 16%
tight silicon demand and supply.
MEMC Wacker REC
13% Chemi 17%
17%
Source: Companies, Daiwa 17