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International investors can be forgiven for never having heard of Motech, E-Ton or Sino-American Silicon. Compared with better-known Taiwan-based chip giants such as Taiwan Semiconductor and United Microelectronics, listed on the New York Stock Exchange, these three Taiwanese semiconductor plays have flown under most people's radar.
Until now. Continuing high oil prices and growing concern over sustainable energy have made them the hottest stocks in the tech-heavy Taiwan Stock Exchange. Motech and E-Ton Solar make photovoltaic (PV) semiconductors, better known as solar cells. Sino-American is in the business of supplying them with silicon wafers, which are the basic PV building blocks. And shares of all three have delivered stellar gains thanks to the world's growing appetite for solar power as a hedge against the high price of crude.
When E-Ton Solar debuted on the Taiwan OTC market on March 8, its share price quadrupled on opening day, soaring from $6.72 to $26.85. The performance gave E-Ton a market cap exceeding $570 million, vaulting it into the ranks of Taiwan's 100 largest public companies. Investor enthusiasm for the company, a spin-off from little-known maker of electric bikes and motors JI-EE Industry, is largely explained by one simple fact: E-Ton has pre-sold its entire 2006 production due to growth in demand worldwide.
E-Ton is following a path already established by Motech, which rose 130% on Taiwan's small-cap bourse last year, outstripping other pure-play solar manufacturers such as Germany's SolarWorld (up 61% last year). Sino-American was another spectacular winner: its share price trebled last year on the back of a shortage in silicon wafers.
Because Japanese electronics giants Sharp, Hitachi and Kyocera dominate the relatively small global market for solar cells ($6.5 billion in 2004), you'd expect that sales growth for smaller players might be hard to achieve. But industry executives say their prospects are bright, because of an opportunity that is opening up in the U.S. In January, the California legislature passed a law that earmarks $3 billion to subsidize solar-panel purchases by homeowners over the next 10 years. The goal is to add 3,000 megawatts of solar energy to the state's power grid, which is more than the total cumulative energy capacity of all solar cells that were installed worldwide at the end of 2004. California is not alone. Germany and Japan have been subsidizing solar installations for years.
For now, subsidies are a must. Even with higher oil and energy prices, the cost of generating electricity from the sun remains at least three times more expensive than prices that homeowners normally pay their local electric utility. So long as that is the case, it's hard to see how solar power can grow into a mass-market business. Many companies are trying to make that happen through technological improvements that boost the output of solar cells. Taiwan's solar startups take a different tack: they're trying to reduce the cost of solar power through more efficient production processes. Motech, for example, "has a cost advantage compared with rivals in Japan and Europe," says Nicholas Teo, who covers the company for Macquarie Securities in Taipei. "Their focus is on efficiency rather than quality." Motech plans to more than double its annual production capacity this year; E-Ton Solar has similar plans.
That expansion could pose a danger to investors. Even though solar power manufacturers are relatively few in number, additional factory output coming online this year in Taiwan alone will outstrip the growth in demand anticipated from California's initiative. In addition, new players entering the market and competing for already scarce silicon wafers will likely drive up production costs, writes CLSA analyst Timothy Chen, who recommends investors sell Motech because it's overpriced.
Falling sales prices and higher manufacturing costs could mean a shakeout is inevitable in the next several years, says Anthony Wilkinson, chief of power and gas research at CLSA in Hong Kong. Because it's difficult at this stage to pick winners and losers, those who still like the industry's long-term outlook may want to buy the stocks of several to spread their risk. Solar-cell stocks are having their day in the sun right now. But in the highly cyclical silicon-chip industry—even this promising new corner of it—night surely follows day.
- Tim Culpan | Taipei
- Shares of Taiwanese solar-cell makers are hot, for now