Renewable en DRKW 79209 N

DrKW Equity research
Renewable Energy | Germany

Initiation on sector 20 July 2005
Solar Industry
A bright future
SolarWorld (Buy) The solar industry has grown at an average rate of over 30% p.a. over the past
Current €78.9 decade. While a reliance on political support increases industry risk, the longer-term
Target €90 direction of such support is clear. When combined with solar technology cost
Market cap €1bn improvements, we expect the solar industry to grow at 25-30% p.a. until the end of
the decade. We initiate on SolarWorld with a Buy and Conergy with a Hold.
Conergy (Hold)
Current €84.3
► Growth industry: Environmental initiatives coupled with a desire for energy security and
Target €80
diversification are driving political support for renewables and hence solar power. In
Market cap €0.8bn
conjunction with ongoing cost reductions in solar technology, the Photovoltaic (PV)
industry looks set to grow at a rate of 25-30% p.a. out to the end of the decade.
► Risks to our view: Barring a notable shift in political support, short-term supply
constraints, particularly with regards to the availability of silicon, are likely to be the
limiting factor for industry growth. A sharp interest rate rise could also impact forecasts.
► Solar vs. Wind: As balance sheet strength is unlikely to emerge as a notable competitive
advantage in the PV sector, as it has in the wind industry, we see greater potential for
listed PV firms to successfully compete long-term, relative to a wind industry counterpart.
► Stock picks: We initiate on SolarWorld, a vertically integrated PV manufacturer, with a

Buy recommendation and peer-group derived €90 target price. For Conergy, a solar-
specific integrator and distributor, we initiate with a Hold recommendation and €80 price
target.
Price relative
160
150
140
130
120
110
100
90
25 2 9 16 23 30 6 13 20 27 4 11 18
APR MAY JUN JUL
(SOLARWORLD vs. DJSTOXX)
(CONERGY vs. DJSTOXX)
Source: Thomson Financial Datastream
Research Analysts
Alastair Bishop
+44 (0)20 7475 1594
alastair.bishop@drkw.com
James Stettler
+44 (0)20 7475 2357
james.stettler@drkw.com
Please refer to the Disclosure Appendix at the end of this report for all relevant
disclosures and our disclaimer. In respect of any compendium report covering six
Online research: or more companies, all relevant disclosures are available on our website
www.drkwresearch.com www.drkwresearch.com/disclosures or by contacting the DrKW Research
Department at the address below.
Bloomberg: Dresdner Kleinwort Wasserstein Securities Limited, Authorised and regulated by the Financial Services Authority and a Member Firm of the
London Stock Exchange PO Box 560, 20 Fenchurch Street, London EC3P 3DB. Telephone: +44 20 7623 8000 Telex: 916486 Registered in
DRKW<GO> England No. 1767419 Registered Office: 20 Fenchurch Street, London EC3P 3DB. A Member of the Dresdner Bank Group.
Solar Industry 20 July 2005
Contents
Introduction ................................................................................................................3
Solar industry overview ............................................................................................5
Industry growth drivers...........................................................................................11
Risks to industry growth.........................................................................................17
Equity opportunities ................................................................................................19
SolarWorld ................................................................................................................22
Conergy.....................................................................................................................28
Appendix – The value chain....................................................................................33
2
Introduction
The solar industry has grown at an average rate of over 30% p.a. over the past
decade. While a reliance on political support increases industry risk, the longer-
term direction of such support is clear. When combined with PV cost
improvements, we expect the solar industry to grow at 25-30% p.a. until the end of
the decade. We initiate on SolarWorld with a Buy recommendation and €90 target
price and Conergy with a Hold recommendation and €80 target price.
Scientists and politicians broadly agree that the use of fossil fuels is contributing to global
warming. The current reliance on fossil fuels is also raising concerns over both a
country’s level of energy dependency and the scale of its long-term fuel costs.
A greater adoption of renewable energy appears to offer at least a partial solution on all
accounts. While wind power is currently the most economic of the renewable energy
technologies, its intermittency of power production means that it alone is only likely to
partially replace fossil fuels. Other renewable energy forms, including solar power, are
thus expected to witness significant growth in the coming years.
Solar industry overview

Photovoltaic or solar technology generates electricity through the conversion of light
energy. According to the International Energy Agency (IEA), the PV industry has grown
at an average rate of 33% p.a. since 1993. We estimate annual growth of 25-30% out to
the end of the decade.
Industry growth drivers

Over the medium-term, the PV industry is likely to remain dependent on the level of
political support. To date, solar industry growth has been driven by support from just 3
countries (Japan, Germany and the US) though the emergence of new markets (China
and Spain in particular) offers significant growth potential, as well as reducing single-
market risk.
Longer-term, the relative success of the PV industry will be determined by the industry’s
ability to lower costs in order to compete with traditional power generation alternatives on
a stand-alone basis. Depending on a PV system’s location, solar technology currently
generates electricity at a price of €0.20-0.60/kWh. While multiples above the cost of
traditional fossil fuels, it should be remembered that solar power has the advantage of
being able to be located at the point of energy usage. As a result, solar power used in
distributed applications (roof-top systems, building integrated PV) competes not with
centralised power generation costs but with far higher final electricity prices.
As a historical rule of thumb, the cost of solar power has fallen by 20% for every doubling
of production, equivalent to an annual price decline of 5% since the mid 1990s. Looking
ahead, we anticipate that this rate of cost reduction will continue, driven by a combination
of scale benefits (as plant sizes increase) and technological improvements (in respect to
the size, efficiency and thickness of a solar cell amongst others). We thus expect solar
power to move into the realms of competitiveness during the next decade.
Risks to industry growth

Due to the political nature of the industry, a detrimental change in a core market’s
support for PV is arguably the single biggest risk to our forecasts. Within Germany, the
main PV market in Europe, a change in the EEG (renewable energy) law in 2008 is seen
as a potential negative for the industry. In our view, while support may be lowered, it is
likely to remain at a good level due to the solar industry’s strong job creation potential
within Germany and the technology’s limited impact on final electricity prices.
3
Barring a significant decline in political support, we do not expect demand to be the

limiting factor in industry growth. The availability (or lack) of silicon is likely to be a far
more relevant near-term growth limiter. A sharp increase in interest rates in a core PV
market, though not likely near-term, could also impact demand for PV systems.
Equity opportunities – Solar vs. Wind

To date, equity investments in renewable energy have focused on firms situated in the
wind industry (mainly turbine suppliers). Wind power has now become big business. Due
to a change in customer mix (from small funds to large utilities) and a subsequent
increase in average project size, balance sheet strength has become a more important
variable in a turbine buyer’s decision-making process. Listed manufacturers, unable to
compete on financial strength against the likes of GE and Siemens, are increasingly
being forced to compete on price, to the detriment of margins.
In contrast, such conglomerates have long represented the solar sector. However, balance
sheet strength is unlikely to become such a significant competitive advantage in the PV industry,
in our view. Assuming that solar industry growth continues to be driven by distributed grid-
connected applications as opposed to utility scale centralised projects, as in the wind sector,
single project size will not notably increase, and only the number of projects will rise. Balance
sheet strength under such a scenario will thus be of less importance for determining the supplier
for any one project. As a result, there appears to be greater scope for listed solar firms to
successfully compete longer-term, relative to a wind industry counterpart.
Within Europe, there are currently few listed PV companies through which to play the
industry’s strong expected growth. With relative size likely to be an increasingly important
competitive advantage (for scale benefits not balance sheet), we focus only on the
largest listed investment opportunities and thus initiate on SolarWorld and Conergy.
SolarWorld
SolarWorld is a highly vertically integrated PV manufacturer, present across the entire
value-chain. While such a degree of integration could limit the company’s ability to
internally fund growth longer-term, the security of supply it currently offers is allowing for
strong profitability in a time of material shortages. We initiate with a Buy recommendation
and a peer-group derived target price of €90.
Conergy
Conergy is the largest solar-specific systems integrator and distributor in Europe. Given
the low level of capital employed in its business, the company has been able to
comfortably outgrow the overall industry in recent years. While we expect strong growth
to continue, we have concerns over the long-term barriers to entry and the impact of this
on future profitability. We initiate with a Hold recommendation and a peer-group derived
€80 target price.
Peer group comparison
(x) 2005E 2006E 2007E 2008E 2009E 2010E
P/E
SolarWorld 22.2 17.3 16.1 14.6 13.5 12.0
Conergy 24.9 17.1 15.0 13.4 12.4 11.4
IT hardware sector 20.8 17.6
EV/sales
SolarWorld 3.4 2.3 1.8 1.4 1.1 0.9
Conergy 1.3 0.9 0.7 0.6 0.5 0.4
EV/EBITA
SolarWorld 13.7 10.9 10.2 9.3 8.6 7.7
Conergy 13.8 9.3 8.1 7.2 6.5 5.9
Source: DrKW Equity research estimates
4
Solar industry overview

The solar industry has expanded at an average rate of 33% per annum since 1993,
with growth in the subsidised grid-connected market far higher than that achieved
in the off-grid sector. To date the key markets have been Japan, Germany and the
USA, though new markets (notably China and Spain) are emerging.
Derived from photo, the Greek word for light, and Volta, the electricity pioneer of that
name, photovoltaic or solar technology generates electricity through the conversion of
light energy. While the French physicist, Becquerel, originally discovered the PV effect in
1839, its use in industry did not occur until the 1960s. Initially designed for use in space
applications, terrestrial uses for solar power have become standard, as the technology
has developed. The use of solar power in an increasing number of applications is fuelling
strong industry growth.
Annual installations of solar power (MWp)

(MW)
500
450
400
350
300
250
200
150
100
50
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Germany Japan USA Total
Source: IEA, DrKW Equity research
Applications
Over 80% of solar cells are currently The end use for solar cells can simplistically be divided into two categories, off-grid and
used in grid-connected applications
grid-connected. Between 1993 and 2003, the off-grid market grew at an average rate of
13% p.a. (in countries covered by the International Energy Agency), compared with 44%
p.a. for the grid-connected market. While such figures underplay the true growth in the
off-grid market, as rural electrification projects in developing countries are not included,
expansion has certainly been slower. This is despite off-grid applications already being
economic in many circumstances. The market split between off-grid and grid-connected
applications has shifted significantly in favour of the latter as a result.
Annual PV installations by application in selected IEA countries

(%)
100
90
80
70
60
50
40
30
20
10
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Off-grid Grid-connected
Source: IEA, DrKW Equity research
5
Off-grid applications
Off-grid is currently the most natural market for solar power, with growth that can be fully
justified by economics. The off-grid market includes the use of PV in consumer products,
communication and signalling applications and rural electrification projects. One example
of the potential growth opportunities in consumer applications can be found in the
automotive industry. Within Germany, both Audi and Mercedes already offer solar
integrated sunroofs as an optional extra on some high-end models. As highlighted in a
recent paper by the CEO of RWE Schott Solar, if all cars were to incorporate such a PV
system, around 3GW per annum of PV cells would be required in just this one
application.
Grid-connected applications
The grid-connected market is made up of centralised systems (commonly referred to as
solar farms) and distributed applications (e.g. roof-mounted systems, Building Integrated
Photovoltaic applications (BIPV)). Despite current cost issues, the grid-connected PV
market has witnessed far higher rates of growth due to increasingly supportive
government policies.
End-markets
Japan, Germany and the US account Given the industry’s subsidised nature (for grid-connected applications), it is unsurprising
for over 85% of the global installed
PV capacity to see that growth has been geographically concentrated. Just three markets (Japan,
Germany and the US) currently account for more than 85% of global installed PV
capacity.
Japan
Japan is currently the largest PV With almost half of the global installed PV capacity and solar production located in the
market. A reduction in subsidy
support in FY06 may, however, country, Japan has been instrumental in the PV industry’s early development. Notable
moderate future growth growth in the country began with the introduction of the 70,000 roofs program in 1994. In
combination with net metering and research and development support, such government
policies have led to the installation of over 1.1GW of solar power by the end of 2004.
Such support has also proved successful in helping lower the cost of solar power and in
establishing a thriving domestic industry (note that 3 of the top 5 cell manufacturers are
domiciled in Japan). According to the IEA, the typical PV module price in the country has
fallen from ¥927/Wp in 1994, when the programme began, to ¥446/Wp in 2003,
equivalent to an average annual price decline of almost 8%.
► Potential for market growth: The government is targeting 4.8GW of PV capacity by

2010. The main support scheme currently in place is the Residential PV Dissemination
Programme (RPVDP). Although subsidies under the scheme have been cut in recent
years, from US$862/kWp in 2003 to just US$191/kWp in 2005, it still remains a strong
industry driver when offered in collaboration with other local policies. It should be noted
that the high residential electricity price in the country (averaging around €0.20/kWh) is
supporting the industry’s development from an economic perspective.
► Risks to market growth: Given the country’s lacklustre macro economic outlook, both
government and regional budgets are under pressure. The RPVDP is scheduled to expire
at the end of March 2006, though early industry estimates suggest that subsidy funding
will run out by as early as August. Only a fifth of the 300 regional governments have
currently committed to continue offering PV subsidies beyond the current fiscal year if no
RPVDP is in place. If PV support programmes were ended it would clearly be negative
for the industry. It should be noted, however, that the current RPVDP subsidy only covers
3% of the system cost (i.e. it is fairly insignificant in itself). Japan may thus emerge as the
first unsubsidised PV market.
6
Germany
Germany overtook Japan for the first As in Japan, the initial German solar support scheme (the 1,000 roof programme),
time in 2004 in terms of MW
installed. Strong growth is expected launched in late 1990, focused on the distributed grid-connected market. Support was
to continue in the coming years due accelerated through the 100,000 roof programme (from late 1998) and through the
to supportive legislation
adoption of a feed-in tariff under the initial renewable energy law (EEG) in 2000. The
latter policy helped Germany overtake the US in 2001 in terms of installed PV capacity.
The current and updated EEG law, implemented in August 2004, provides a guaranteed
20-year feed-in tariff, offering companies the certainty required to invest in the industry.
As with early government policies, the new EEG law favours distributed grid-connected
applications, with a higher initial feed-in tariff and a lower rate of subsidy decline post
2005 (5% p.a.) than for other market segments (6.5% p.a. for open space systems). As
at the end of 2004, almost 800MW of PV had been installed in the country.
It should be noted that the EEG does not use net metering as a support mechanism. As a
result, all solar power generated is fed into the grid at the fixed price, regardless of the
system’s location (i.e. whether it is on a roof-top or in a solar farm). The technology’s
advantage of being able to be situated at the source of energy usage is thus ignored
under the current support mechanism.
Changes to the German EEG law
(€ cents/kWh) 01-Apr-00 01-Jan-04
Roof-tops
<30kW 57.4
>30kW 45.7 54.6
>100kW 54.0
On facades
<30kW 62.4
>30kW 45.7 59.6
>100kW 59.0
Open space
Source: German Federal Ministry of Environment, DrKW Equity research
<100kWp 43.4 45.7
>100kWp NA 45.7
Source: German Federal Ministry of Environment, DrKW Equity research
► Potential for market growth: The EEG law adopted in 2004 has proved extremely
successful. According to the renewable energy consultant Observ’ER, Germany installed
more than Japan in 2004 for the first time in over a decade (363MW vs. 280MW). Other
sources (e.g. Photon International) put the figure for Germany as high as 600MW. Either
way, strong growth is expected to continue if support remains in place.
► Risks to market growth: The current EEG law is up for renewal in 2008. If, as current
opinion polls suggest, the CDU-led opposition wins the upcoming election, there is a risk
that industry support could be cut. Given the solar industry’s job creation potential (due to
the industry’s high domestic growth and Germany’s first-mover advantage in European
PV development) and its low impact on consumer electricity prices, we would expect
support for solar to remain at a good level, even if overall renewable energy support is
lowered.
7
USA
The lack of a coordinated federal Once the leader in PV development, the US has since dropped to third in terms of installed
policy has hampered industry growth
PV capacity, largely due to the lack of an integrated federal policy. Within the US, only
California has seen strong sustained development and currently accounts for over 80% of
the country’s total installed capacity. Although a federal policy is currently in place (the
1997 Million Solar Roof Initiative), a lack of funding behind the scheme has limited its
impact. Growth has thus been driven by state support mechanisms. 2001 data highlighted
the mismatch between state and federal support, with only US$66m out of the total PV
budget of US$470m for that year coming from federal sources. At present, 32 States
currently offer net-metering schemes and a number have implemented Renewable Portfolio
Standards. As at the end of 2004, over 300MW of PV had been installed in the country.
US state-wide support for PV (as at the start of 2005)

State RPS Solar requirements of RPS Net metering
Arizona 0.2% in 2001 increasing to 1.1% in 2007-12 50% PV in 2001-03, 60% in 2004-12 No
Arkansas None None Yes
California Increase 1% p.a. from 2003 to at least 20% by end of 2017 None Yes
Colorado 3% by 2007, 6% by 2011, 10% by 2015 4% from solar Yes
Connecticut 4% by 2004, rising to 10% by 2010 None Yes
Delaware None None Yes
Georgia None None Yes
Hawaii 8% by end 2005, 10% by end 2010, 15% by end 2015, 20% by end 2020 None Yes
Iowa 105MW from renewables None No
Kentucky None None Yes
Louisiana None None Yes
Maine >30% of retail sales from eligible renewables None Yes
Maryland 7.5% renewable requirement by 2019 None Yes
Massachusetts 4% by 2009, plus 1% each year thereafter None Yes
Minnesota 1,125MW wind by end of 2010; approximately 125 MW biomass None Yes
Montana None None Yes
Nevada 5% in 2003, rising to 15% by 2013 5% must be solar Yes
New Hampshire None None Yes
New Jersey 6.5% by 2008 0.16% from solar by 2008 Yes
New Mexico 5% by 2006, rising to 10% by 2011 None Yes
New York 25% by 2013 None Yes
North Dakota None None Yes
Ohio None None Yes
Oklahoma None None Yes
Oregon None None Yes
Pennsylvania 18% by 2015 0.5% from solar Yes
Rhode Island 6% by end of 2019 None No
Texas 2GW of new renewables installed by 2009 None Yes
Utah None None Yes
Vermont None None Yes
Virginia None None Yes
Washington None None Yes
Washington DC 11% by 2022 0.386% from solar Yes
Wisconsin 2.2% by end of 2011 None Yes
Wyoming None None Yes
Source: US Database of State Incentives for Renewable Energy, DrKW Equity research
8
► Potential for market growth: The Senate version of the 2005 Energy Bill contains two
policies that, if incorporated in the final legislation, would be supportive for US PV
industry development. Firstly, a 10% federal RPS by 2020 is included. Secondly, the
Senate version contains the US PV industry’s first solar tax credit since 1982. Under the
credit, homeowners purchasing PV or solar thermal systems would receive a 30% tax
credit (worth up to US$2,000) through to the end of 2009. Given the size of the overall
Energy Bill, however, it is unclear what will make it into the final version and indeed
whether the legislation will be approved before the 2005 congressional session ends. In
the absence of a federal policy, industry development is likely to be driven by increasing
state support – California, for example, is currently in the process of adopting its own
million-roof programme and New Jersey’s Clean Energy Program, targeting 90MW by
2008, is also proving a success.
► Risks to market growth: Of the three core PV markets, the US has the greatest
potential. However, a clear federal policy is lacking. The risk appears to be not that
industry development declines but that installation rates just continue to stagnate.
Rest of Europe
Within Europe, Spain is likely to be While a number of countries in Europe outside of Germany have adopted solar support
the next big growth market
mechanisms, few to date have proved as successful. A too low support level and/or too
small a budget have been the main causes of such relative policy failure. With the
relatively recent change in government and the adoption of a more proactive renewable
policy, Spain looks the most likely European market outside of Germany to witness
notable near-term PV growth.
Spain benefits from a very good natural solar resource. As a result, the unsubsidised cost
of PV electricity in Spain is around half that in Northern European countries. The current
Spanish renewable law offers systems of 100kWp or below an attractive €41.4/kWh feed-
in tariff (up to 150MW) and a €21.6/kWh tariff for larger systems.
PV support mechanisms in Europe (as at the end of 2004)
Country Programme
Austria No specific PV programme at present

Belgium €0.15/kWh feed-in tariff
Cyprus €0.12-0.26/kWh feed-in tariff as well as investment subsidies
Czech Republic €0.2/kWh feed-in tariff, reduced VAT (5% vs. 22%) and investment subsidies
Denmark No specific PV programme at present
Estonia No specific PV programme at present
Finland Investment subsidy (up to 40%)
France €0.15/kWh feed-in tariff for projects <12MW, lower VAT
Germany €0.457-0.574/kWh feed-in tariff with 5% p.a. decline from 2005 (6.5% decline for open sites from
2006)
Greece €0.078/kWh feed-in tariff on islands, €0.07/kWh on mainland plus subsidies
Hungary €0.06-0.068/kWh feed-in tariff
Ireland No specific PV programme at present
Italy No specific PV programme at present (expected in 2005)
Latvia Feed-in tariff of 2x average sales price for 8yrs
Lithuania €0.056/kWh feed-in tariff
Luxembourg €0.45/kWh feed-in tariff for private investors (€0.25/kWh for municipalities)
Malta Reduced VAT (5% vs. 15%)
Netherlands €0.068/kWh feed-in tariff
Poland Tax incentives (no customs duty, lower VAT)
Portugal €0.41/kWh feed-in tariff for projects <5kWp (€0.224/kWh for those >5kWp)
Slovakia No specific PV programme at present
Slovenia €0.37/kWh feed-in tariff for projects <36kWp (€0.065/kWh for those >36kWp)
Spain €0.396/kWh feed-in tariff for projects <100kWp (150MW cap), €0.216/kWh for those >100kWp
Sweden 70% tax deduction on investment
Switzerland €0.1/kWh feed-in tariff
UK Investment subsidy
Source: European Commission - PV Status Report 2004, DrKW Equity research
9
Rest of the World

China’s need for electricity is fuelling Outside of the traditional market regions, China arguably shows the greatest promise for
demand for PV systems
near-term PV development. While a desire for improved air quality is one driver behind the
country’s push for renewable energy, China’s basic need for power generation capacity is
likely to prove far more potent. Solar power’s suitability off-grid is particularly beneficial in a
developing market – industry estimates suggest that there are 30 million inhabitants in
China currently living without access to electricity. As part of China’s required power
generation needs, the country recently announced a renewable energy law that is expected
to lead to 10% of total power generation capacity coming from renewable energy by 2020
(up from 3% in 2003). Under the scheme, China’s electricity grid is obligated to buy all
electricity generated from renewable energy sources at a price determined by the State
Council. It is as yet unclear what specific support will apply to solar.
10
Industry growth drivers

The growing adoption of renewable energy is being driven by rising environmental
concerns, a desire for energy security and by improvements in ‘alternative energy’
technology. We expect that such drivers will ensure annual solar industry growth
of 25-30% until the end of the decade.
Rising political support

Environmental concerns and a desire Global energy policy is increasingly being driven by environmental awareness and a
for energy security and diversity is
driving political support for renewable desire for both energy security and diversification. With the oil price pushing record highs
energy and the gas price rising, the current level of reliance on traditional fossil fuels is being
called into question. A greater adoption of renewable energy appears to offer at least a
partial solution on all accounts.
The Kyoto Protocol has been the most high profile political policy for environmental
improvement. The agreement, adopted in 1997 by a number of industrialised nations,
aims to reduce greenhouse gas emissions to a proportion of each country’s 1990
emission level by 2012. Following Russia’s ratification in November 2004, the Kyoto
Protocol came into force on 16 February 2005. The US and Australia have so far refused
to ratify the treaty.
GHG reduction targets under the original Kyoto Protocol
European Union commitments
Country Target (100 = 1990) Country Commitments (%)
Australia 108 Austria -13

Bulgaria 92 Belgium -8
Canada 92 Denmark -21
Croatia 95 Finland 0
Czech Republic 92 France 0
European Union 92 Germany -21
Estonia 92 Greece 25
Hungary 94 Ireland 13
Iceland 110 Italy -7
Japan 94 Luxembourg -28
Latvia 92 Netherlands -6
Liechtenstein 92 Portugal 27
Lithuania 92 Spain 15
Monaco 92 Sweden 4
New Zealand 100 United Kingdom -13
Norway 101 EU Total -8
Poland 92
Romania 92
Russian Federation 100
Slovakia 92
Slovenia 92
Switzerland 92
Ukraine 100
United States of America 93
Source: Emissionstrategies.com, DrKW Equity research
Probably the most efficient way of meeting a country’s Kyoto target is through a reduction
in the use of traditional coal-fired power plants and a move to cleaner power sources.
While Combined Cycle Gas Turbines (CCGT) are currently the most efficient alternative,
concerns over the long-term gas price suggest that energy diversification is also
desirable. With nuclear power remaining both socially unpopular and opaque in regards
its full lifetime cost, renewable energy and within that the PV industry stands to benefit.
11
Annual CO2-savings from investments of €5bn

1
30 C0 – Reduction for investment of 5bn per power plant type
2
30
25
Reduction Mn tOO 2/a

22
20
16
15 30
22 10
10
16
5 10
2
2
0
CCPP Nuclear Wind STPP Photovoltaics
Output: 9GW 3GW 7GW 6GW 1GW
1
When replacing a hard coal power plant of installed fleet
Source: Siemens
PV cost improvements
As a historic rule of thumb, the cost of solar power falls by 20% for every doubling of
production, which has been equivalent to an annual price decline of 5%. Currently, the
average price of a solar module is around €3/Wp. €1-2/Wp is required to move into the
realms of competitiveness.
Cost comparison
Solar power currently generates A solar module typically represents around 60% of a total PV system’s cost, the other
electricity at a cost of €0.20-
0.60/kWh, depending on the 40% being balance-of-system components and installation expenses.
system’s location
Cost breakdown of a typical 3kW grid-connected PV system
System design and

Balance of System installation
20% 20%
PV Module
18%
PV Cell
42%
Source: United Nations Environment Programme
The cost per kWh of the electricity generated is not surprisingly dependent on the
strength of sunlight and thus the PV system’s location. A 1kWp system typically produces
1800kWh/year in Southern California, compared with just 850kWh/year in Northern
Germany. Based on a 25-year system lifetime and a 7% cost of capital, solar power
currently costs somewhere between €0.20-0.60/kWh depending on the system’s location.
12
PV system costs
Solar module cost (€/Wp) 3
Module as % system cost 60%
Total system cost (€/Wp) 5
Total system cost (€/kWp) 5000
System lifetime (years) 25

Discount factor 7%
Annual cost of system 429
Sun hours per year

Northern Germany 850
California 1800
Cost per kW/h (€)

Northern Germany 0.50
California 0.24
Source: DrkW Equity research estimates
PV cost reduction
PV cost reductions are expected to Lowering the cost of solar power is essential to the industry’s long-term success. We
come from both economies of scale
and technology improvements expect such cost reductions to be achieved through both technological innovation and
improvements in manufacturing. As regards the latter, a study carried out by BP Solar
suggested that the price of solar panels could be lowered to competitive levels by scaling
up factories to around 500MW. KPMG Netherlands reached a similar conclusion in a
1999 study carried out for Greenpeace. Given the rate of industry development, some
industrial participants have suggested that a smaller volume could be required. Improved
production methods also have the potential to help lower the cost of solar power. For
instance, a reduction in energy usage in silicon production, lower silicon wastage in the
sawing process, fewer breakages in cell production, a decreased variation in product
quality and a higher level of automation in module manufacturing should all reduce costs.
From a technology perspective, an increase in cell size, a reduction in the thickness of a

cell and an improvement in its efficiency are all targeted in order to lower costs.
► A standard cell currently measures 6 inches in length. As the industry move towards
larger cells, costs should decline, due to a reduction in sawing waste and an increase in
plant MW volume potential.
► An average crystalline silicon cell currently has a thickness of between 250-300µm. This
is expected to decline to below 200µm by the end of the decade. While only the first
c.50µm is required to absorb the sunlight, maintaining structural strength at such
thicknesses is proving difficult. A reduction in thickness has clear implications for material
usage and thus input costs.
► A typical crystalline solar module currently achieves an efficiency of 14-17%, compared

with a theoretical maximum of around 28%. This relatively low level of theoretical
electricity conversion is caused by a combination of bandwidth limitations (less than half
of all energy in the solar spectrum is currently utilised), electrical resistance, solar
reflection and heat losses. Increasing a cell’s bandwidth is likely to require the use of
multi-junction (stacked or microcrystalline) cells, which incorporate a number of different
semiconductor materials. Reducing resistance and reflection, however, should be
achievable with current technology.
13
Competitiveness is application dependent

When used in distributed When analysing how far solar power currently is from being competitive, the application
applications, solar power competes
with peak electricity prices, not power in question needs to be considered. As mentioned earlier in this report, off-grid systems
generation costs are already financially viable on a stand-alone basis, given the level of grid investment
offset. The same is true for a number of consumer applications, where the use of low
cost/low efficiency cells can already compete with traditional power sources. It is the grid-
connected market that currently relies on subsidies. Even here, the level of
competitiveness varies by application.
► Centralised grid-connected applications: For the foreseeable future, solar power is

unlikely to be an economically attractive centralised power generation source in the
majority of markets. To be effective in such an application, solar power must compete
directly with traditional power generation alternatives. Although the PV industry’s strong
development has led to significant cost reductions, the cost of electricity generation is still
in the range of €0.20-0.60/kWh, multiples above the nearest alternative.
Cost comparison
Power generation source € cents/kWh
Gas 3-6
Nuclear 3-6
Coal 2-4
Hydro 2-8
Wind 4-12
PV 20-60
Bio-Energy 5-6
Source: CERA, EU Commission, DrKW Equity research estimates
► Distributed grid-connected applications: In our view, the most interesting medium-term

application for solar power is distributed grid-connected systems. While currently reliant on
political support for development, the use of solar panels in rooftop and building integrated
applications is already not too far from being economically attractive. When used in such
applications, solar power is not competing against the power generation cost of traditional
energy alternatives per se but the final electricity price. This is higher due to grid connection
costs and utility profit margins. Furthermore, given solar technology’s intra-day power
curve, with the bulk of electricity generated during the middle of the day, a distributed grid-
connected system typically competes with peak electricity prices.
Solar power curve vs. spot electricity prices
Source: Fraunhofer Institute
A summary of the average electricity price in the major solar markets highlights that solar
power is not too far from being competitive in the distributed grid-connected market.
14
A selection of residential electricity prices

Country Residential electricity price (€ cents/kWh)
Germany 17
Italy 19
Japan 20
Spain 10
UK 10
US 8
PV power 20-60
Source: Eurostat, EIA, SolarWorld
Competitiveness is relative
With rising fossil fuel prices, solar While lowering the cost of solar power to achieve economic efficiency is almost certainly
power is becoming increasingly
competitive by default required longer-term, it should be remembered that being competitive is a relative and
not absolute concept. Most industry experts agree that the cost of traditional fossil fuels is
likely to rise in the coming years due to supply constraints. With a solar cell’s typical base
material being silicon, the world’s second most abundant element, the same is unlikely to
occur with solar power (once short-term supply restrictions are overcome). The cost gap
should thus close far quicker than ceteris paribus conditions would suggest.
A prime example of the relative potential for solar power (and indeed for other forms of
renewable energy) can be seen in the US market. During the late 1990s and early part of
the current decade, the US power generation industry significantly invested in new CCGT
capacity, basing their investment decision on an assumed long-term gas price of around
US$3/MMBtu. With growth in the gas supply not matching CCGT capacity expansion, the
cost of natural gas has sharply increased in recent years. This rise has notably altered
the industry’s long-term price assumption for natural gas, as seen in the following chart.
Change in the US power industry’s long-term gas price assumption

US$ per thousand cubic feet
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1997
2023
2025
2003
2005
2007
2009
2011
2013
2017
1999
2001
2015
2019
2021
1995
AEO 1997 AEO 1998 AEO 1999 AEO 2000 AEO 2001
AEO 2002 AEO 2003 AEO 2004 AEO 2005
Source: EIA, DrKW Equity research
The importance of such a notable and ongoing shift in the long-term assumed cost for
natural gas should not be underestimated. Based on a long-term price forecast of around
US$3/MMBtu, CCGT is the natural choice for future capacity expansion. However, with a
current price assumption of US$4-5/MMBtu, other forms of power generation become
increasingly attractive.
Although solar power is unlikely to directly benefit from such a trend, as its high cost means it
is currently far from being a viable centralised power generation source, it should still benefit
indirectly. The rise in total US power generation costs from the increase in the natural gas
price is feeding through to the end-consumer’s electricity price. Average US residential
electricity prices have risen by almost 10% since 1999 as a result and currently stand at
around US$9/kWh depending on the state. Such a price rise is making an investment in
distributed grid-connected solar applications increasingly attractive.
15
US residential electricity price (US cents/kWh)
8.90
8.70
8.50
8.30
8.10
7.90
7.70
7.50
1995
1996
1998
1999
2002
2003
1991
1992
1994
1997
2000
2001
2004
1990
1993
Source: EIA, DrKW Equity research
Time to competitiveness
Solar power should move into the With the price of traditional fossil fuels likely to continue as the supply-demand imbalance
realms of competitiveness in the next
decade grows, end-user electricity prices should follow suit. Assuming an annual increase in real
electricity prices of 2% and by factoring in ongoing price declines for solar power of 5%
per annum, we can obtain an approximation for when grid-connected distributed PV
power will turn economically competitive. Under our assumptions, PV power should
become competitive between 2010 and 2030, depending on the system’s location.
Electricity generating costs for PV and utility prices low
€ per kW/h
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Utility peak power (lower-end) Utility peak power (upper-end)

Solar power (low sun hours) Solar power (high sun hours)
Source: RWE Energie AG, DrKW Equity research estimates
16
Risks to industry growth

The PV industry is partly reliant on political support for development. Any negative
change here remains a notable risk to industry development. Near-term silicon
supply shortages and a sharp rise in interest rates could also negatively impact
industry growth.
Changing political support

A negative change in a core market’s As long as solar power remains uncompetitive in its own right for certain applications, the
support for PV is the largest near-
term risk to industry growth, in our PV industry will rely on government support. While such support is beneficial, it does
view increase the inherent level of risk surrounding the industry’s outlook. The level of political
support is likely to vary as a function of perceived price development, job creation and
lobbying.
► Price development: If the price of solar power fails to develop favourably (i.e. decline)
under a supportive subsidy programme, politicians may question the success of such
schemes. Current PV price rises, due to supply shortages, are hence undesirable over
the long-term.
► Job creation: Strong industry support in both Japan and Germany has created
thousands of jobs. Political support is more likely to remain if job creation continues. This
may prove important in Germany when the EEG law comes up for renewal in 2008; the
potential for additional domestic job creation in the German solar industry appears to be
far greater than in the wind industry given the domestic market’s greater growth potential
and Germany’s first mover-advantage in establishing a European PV industry base.
► Political lobbying: As the number of rooftop solar systems rises, the revenue base of
utilities will typically fall. This may be enough to encourage such firms to lobby against
continued government support for the solar industry.
Geographic diversification of the industry and technological improvements should

decrease reliance on political support. Until then, however, industry growth is likely to
remain linked to the overall level of support in place.
Silicon shortages
A lack of silicon in 2005/06 is Barring a significant decline in support, demand is not expected to be the main
expected to moderate solar industry
growth determinant of solar industry growth in the next few years. The availability of supply, of
electronic or solar grade silicon in particular, is more likely to be the limiting factor.
A PV cell requires a lower level of silicon purity than that used in a semiconductor wafer.
As a result, the solar industry has historically relied on top-and-tails and other off-cuts
from the semiconductor industry for its silicon supply. With the solar industry’s strong
growth, however, core production is now also being used. Of the c.27,000 tonnes of
purified silicon produced in 2003, approximately one-third was used in the solar industry.
With 750MW of solar cells produced in the year, this equates to around 12 tonnes of
silicon required per MWp of solar power.
During a period of semiconductor industry weakness at the start of the decade, an

excess of supply caused silicon prices to fall to US$25-30/kg. At such levels, silicon
manufacturers were unable to justify capital investments. Although silicon is the second
most abundant element in the Earth’s crust, it is both expensive and complex to process.
This period of capacity under-investment, when coupled with both the recent recovery in
the semiconductor industry and the ongoing strength in the solar sector, has led to a
reversal of the supply-demand imbalance.
17
Recent capacity constraints have caused the price of some silicon contracts to effectively
double to around US$50/kg. Spot market prices have even risen as high as US$75/kg.
Although at such prices capacity expansion is once again extremely economical, not all
silicon manufacturers are investing significantly to increase production volumes. Many
suppliers are demanding long-term price contracts with solar companies before investing
in new facilities to mitigate the risk of another downturn. Even for those silicon
manufacturers willing to expand capacity, lead-time remains an issue. A new polysilicon
plant typically takes two to three years to plan and build, which suggests to us that supply
is likely to remain constrained until at least 2007. Under such a scenario, competition for
supply between the solar and semiconductor sectors appears almost inevitable. As
silicon is typically a smaller proportion of total cost in a semiconductor chip than in a solar
cell (<5% for a high value semiconductor product vs. 6-8% for a solar cell),
semiconductor companies appear to be in a stronger position with regards to absorbing
price rises.
If the doubling of the purified silicon price sticks, it would increase the cost of a solar cell
by around 7%, all other things being equal. While clearly not beneficial, this degree of
price rise would not be overly prohibitive to market growth. The issue is thus not the price
impact per se but that the physical lack of silicon supply limits the industry’s ability to
grow. Aggressive solar company expansion plans may well have to be pared back as a
result, with those firms having a secured access to silicon at a relative advantage. The
supply restriction is likely to act as a barrier to new entrants over the coming years; those
companies that can obtain supply should be left in a strong industry position.
Interest rate rises

A sharp rise in interest rates could Unlike with a traditional power generation plant, a distributed grid-connected solar system
make the purchase of a PV system
financially unattractive is typically financed by individual households or small businesses and not by large
utilities. As a result the cost of finance tends to be a more important and variable part of
any buying decision.
A typical roof-top solar system costs around €15,000 for a 3kWp residential system.
Given sunlight conditions in Northern Europe, a 3kWp system will produce around
2,550kWh of electricity per annum. In the key German market, an owner of a 3kW
system receives a guaranteed €0.5453/kWh for the output (for 2005 installations),
equivalent to €1,391 per year at the assumed output level. The Net Present Value (NPV)
for a system (assuming a 25 year life-time and 0.5% annual output degradation) is over
€6,000 using an interest rate of 4%. The NPV would turn negative if bank interest rates
were to rise much above 8%. A c.4% rise in bank lending rates would thus make it
difficult to justify an investment on purely a financial basis.
Given current benign economic conditions in both Europe and Japan, the risk of a sharp
interest rate rise in these markets appears relatively low short-term. In fact, interest rate
cuts look more likely, which would increase industry demand.
18
Equity opportunities
As balance sheet strength is unlikely to emerge as a notable competitive
advantage in the PV sector, as it has in the wind industry, we see greater potential
for listed PV firms to successfully compete long-term, relative to a wind industry
counterpart. Within the PV sector, those companies located at the wafer and cell
manufacturing stages look best positioned longer-term.
Solar vs. Wind

Equity investments in solar power Although the wind industry has suffered from volatile end-markets in recent years (largely
appear to us to have the potential for
greater longer-term returns relative to due to the boom-bust nature of the US market), long-term growth is expected to remain
a wind industry counterpart strong, driven by ongoing political support, improving technology and the need for energy
diversification (i.e. the same drivers as behind solar industry expansion).
Balance sheet risk

Balance sheet strength is less Despite, or perversely because of, wind power’s increasing competitiveness, the long-
important in the PV industry
term opportunities for equity investors appear to have diminished. Simplistically, the
‘problem’ is that wind power has become big business. With the final customer
increasingly a large utility and no longer a small fund or developer, projects have grown
in size. Larger projects imply an increased level of risk in construction and maintenance.
As a result, balance sheet strength is becoming increasingly important in a turbine
buyers’ decision-making process.
While independent listed manufacturers are arguably offering better technology, there are
relevant question marks over whether they can compete longer-term for the larger
projects against an industrial conglomerate (General Electric and Siemens). The one
thing that such conglomerates can undoubtedly offer ahead of any of the listed turbine
manufacturers is balance sheet security. As a result, listed manufacturers are
increasingly being forced to compete on price, to the detriment of margins.
In contrast to the recent emergence of conglomerates in the wind industry, the solar
sector has long had a significant number of such companies within it, predominantly
positioned in the cell manufacturing stage of the industry. While a large conglomerate
potentially has access to a greater level of funding required for growth (though not
always, if the company has less focus in this area), balance sheet strength is unlikely to
become such a significant factor in the PV industry as it has in the wind industry, in our
view. Assuming that solar industry growth continues to be driven by distributed grid-
connected applications, as opposed to utility scale centralised projects as in the wind
sector, single project size should not notably increase, and only the number of projects
will rise. Balance sheet risk under such a scenario should thus be of lower importance for
determining the supplier for any one project. As a result, there is greater scope for listed
PV firms to successfully compete long-term, relative to a wind industry counterpart.
Relative pricing power

As the wind industry has developed and utilities have replaced small funds as the typical
end-customer, the ability of suppliers to set prices has decreased, with margins coming
under pressure as a result. Looking ahead in the PV industry and assuming the grid-
connected distributed PV market develops as expected, the average customer will be a
household (via a systems integrator) commanding a relatively lower level of pricing
power. As a result, solar industry suppliers should be in a stronger relative position with
regards price setting.
19
PV industry investment criteria

Longer-term, we see the earlier Simplistically, there are five stages in the solar industry. While all are important to the
stages of wafer and cell
manufacturing as offering higher overall industry’s development, the value-added is not evenly distributed between the
value-added stages. In our view, the highest long-term value-added will likely occur in the wafer and
cell manufacturing areas.
► Silicon suppliers: As the provider of the PV industry’s core base material, silicon
suppliers are benefiting from the growth in solar power. Current supply shortages are
improving pricing power, though capacity constraints should be largely resolved by
2007/08. Given the long lead-time required to change production levels, industry
profitability is likely to remain cyclical in the long-term. The emergence of a second end-
market for poly-silicon in solar power (along with the semiconductor industry) should,
however, reduce some of this volatility.
► Wafer manufacturers: This is a core value-added process within the crystalline silicon
PV market, with high technology content and good barriers to entry. Given the expected
emergence of thin-film technologies in the years ahead, the growth in the independent
wafer industry’s available end-market is likely to be below that of the overall PV industry.
Growth for pure-play wafer manufacturers may also be reduced if the level of vertical
integration in the industry increases.
► Cell manufacturers: This is arguably the most interesting stage of the solar industry,
which may explain why virtually all of the conglomerates present in the industry have
exposure to this area. In addition to incorporating a good level of value added in the
production process, the cell manufacturing industry does not have the growth limitations
of the wafer-manufacturing sector. While cell manufacturing in itself is a fairly standard
procedure across the industry, comparative advantage is created by both a company’s
scale, level and quality of automation, average cell efficiency as well as consistency (i.e.
standard deviation) of cell efficiency. Given that a module’s efficiency is set by the quality
of its weakest cell, consistency of a cell manufacturer’s product is extremely important.
The largest specific risk for cell manufacturer is probably technology change – a
company focused on just one technology type could lose out if a breakthrough occurs in
another technology form.
► Module manufacturers: As with wafer manufacturers, module manufacturers are

typically only required in the crystalline silicon PV market. The manufacturing process
tends to be labour-intensive, which suggests that those manufacturers located in high
cost countries may struggle longer-term against low-cost competitors. Given supply
shortages along the value chain, barriers to entry are relatively high at present, with those
module manufacturers having access to cell supply contracts at an advantage. This
value-added is likely to decline, as supply issues are resolved.
► Systems integrators: Such businesses act as final stage contractors and distributors.
The advantage of systems integrators is the low level of capital employed in their
business model and the reasonable barrier to entry created by current supply restrictions.
The key value-added is the strength of client and supplier relationships. As the lack of
supply corrects and the industry grows, mainstream-contracting firms may look to enter
this space, which could put pressure on current incumbents.
20
Vertical integration or specialisation?

While there is a short-term benefit As a reflection of the PV industry’s varying technologies, the production process is non-
from being vertically integrated, we
expect companies to specialise over homogenous and, in practice, many of the stages outlined above are merged or
the long-term integrated to differing degrees. For thin-film companies, wafer manufacturing is an
inherent part of the cell manufacturing process. Even in the crystalline silicon cell market,
some wafer manufacturers are increasingly attempting to form their own supply of solar
grade silicon. Likewise, some cell manufacturers also produce their own or some of their
own wafers and modules.
While there are benefits to being vertically integrated, particularly in light of the current
material shortages, we believe the industry will move towards increasing specialisation in
the long run in order to concentrate economies of scale and focus R&D spend. Given the
industry’s expected strong growth, required capital expenditure levels are likely to remain
high in the years ahead. For any level of investment, a focused or ‘pure-play’ company
will likely be able to grow faster than a vertically integrated competitor. In our view,
gaining scale during the current period of strong industry growth is essential for a
company to establish a competitive long-term position. A focused approach appears to
offer an easier route to achieving scale.
While not entirely related to the business strategy, it is perhaps no coincidence that of the
top-ten cell manufacturers, those manufacturers with a more focused approach (i.e. only
cell and module production) have achieved significantly faster growth in recent years
than those that are highly vertically integrated.
Industry growth - Vertical integration vs. specialisation
Market position Manufacturer Strategy MW 2001 MW 2004 % change
1 Sharp Focused 74 324 338%

2 Kyocera Vertically-integrated 54 105 94%
3 BP Solar Vertically-integrated 54 85 56%
4 Mitsubishi Electric Focused 14 75 436%
5 Q Cells (private) Focused 0 75 NM
6 Shell Solar Vertically-integrated 48 72 51%
7 Sanyo ThinFilm 16 65 306%
8 RWE SCHOTT Solar Vertically-integrated 23 63 178%
9 Isofoton (private) Vertically-integrated 19 53 185%
10 MoTech Solar Focused 4 35 900%
Source: Photon International, DrKW Equity research
Investment options are currently limited

Within Europe, there are currently few listed solar companies through which to play the
industry’s strong expected future growth. In the wafer industry, only SolarWorld’s
business (Deutsche Solar) is quoted at present. Of the cell manufacturers, none of the
top ten are currently listed within Europe and again SolarWorld’s business (Deutsche
Cell) is the largest listed European play on this market. Module manufacturing is an
unconsolidated market. While listed European manufacturers do exist (e.g. Solon, Solar-
Fabrik) they are all currently relatively small in size. Finally at the end-stage of systems
integration and distribution, only the market leader, Conergy, is of significant size.
With relative size likely to be an increasingly important competitive advantage, as

companies benefit from economies of scale, we focus on the largest listed investment
opportunities in Europe. We thus initiate on SolarWorld and Conergy.
21
SolarWorld
SolarWorld is a highly vertically integrated PV manufacturer, present across the
entire value-chain. While such a degree of integration could limit the company’s
ability to internally fund growth longer-term, the security of supply it currently
offers is allowing for strong profitability in a time of material shortages. We initiate
with a Buy recommendation and a target price of €90.
Company overview
SolarWorld is a highly integrated Founded in 1998 by the current CEO and largest shareholder (27.6%), Frank Asbeck,
solar manufacturer, present across
the entire value chain SolarWorld focused on renewable energy project management for its first ten-years of
operation. Although the company began trading in solar equipment (modules and inverters) in
1995, it was not until 1998 that the business was officially refocused as a solar energy company.
In 1999, SolarWorld entered module manufacturing through the acquisition of a 71.3% stake in
the Swedish module company GPV, the minorities in which were bought out in 2002. In 2000,
the company acquired an 82% stake in the wafer manufacturing business, Bayer Solar (bought
out minorities in 2002), and, in 2001, its second module operation was founded (Solar Factory).
Vertical integration was largely completed by the start-up of a cell business (Deutsche Cell) in
2002 and a silicon supply JV (Joint Solar Silicon) in 2003. SolarWorld has thus positioned itself
as one of the most vertically integrated companies in the PV industry.
Positives
► Security of supply: SolarWorld operates a three-tier strategy to ensure adequate access
to silicon feedstock. As well as having an in-house silicon supply JV with Degussa (Joint
Solar Silicon), SolarWorld has built up a successful cell recycling operation (Solar
Materials) and has signed a 10-year supply agreement with Wacker, starting in 2007.
When combined with its internal wafer manufacturing business, SolarWorld is in a strong
position in terms of having access to supply across the whole value chain. This is proving
to be a competitive advantage at present, given current feedstock shortages, and is
allowing the company to operate at super-normal profit margins within its wafer business
(note the Q1 EBIT margin of 31%). We do not expect the silicon and thus wafer supply
constraints to be fully resolved before 2007 at the earliest.
► High value-added production processes: Although we question the long-term value-

added in both module manufacturing and product distribution, SolarWorld is also
positioned in the more attractive areas of wafer and cell manufacturing.
Negatives
► Capex requirements: Capital expenditure has averaged almost 50% of sales over the
past four years. Although the capital requirement in growth companies is typically
significant, SolarWorld’s high level of vertical integration implies that a greater level of
capital expenditure is required to achieve any given level of scale. As a result, the
company appears more reliant on external sources of funding for growth than a more
focused manufacturer. One positive, that partly offsets the company’s high capital
expenditure burden, is the significant level of investment subsidies obtained due to the
company’s location in East Germany. Funding from both the EU and the local state
currently subsidises around 35% of all capital expenditure.
► Dividend policy: Paying a dividend is not typically seen as a negative. However, in a fast
growing industry such as solar, with high capital investment requirements, paying a dividend
without FCF support is potentially taking money out of the business that would be better spent
re-investing. To the end of 2004, SolarWorld had paid out €7m in dividends and obtained
€32m from issuing new equity. Net debt at the end of 2004 stood at €40m or 32% of equity.
22
► Technological change: Through a highly vertically integrated business model,

SolarWorld is geared in to the fate of the crystalline silicon PV market. The emergence of
alternative cell production methods (eg. string ribbon, thin-films) could put pressure on
the future demand for the company’s products (particularly wafers). For the next few
years at least, this risk, while relevant, appears limited.
Divisional overview
► Joint Solar Silicon: Founded in 2003, Joint Solar Silicon is a JV between Degussa
(51%) and SolarWorld’s wafer manufacturing division, Deutsche Solar (49%). The
company is researching a solar grade silicon production method based on the
decomposition of silane (a gas consisting of silicon and hydrogen) in a tube reactor.
While the project has suffered some delays in the laboratory stage (pilot production was
originally planned for 2004), the company is currently planning a test production run (20-
100t) in 2005, with full-scale pilot production (800t) to follow in 2007/08.
► Deutsche Solar: The division is the largest wafer manufacturer in Europe and, according
to internal estimates, joint largest globally with the Japanese manufacturer, M.Setek. As a
wholly owned subsidiary of SolarWorld, Deutsche Solar manufactures mono- and
polycrystalline wafers for both its parent company’s operations and for external cell
manufacturers. Note that 40% of wafers are currently exported (mainly to Japan), which
leaves SolarWorld more exposed to FX fluctuations than many of its domestic peers. In
2004, the capacity of the company reached 120MW, which is expected to double to
240MW by 2007. Within the division, SolarWorld operates its highly profitable Solar
Materials business unit, which is focused on the recycling and reuse of waste solar cells
in new wafer production. According to the company, around 20% of its silicon supply
should come from recycling by the end of 2005. Given the recycled material’s apparently
much lower cost (up to 40%), Deutsche Solar should be at a competitive advantage.
► Deutsche Cell: Deutsche Cell is the cell-manufacturing subsidiary of SolarWorld. The

company has produced crystalline silicon cells since 2002 and had a production capacity
of 30MW by the end of 2004 producing cells with 15-16% efficiency. Capacity is targeted
to rise to 60MW in 2005, 90MW in 2006 and 120MW by 2007. The wafers used by the
company are exclusively supplied by SolarWorld’s Deutsche Solar subsidiary. Compared
with its market leading position in the wafer industry, SolarWorld is a relatively small
player in the cell manufacturing industry (ranked 13th in 2004 in terms of output). Building
up scale rapidly will be important if SolarWorld is to become an established cell
manufacturer longer-term (a secure wafer supply should make this task easier).
► GPV/Solar Factory: As mentioned earlier in this report, module manufacturing tends to

be labour intensive with relatively low value-added and thus limited barriers to entry.
Through its two wholly owned subsidiaries (GPV and Solar Factory), SolarWorld has
attempted to increase its competitive position through a higher level of automation in the
production process. According to internal estimates, every 1MW of modules produced by
SolarWorld requires two employees, which compares to 5-6 employees for many of its
domestic competitors and 15+ for a typical Chinese manufacturer.
► SolarWorld: All module trading and distribution activities are carried out in-house under
the SolarWorld brand. Longer-term, as more established distributors emerge,
SolarWorld’s competitive position in this area may come under threat if growth cannot be
maintained.
23
Forecasts
SolarWorld has achieved 40% average annual sales growth since 2000 and witnessed a
doubling of sales in 2004 following the introduction of the new EEG law in Germany. With
strong domestic growth expected until at least 2008 (when the EEG is up for renewal) and
new markets emerging (Spain in particular), we look for 33% average annual sales growth
out to 2010. Note that for 2005, SolarWorld is targeting sales of more than €280m.
In 2004, SolarWorld achieved a group EBIT margin of 16.5% up from -3.1% in 2003.
While higher volume was the main driver, the use of wafers from inventory (costed at
2003 market rates but sold at higher 2004 prices) also aided profitability. Note that the
cost of materials as a percentage of sales fell from 89.4% in 2003 to 46.5% in 2004.
Even without the repeat of this effect, we expect further margin improvement in 2005,
due to continuing end-market strength. For 2005, we estimate a group EBIT margin of
24.9%. As supply constraints ease and competitive pressures rise, we expect margins to
moderate towards 12% by 2010. Longer-term we see a group margin of 8-10% as
realistic.
Divisional summary
€m (Y/E 31st Dec) 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Sales by division
Deutsche Solar 38 54 75 78 111 153 204 242 295 358 436
Deutsche Cell 1 17 63 90 121 146 183 227 283
GPV & Solar Factory 5 10 23 34 79 131 176 212 266 331 412
Trade in modules 17 36 43 47 104 200 316 427 535 667 829
Eliminations (9) (20) (35) (78) (157) (269) (362) (438) (549) (684) (851)
Group sales 51 82 109 98 200 305 454 589 729 900 1,110
EBIT by division
Deutsche Solar 9 7 5 4 14 40 43 44 47 47 48
Deutsche Cell (1) 1 11 14 22 23 26 30 31
GPV & Solar Factory (2) 0 0 0 4 9 11 13 13 15 19
Trade in modules 2 1 4 (7) 5 14 22 26 29 33 41
Energy 0 1 1
Net unallocated expenses 0 4 (7) (1) (1) (2) (2) (3) (4) (5) (6)
Group EBIT 9 13 2 (3) 33 76 96 102 112 120 134
EBIT margin by division (%)

Deutsche Solar 23.7 13.0 6.7 5.1 12.6 26.0 21.0 18.0 16.0 13.0 11.0
Deutsche Cell 5.9 17.5 16.0 18.0 16.0 14.0 13.0 11.0
GPV & Solar Factory -40.0 0.0 0.0 0.0 5.1 7.0 6.5 6.0 5.0 4.5 4.5
Trade in modules 11.8 2.8 9.3 -14.9 4.8 7.0 7.0 6.0 5.5 5.0 5.0
Group EBIT margin 17.6 15.9 1.8 -3.1 16.5 24.9 21.1 17.4 15.3 13.3 12.0
Source: SolarWorld, DrKW Equity research estimates
24
P&L statement
€m (Y/E 31st Dec) 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Sales 51 82 109 98 200 305 454 589 729 900 1,110
Change in inventories of finished goods 3 2 3 26 (15)

Own work capitalised 0 2 0 0 0
Other operating income 6 13 6 10 11
Cost of materials (32) (53) (73) (88) (93)
Staff costs (6) (9) (13) (19) (31)
Depreciation and amortisation (5) (7) (9) (15) (16)
Other operating expenses (8) (16) (20) (17) (23)
EBIT 9 13 2 (3) 33 76 96 102 112 120 134
Net Financial income (0) (0) (4) (6) (4) (3) (3) (3) (3) (3) (3)
PBT 9 13 (2) (9) 29 73 93 99 109 117 131
Income tax (4) (4) 0 4 (10) (27) (35) (37) (40) (43) (47)
Minorities (1) (1) (0) 0 0 0 0 0 0 0 0
Deutsch Solar profit until acq' date (3)
Net income 1 8 (2) (5) 18 45 58 62 69 74 84
EPS (€) 0.16 0.81 (0.16) (0.47) 1.57 3.55 4.57 4.91 5.41 5.86 6.59
EPS pre goodwill amortisation (€) 0.94 (0.01) (0.30) 1.57 3.55 4.57 4.91 5.41 5.86 6.59
DPS (€) 0.15 0.18 0.09 0.09 0.18 0.53 0.69 0.74 1.08 1.17 1.32
Owing to a build-up of working capital and significant capital expenditure requirements for
production expansion, we estimate a free cash outflow of €36m, equivalent to -12% of
sales in 2005.
Cash flow summary
€m (Y/E 31st Dec) 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Operating cash flow (pre WC) 7 13 24 48 88 102 93 102 111 124

Change in working capital (14) (17) (11) 29 (64) (49) (36) (35) (40) (41)
Capex (50) (87) (31) (32) (59) (49) (50) (53) (56) (58)
Capex as % sales 60.5 79.7 31.4 16.2 19.4 10.8 8.5 7.2 6.2 5.2
FCF (56) (90) (18) 44 (36) 4 8 14 15 26
FCF as % sales -68.7 -82.6 -18.2 22.2 -11.8 0.9 1.3 2.0 1.7 2.3
25
Cash flow statement

€m (Y/E 31st Dec) 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Net profit before taxes 13 (2) (9) 29 73 93 99 109 117 131

Depreciation and amortisation 7 8 15 16 22 27 31 34 37 41
Depreciation 5 7 12 16 20 25 28 31 33 36
Goodwill Amortisation 1 2 2 0 0 0 0 0 0 0
Other Amortisation 0 0 1 1 1 2 2 3 4 5
Net interest income 0 4 6 4
Interest paid (0) (4) (6) (3)
Net interest paid 0 0 (0) 1 0 0 0 0 0 0
Result from valuation at equity 0 0 1 0 0 0 0 0 0 0
Loss / income on disposal of assets (6) 0 0 0 0 0 0 0 0 0
Proceeds from investments grants 2 8 17 1 21 17 0 0 0 0
Taxes reimbursed / paid (9) (2) 1 2 (27) (35) (37) (40) (43) (47)
Operating cash flow (pre WC) 7 13 24 48 88 102 93 102 111 124
Increase / decrease in inventories (20) (12) (8) 11 (45) (40) (27) (27) (30) (28)
Increase / decrease in other working capital 6 (4) (3) 18 (20) (9) (8) (8) (10) (13)
Change in working capital (14) (17) (11) 29 (64) (49) (36) (35) (40) (41)
Cash flow from operations (7) (3) 13 77 23 53 57 67 71 83
Total Capex (50) (87) (31) (32) (59) (49) (50) (53) (56) (58)
Capex - Deutsche Solar (19) (56) (9) (18) (26) (18) (17) (18) (18) (17)
Capex - Deutsche Cell (7) (19) (12) (11) (16) (12) (12) (11) (11) (11)
Capex - GPV/Solar Factory 0 (5) (9) (2) (13) (12) (13) (13) (13) (12)
Capex - Trade in modules (2) (1) (1) (1) (4) (6) (9) (11) (13) (17)
Capex - Energy (19) 0
Other 7 3 0 0 0 0 0 0 0 0
Cash flow from investments (43) (83) (31) (32) (59) (49) (50) (53) (56) (58)
Proceeds from / repayments of debt 17 35 30 (28) 0 0 0 0 0 0

Proceeds from addition to equity 17 15 0 0 43 0 0 0 0 0
Dividends (2) (3) (1) (1) (2) (7) (9) (9) (14) (15)
Cash flow from financing activities 32 47 29 (29) 41 (7) (9) (9) (14) (15)
FX (0) (0) (0) 0 0 0 0 0 0 0

Net change in financials (17) (40) 11 16 5 (2) (1) 5 2 11
Due to the inventory sell down in 2004, working capital as a percentage of sales fell from
71% in 2003 to just 23% in 2004. This decline is likely to partly reverse in 2005. From
2010, we forecast working capital to represent 28% of sales.
Working capital summary
€m (Y/E 31st Dec) 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Inventories as % sales 32.0 44.6 44.9 58.2 23.4 30.0 29.0 27.0 25.5 24.0 22.0
Accounts receivable as % sales 12.0 13.1 13.2 18.9 6.5 14.0 14.0 14.0 14.0 14.0 14.0
Accounts payable as % sales 7.6 22.4 12.3 5.9 7.1 8.0 8.0 8.0 8.0 8.0 8.0
Trade Working Capital 19 29 50 70 45 110 159 194 230 270 311
Trade Working Capital as % sales 36.4 35.3 45.8 71.1 22.7 36.0 35.0 33.0 31.5 30.0 28.0
We expect net debt to fall from €40m in 2004 to €35m in 2005, following the H1 capital
raising, which yielded €43.1m. Given the high capital requirements of SolarWorld’s
vertically integrated business model, the company may become reliant on additional
external financing for growth if internal cash management is not suitably controlled.
26
Balance sheet
€m (Y/E 31st Dec) 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Fixed assets
Intangible Assets 23 26 36 35 35 37 37 37 37 36 34
Property, plant and equipment 45 84 114 130 146 180 201 219 237 256 274
Financial assets 1 1 1 0 1 2 3 4 5 6 7
Deferred taxes 2 2 3 8 4 4 4 4 4 4 4
Total fixed assets 71 113 154 174 185 222 244 264 282 301 318
Current assets
Inventories 16 37 49 57 47 91 132 159 186 216 244
Trade accounts receivable 6 11 14 19 13 43 64 82 102 126 155
Tax receivables 2 3 2 1 1 1 1 1 1 1
Other receivables and assets 3 4 3 2 4 4 4 4 4 4 4
Marketable securities 2 1 0 0 0 0 0 0 0 0 0
Liquid funds 61 43 14 20 27 32 29 28 33 35 46
Prepaid expenses 0 1 0 1 0 0 0 0 0 0 0
Total current assets 89 99 83 101 91 171 229 274 326 382 450
Total assets 160 212 238 275 276 393 473 538 608 683 768
Current liabilities
Short-term borrowings 10 22 42 52 25 25 25 25 25 25 25
Trade accounts payable 4 18 13 6 14 24 36 47 58 72 89
Tax payables 1 0 0 8 8 8 8 8 8 8
Current provisions 6 2 3 2 12 12 12 12 12 12 12
Deferred income 0 0 0 1 0 0 0 0 0 0 0
Other current liabilities 2 2 4 12 9 30 47 47 47 47 47
Total current liabilities 22 44 62 73 69 99 128 139 150 164 181
Long term liabilities

Noncurrent borrowings 27 31 37 51 42 42 42 42 42 42 42
Other noncurrent liabilities 10 12 21 34 34 34 34 34 34 34 34
Provisions for pensions 0 0 0 0 0 0 0 0 0 0 0
Other noncurrent provisions 0 0 0 0 0 0 0 0 0 0
Total long term liabilities 37 44 57 85 76 76 76 76 76 76 76
Share capital 5 5 6 6 6 13 13 13 13 13 13
Capital reserve 81 87 101 101 101 137 137 137 137 137 137
Translation reserve (0) 0 0 0 (0) (0) (0) (0) (0) (0) (0)
Retained Earnings 3 12 4 1 18 61 112 166 225 286 355
Shareholder's Equity 89 103 110 108 124 210 262 315 375 435 504
Minorities 6 14 0 0 0 0 0 0 0 0 0
Deferred taxes 6 7 8 9 8 8 8 8 8 8 8
Total equity and liabilities 160 212 238 275 276 393 473 538 608 683 768
Net debt/(cash) (27) 8 65 83 40 35 38 39 34 32 21
Gearing (%) -30.5 8.0 58.9 77.5 32.2 16.7 14.4 12.3 9.0 7.4 4.2
Valuation and recommendation

Given the industry’s higher expected As seen in our estimates, we forecast strong top-line growth for SolarWorld over the
growth and lower cyclicality, we
value SolarWorld at a 10% P/E coming years. Given the company’s growth characteristics, we base our target price on a
premium to the IT hardware sector comparison with the IT hardware sector (including the semiconductor industry). Based on
our estimates, the IT hardware sector currently trades on a 2006 P/E of 17.6x, with 18%
EPS growth factored in for that year. Given the higher expected earnings growth for
SolarWorld (29% in 2006) and lower level of expected cyclicality in end-market demand,
we believe a 10% premium is justified. We thus obtain a target price for SolarWorld of
€90 and initiate with a Buy recommendation.
27
Conergy
Conergy is the largest solar-specific systems integrator and distributor in Europe.
Given the low level of capital employed in its business model, the company has
been able to significantly outgrow the overall industry in recent years. While we
expect strong growth to continue, we have concerns over the long-term barriers to
entry and the impact of competition on future profitability. We initiate with a Hold
recommendation and a €80 target price.
Company overview
Conergy is a specialist integrator and The CEO, Hans-Martin Rüter, and Chairman of the Supervisory Board, Dieter Ammer,
wholesaler of PV products
established Conergy in 1998. The company acquired the German solar wholesaler AET
Alternative-Energie-Technik GmbH in September 1999 and expanded into the Spanish
market with the purchase of the wholesaler ALBASOLAR in December 2000. A position
in the US market was obtained through the acquisition of Dankoff Solar Products earlier
in the current year. Through both acquisitions and organic growth, Conergy is currently
present in 15 countries worldwide. In 2004, over 94% of group sales were generated in
Germany. Conergy is targeting 50% of group sales from international markets within five
years.
Positives
► Low capital intensity: Due to the limited level of manufacturing carried out in-house and
the low level of working capital tied up in the distribution business (aided by good current
payment terms), Conergy’s capital employed was just €1m in 2004, giving it a ROCE of
286%. The far lower capital requirements of the business should allow the company to
grow rapidly over the next few years, without any strain on the company’s balance sheet.
► High value-added at present: Balance of system components, system design and

implementation currently account for around 40% of the total cost of a typical PV system.
Given the lower capital requirements at this end of the value-chain, companies are
currently enjoying both high margins and high returns on their capital employed due to a
relative lack of competition.
Negatives
► Decline in value added: Given the industry’s early stage of development, a significant
proportion of a distributor’s business is currently customised systems integration, which
typically offers a higher margin than an ‘off-the-shelf’ system. As the industry matures
and production volumes increase, the level of standardisation in equipment and systems
is likely to rise. If Conergy is unable to lower costs at the same rate as the level of value-
added in its service declines, its margins will come under pressure.
► Increased competition: In addition to increasing the level of product standardisation,

greater industry volumes are likely to encourage new entrants (possibly from other
building distribution channels). If Conergy is unable to maintain its currently strong
distribution relationships, particularly when it attempts to expand internationally, returns
will suffer.
► Supplier risk: In 2004, Conergy obtained 60% of its PV modules from just one supplier,
namely Sharp. Although the percentage sourced from this one supplier is expected to fall
to 50% in 2005, reliance on any customer, even one as large as Sharp, does introduce a
certain level of company-specific risk. It is worth noting that Conergy sources from more
than 15 module suppliers, which somewhat mitigates this risk.
28
Divisional overview
► Voltwerk Group: Conergy’s Voltwerk business is involved in the design, financing,
construction and operation of renewable energy projects (predominantly in the solar
sector) for closed investment funds. By the end of 2004, Voltwerk had implemented PV
projects with a combined output of 21MW and enjoys a market share of c.40%. While the
division has achieved reasonable growth in operations, profitability is capped by the strict
returns focus of the investment funds. One notable area of concern relates to a potential
future change in the German tax law. While far from certain, there have been some
political moves to reduce the tax incentives attached to investment funds. If this were to
be introduced, the interest in solar funds from private investors and hence part of the
business for Voltwerk could be significantly impacted.
► SunTechnics Group: The SunTechnics business has been active in the sale and
installation of complete PV systems for final-use customers since 1996. SunTechnics is
also sub-contracted by Voltwerk to work on centralised projects. In 2004, the business
diversified into solar thermal systems with the latter representing c.10% of sales last year.
Conergy is looking to generate around half of sales from non-PV sources within 5 years.
According to the company, SunTechnics is the European market leader in engineering
complete solar systems, with a market share of 21.2% in 2004 (13.4% in 2003). Not
surprisingly, its position in Germany is strong (23.9% market share in 2004, up from
17.7% in 2003).
► AET Group: Whereas SunTechnics focuses on end-consumers, AET sells both products
and complete systems (PV and solar thermal) to installers and electrical fitters. Given its
strong domestic position (market share of 24% in 2004) and its relatively less price-
sensitive customer base, margins tend to be higher in this business. Maintaining strong
long-term relationships with the core resellers is key to the business’ long-term success.
► Conergy (DMS&CS): Conergy’s Development, Manufacturing, Sales and Central

Services (DMS&CS) division is involved in the manufacturer of mounting systems,
inverters and solar thermal collectors and the procurement of other solar products. The
products manufactured/procured are sold to AET, Suntechnics and directly to
wholesalers, predominantly under the Conergy brand.
Forecasts
Group revenues have grown from €1m in 1999 to €285m in 2004, a CAGR of 210%. As a
result, Conergy is currently the largest PV systems integrator in Germany. For 2005, the
company is targeting sales of at least €500m, implying up to a doubling of sales over the
prior year period. Given the business’ lower capital expenditure requirements and its
potential for international expansion, we estimate that Conergy should be able to outgrow
the overall PV market over the next few years. Out to 2010, we forecast sales to grow at
a CAGR of 36%.
Despite our strong top-line growth expectations, we estimate that Conergy’s margins are
likely to come under pressure from 2007 onwards, as supply constraints ease and new
competitors emerge. We estimate a peak EBIT margin of 9.6% in 2006, declining to 6.5%
by 2010. If Conergy can increase the level of in-house production, a higher EBIT margin
may be obtainable. Note that Conergy is targeting a medium-term EBIT margin of 10%.
29
Divisional summary
€m (Y/E 31st Dec) 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
External sales by division

Projects (Voltwerk Group) 42 52 62 68 74 80 86 93
Engineering (SunTechnics Group) 31 91 193 280 350 435 538 663
Wholesale (AET Group) 42 108 214 310 387 481 594 733
Development, Manufacturing, Sales & Central Services 7 34 77 119 148 184 228 281
Group Sales 73 122 285 546 777 959 1,180 1,446 1,771
EBIT by division
Projects (Voltwerk Group) 2 3 3 4 4 4 5 5
Engineering (SunTechnics Group) 0 6 19 31 35 39 43 46
Wholesale (AET Group) 3 10 26 37 43 48 51 55
Development, Manufacturing, Sales & Central Services (3) 0 3 5 6 7 9 11
Consolidation (1) (1) (1) (1) (2) (2) (3) (3)
Group EBIT (1) 1 19 50 75 86 97 105 115
EBIT margin by division (%)

Projects (Voltwerk Group) 5.9 5.1 5.5 5.5 5.5 5.5 5.5 5.5
Engineering (SunTechnics Group) 1.0 6.9 10.0 11.0 10.0 9.0 8.0 7.0
Wholesale (AET Group) 7.1 9.5 12.0 12.0 11.0 10.0 8.5 7.5
Development, Manufacturing, Sales & Central Services -48.6 1.1 4.0 4.0 4.0 4.0 4.0 4.0
Group EBIT margin -1.0 0.8 6.7 9.2 9.6 9.0 8.2 7.3 6.5
Source: Conergy, DrKW Equity research estimates
P&L statement
€m (Y/E 31st Dec) 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Revenue 73 122 285 546 777 959 1,180 1,446 1,771
Work in progress (16) 2

Other own work capitalised 0 1
Other operating income 2 1
Cost of materials (93) (244)
Personnel costs (8) (14)
Other operating expenses (5) (10)
Other taxes (0) (0)
EBITDA 0 2 21
Depreciation & Amortisation (1) (1) (2)
EBIT (1) 1 19 50 75 86 97 105 115
Other interest & similar income 0 0 5 4 4 4 2 2

Interest & similar expense (0) (0) (0) (0) (0) (0) (0) (0)
Profit transferred based on a P&L transfer agreement (0) (0) 0 0 0 0 0 0
EBT (1) 1 19 55 79 90 101 107 116
Extraordinary result 0 0 0 0 0 0 0 0
Income taxes (0) (8) (22) (30) (34) (37) (39) (42)
Minority interest (0) (0) (0) (0) (0) (0) (0) (0)
Net income (1) 0 11 34 49 56 63 68 74
EPS (reported) (0.12) 0.05 1.39 3.39 4.92 5.62 6.31 6.79 7.42
EPS (pre GW) 1.46 3.39 4.92 5.62 6.31 6.79 7.42
DPS (€) 0.00 0.00 0.00 0.68 0.98 1.12 1.26 1.36 1.48
A combination of limited capital expenditure and low working capital requirements is likely
to see ongoing free cash flow generation from Conergy’s business.
30
Cash flow summary

€m (Y/E 31st Dec) 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Operating cash flow (pre WC) 2 20 36 52 61 70 76 86

Change in working capital 3 (2) (2) (30) (30) (41) (27) (32)
Capex (1) (5) (10) (14) (17) (21) (26) (32)
Capex as % sales 0.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8
FCF 4 14 24 8 14 8 24 21
FCF as % sales 3.2 4.8 4.4 1.0 1.5 0.6 1.6 1.2
Cash flow statement

€m (Y/E 31st Dec) 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Net profit 0 11 34 49 56 63 68 74
Amortisation/Depreciation 1 2 2 3 5 7 8 11
(Gain)/Loss from asset disposals 0 0 0 0 0 0 0 0
Other non-cash (income)/expenses 0 (0) 0 0 0 0 0 0
Interest & similar income 0 0 0 0 0 0 0 0
Interest expense 0 0 0 0 0 0 0 0
Income tax expense 0 7 0 0 0 0 0 0
Operating cash flow (pre WC) 2 20 36 52 61 70 76 86
Changes in working capital

Change in inventories 10 (5) (11) (27) (22) (29) (24) (29)
Change in other assets 11 (23) (6) (22) (22) (29) (24) (29)
Change in other liabilities (17) 27 15 18 15 18 21 26
Total change in working capital 3 (2) (2) (30) (30) (41) (27) (32)
Cash flow from operations 5 19 34 22 31 29 50 53
Net capex (1) (5) (10) (14) (17) (21) (26) (32)
Cash receipts from from disposal of financial assets 0 0 0 0 0 0 0 0
Cash payments for acquisition of shares in subsidiaries (0) (1) 0 0 0 0 0 0
Other cash payments 0 (0) 0 0 0 0 0 0
Cash flow from investing activities (1) (6) (10) (14) (17) (21) (26) (32)
Cash receipt from issuance of share capital 1 0 103 0 0 0 0 0

Cash payments for acquisition of equity 0 (0) 0 0 0 0 0 0
Change in treasury shares (0) (0) 0 0 0 0 0 0
Change in bonds (0) 0 0 0 0 0 0 0
Dividends 0 0 0 (7) (10) (11) (13) (14)
Cash flow from financing activities 1 (0) 103 (7) (10) (11) (13) (14)
Net change in funds 5 13 127 1 4 (4) 11 8

Working capital
€m (Y/E 31st Dec) 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Inventory as a % sales 8.9 5.7 5.0 7.0 8.0 9.0 9.0 9.0
Accounts receivable as a % sales 4.5 9.4 6.0 7.0 8.0 9.0 9.0 9.0
Accounts payable as a % sales 9.6 10.0 8.0 8.0 8.0 8.0 8.0 8.0
Working capital 5 15 16 47 77 118 145 177
Working capital as a % sales 3.9 5.2 3.0 6.0 8.0 10.0 10.0 10.0
31
Balance sheet
€m (Y/E 31st Dec) 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E
Intangible assets 1 2 3 3 4 5 5 7
Goodwill 4 3 3 3 3 3 3 3
Property, plant and equipment 2 4 12 23 34 48 64 84
Financial assets 0 0 0 0 0 0 0 0
Outstanding contributions 0 0 0 0 0 0 0 0
Deferred tax assets 3 1 1 1 1 1 1 1
Total fixed assets 9 11 19 30 42 57 75 95
Inventories 11 16 27 54 77 106 130 159

Trade receivables 6 27 33 54 77 106 130 159
Other receivables 1 2 2 2 2 2 2 2
Cash and cash equivalents 6 19 146 147 151 148 159 167
Total current assets 23 65 208 258 307 362 422 488
Prepaid expenses 0 1 1 1 1 1 1 1
Total assets 33 77 228 289 350 420 497 584
Subscribed capital 8 9 10 10 10 10 10 10
Reserves 2 4 106 106 106 106 106 106
Accumulated profits/losses (1) 7 41 83 130 182 237 298
Adjustments for currency translation 0 0 0 0 0 0 0 0
Equity 9 20 157 199 246 298 353 414
Minority interests 1 0 0 0 0 0 0 0
Tax provisions 0 5 5 5 5 5 5 5
Other provisions 0 1 1 1 1 1 1 1
Total provisions 0 6 6 6 6 6 6 6
Financial debt 3 0 0 0 0 0 0 0
Advance payments received 3 4 4 4 4 4 4 4
Trade payables 12 28 44 62 77 94 116 142
Other liabilities 5 17 17 17 17 17 17 17
Total liabilities 23 49 64 83 97 115 136 162
Deferred income 1 2 2 2 2 2 2 2
Total Liability and equity 33 77 228 289 350 420 497 584
Net debt / (Cash) (3) (19) (146) (147) (151) (147) (159) (166)
Gearing (%) -34.9 -94.3 -93.1 -73.8 -61.6 -49.6 -44.9 -40.2
Valuation and recommendation

We believe that Conergy deserves to We base our valuation of Conergy on a 15% discount to our targeted P/E for SolarWorld
trade at a discount to SolarWorld,
given its lower expected long-term in 2006. The discount reflects our caution over the level of value-added in Conergy’s
value-added business model, offset by higher near-term growth expectations. On a 15% discount to
the implied 2006 P/E of SolarWorld at our target price, we reach a target price for
Conergy of €80 and initiate with a Hold recommendation.
32
Appendix – The value chain

Simplistically, there are five stages in the solar industry. Longer-term, the highest
level of value-added, in our view, will occur at the early stages of wafer and cell
manufacturing.
The solar industry value chain

Silicon Ingot/Wafer PV cell Module Systems
Silicon Ingot/Wafer PV cell Module Systems
suppliers manufacturers manufacturers manufacturers integrators
suppliers manufacturers manufacturers manufacturers integrators
Source: DrKW Equity research
Technology
Crystalline silicon is used as the The base of solar technology is the PV or solar cell. All solar cells have at least two
base material in over 90% of solar
cells layers – one that is negatively charged (n-layer) and another that is positively charged (p-
layer). Creating the two layers is accomplished by treating the silicon with different
chemicals in a process known as ‘doping’. Typically Boron is diffused throughout the
crystal by adding it to the molten silicon (p-layer). The cut wafers are then doped on one
side only with phosphorus (n-layer).
When the two layers come into contact, the migration of electrons from the n-layer to the
p-layer creates an electric field. By attaching electrical contacts to both sides of the cell
(solid metal on the back, a thin grid of semi conducting material overlaid on the front), a
circuit is created and electricity produced. Typically 3-5% of the cell’s surface is shaded
by the electrical contacts.
In its untreated state, a silicon-based solar cell would reflect more than 30% of incoming
light. In order to minimise this level of reflection, two techniques are commonly adopted.
By adding a thin coat of silicon monoxide to a solar cell, the surface reflection is reduced
to about 10%. A second coat lowers the reflection further to around 4%. An alternative
approach is to texture the top surface through the use of chemical etching. The use of
both approaches can cut reflection to just 2%.
One common misperception in regards PV technology is that the energy cost of

manufacturing the solar cell is greater than the lifetime energy payback. While once the
case, technology advances have lowered the typical Energy Payback Time to around 2
years according to Kaneka estimates, far below the 25-30 year expected lifetime of a
crystalline silicon cell.
Market share by technology
(%) 1999 2000 2001 2002 2003 2004
Monocrystalline Silicon (mono c-Si) 40.8 37.4 34.6 36.4 32.2 36.2
Polycrystalline Silicon (poly c-Si) 42.1 48.2 50.2 51.6 57.2 54.7
Cadmium Telluride (CdTe) 0.5 0.3 0.5 0.7 1.1 1.1
Amorphous Silicon (a-Si) 12.3 9.6 8.9 6.4 4.5 4.4
Copper Indium (Gallium) Diselenide (CI(G)S) 0.2 0.2 0.2 0.2 0.6 0.4
Other (ribbon/sheet silicon etc) 4.1 4.3 5.6 4.6 4.4 3.3
Source: Photon International, P.Maycock - PV News
Crystalline silicon technologies

Crystalline silicon is currently used in over 90% of PV cells. Despite the lower potential
cost of emerging thin-film technologies (less material, higher theoretical efficiencies),
crystalline silicon is expected to remain the dominant PV technology for at least the next
10 years due to its higher current average efficiency and its greater stability.
33
► Monocrystalline (mono c-Si): Cells made from single silicon crystals offer a higher level
of efficiency than polycrystalline cells, due to the lack of grain boundaries that impede the
flow of electrons. Offsetting this benefit is the material’s greater cost, caused by the more
advanced ingot-casting process required in production. To create a monocrystalline cell,
a crystal ‘seed’ is placed into molten high purity silicon. The seed is then slowly pulled
from the liquid, allowing a solid ingot to ‘grow’ from the seed as the material cools.
Monocrystalline ingot growing
Source: US Department of Energy
► Polycrystalline (poly c-Si): A polycrystalline ingot is created through a simple casting

process. While typically less efficient than a monocrystalline cell, polycrystalline cells
benefit from their lower relative cost and their ease of production. As a result of this
cost/efficiency trade-off, the per-watt cost of electricity tends to be similar for both cell
types.
► Ribbon technology: The basic ribbon process involves pulling a thin layer of silicon from
a crucible of molten silicon in a continuous process. Of the different forms of ribbon
technology currently under development, Evergreen Solar’s string ribbon and RWE
Schott’s edge-defined-film-fed growth (EFG) appear to be the most advanced. The main
advantage of ribbon technology is the reduction of silicon usage (Evergreen expects to
produce cells with thickness of just 150 µm from 2006) and silicon waste (caused by the
sawing of ingots into solar wafers). Material loses during the sawing process can reach
as high as 50%. This waste level can be reduced to 10% under ribbon technology
methods, according to RWE Schott. Raising the efficiency level and obtaining economies
of scale in production remains key to the technology’s longer-term success.
Thin-film technologies
Thin-film technologies have the A technique borrowed from the semiconductor industry, the term ‘thin-film’ refers not the
potential for notable cost reductions
and high theoretical efficiencies thinness of the material but to the method of building up the cell using numerous thin
layers. In contrast to a typical crystalline silicon cell, a standard thin-film cell does not
have a metal grid for its top electrical contact. Instead, a layer of a transparent
conducting oxide (commonly tin oxide) is used.
The potential benefits of thin-film technology include the use of less material, the ability to
be manufactured in complete modules (not individual cells) and the option of depositing
the cells on to flexible substrate materials (to be used in building integrated products).
The drawback (at least to date) is the technology’s lower level of efficiency and stability
compared to that achieved with traditional crystalline technology. After many years of
development, thin-film technologies are beginning to move from the laboratory to the
manufacturing line.
34
► Amorphous silicon (a-Si): An amorphous solid is one in which the atoms are not
arranged in any particular order. While this disorganised structure limits the ability of
electricity to flow through the substance and thus the cell’s efficiency, it has the
advantage of absorbing solar radiation 40 times more effectively than a monocrystalline
cell. Hydrogen is often added to the silicon film to increase efficiency. Such cells benefit
from being able to be produced at lower temperatures and deposited on cost-efficient
substrates (plastic, metal or glass for instance). This technology is commonly used in
solar-powered consumer devices that have low power requirement characteristics.
Combining amorphous silicon with microcrystalline silicon is yielding improved results.
► Cadmium Telluride (CdTe): Currently the simplest thin-film technology to manufacture,

Cadmium Telluride can be produced using an array of common industrial processes that
do not require expensive capital equipment. Although the amount of Cadmium in the
product is small (c. 0.033% of the module by weight according to First Solar), its toxicity
factor remains a major drawback. This is particularly the case given the increasing
importance of recycling initiatives in many countries (eg. the Restriction on Hazardous
Substances (RoHS) legislation in the EU). BP Solar, one of the early backers of the
technology, closed its CdTe facility at the end of 2002.
► Copper Indium (Gallium) Diselenide (CIS/CIGS): The biggest asset of this compound
is its facility to absorb light – 99% of solar energy is absorbed in the first micrometer of
the material. The compound also exhibits remarkably stable long-term conversion
efficiencies. CIS typically contains copper, indium and selenium, with higher efficiencies
gained through the addition of gallium. The downside of this particular thin-film technique
is the use of indium, which is relatively limited in supply. Shell Solar has been a notable
proponent of CIS technology, though others are also in the early stages of development.
While potentially interesting for use in certain applications requiring high efficiencies (e.g.
space applications, concentrator systems), supply restrictions are likely to prevent CIS
becoming a significant proportion of long-term PV industry supply.
► Gallium Arsenide (GaAs): The technology has mainly been used for applications
requiring high-efficiency solar cells. While benefiting from a very high absorption rate and
low sensitivity to heat and radiation, cost has remained a significant headwind. Gallium
Arsenide produces some of the most efficient solar cells with efficiencies of up to 30%.
However, with Gallium being rarer than gold and Arsenic being poisonous, such
performance comes at a cost.
Solar module typical efficiencies
Type Module (%)
Crystalline silicon technologies

Monocrystalline (mono c-Si) 15-17
Polycrystalline (poly c-Si) 14-16
String ribbon 13
Thin-film technologies
Amorphous Silicon (aSi) 5-7
Amorphous with Microcrystalline Silicon (a-Si-µSi) 8-10
Cadmium Telluride (CdTe) 7-9
Copper Indium Diselenide (CIS) 9-10
Gallium Arsenide (GaAs) 25-30
Source: OE Magazine, EPIA, CSG Solar, DrKW Equity research
35
Silicon suppliers
Traditionally a highly cyclical Silicon is the second most plentiful element in the Earth’s crust, found in both quartz and
industry, silicon suppliers are
currently benefiting from the growth sand. Despite its abundance, silicon is both expensive (high energy costs) and complex
in the PV market and the recovery in to process. Metallurgical silicon, manufactured from quartz through a carbon thermal
the semiconductor sector
process, is purified to create either electronic grade (EG) or solar grade (SoG) silicon.
The former requires a greater level of purification than the latter.
While the solar industry has historically relied on top-and-tails and other off-cuts from the
semiconductor industry, a combination of the semiconductor industry’s recovery and the
solar industry’s growth is putting pressure on the availability of supply. As a result, silicon
manufacturers are currently in a strong position in the overall PV value chain.
► Elkem: As the world’s largest supplier of silicon metal, Elkem has a claim on 20% of the
world silicon market. In addition to owning a 23% stake in the vertically integrated
Norwegian solar manufacturer, Renewable Energy Corporation (REC), the company has
invested in its own solar grade silicon feedstock company, Elkem Solar. Originally
created in 2001 from a cooperation agreement with the now defunct AstroPower, Elkem
Solar is currently targeting full scale SoG silicon production from 2006. The company has
developed a simplified refining process for SoG silicon that it hopes will lower the energy
consumption in solar silicon production from 120-160kWh/kg (EG-silicon) to just 25-
30kWh/kg. If achieved, this would significantly reduce the cost associated with SoG
silicon production.
► Hemlock Semiconductor Corporation: A JV between Dow Corning (63.25%), Shin-

Etsu Handotai (24.5%) and Mitsubishi Materials (12.25%), Hemlock manufactures
polycrystalline silicon, predominantly for the semiconductor industry. The company’s
supply of silicon to the solar sector is actually expected to fall over the medium-term
(from 2000t to 1500t) as profitability is currently higher in its core semiconductor end-
market. However, the company does plan to begin lower-cost solar grade silicon
feedstock production by 2008.
► Joint Solar Silicon: See section on SolarWorld for details.
► Solar Grade Silicon (SGS): Established in August 2002, SGS is a 70:30 JV between the
Renewable Energy Corporation and Komatsu’s subsidiary, Advanced Silicon Materials
(ASiMI). SGS was created to solely supply SoG silicon to the PV industry. REC has
recently signed a letter of intent to acquire a 75% stake in ASiMI. Under the agreement,
the stake build will take place in September 2005. The company’s capacity in 2004 was
2100t, though this is expected to increase notably in the coming years. Although up to
now the traditional Siemens method of silicon production has been utilised, the company
is developing a fluidised bed technology in order to lower costs. Pilot production of 200t is
planned for the current year, with plans to increase capacity to 500t in 2006, 1500t in
2007 and 5000t by 2008.
► Tokuyama: As the world’s second largest polysilicon producer, Tokuyama currently

supplies off-cuts to the solar industry. The company has also been involved in SoG
silicon production research and has developed a new process (Vapour to Liquid
Deposition) specifically for the PV industry. Pilot production (200t) of the new SoG silicon
supply is scheduled for the end of 2005 with large-scale production pencilled in for 2008.
► Topsil: Danish Topsil is the largest manufacturer of float-zone (an alternative to the
more-common Czochralski method) silicon ingots for the semiconductor industry. In
2002, the company announced an intention to develop a PV-specific silicon supply. Full-
scale commercial production is scheduled to begin this year.
36
► Wacker Chemie: Given the growth in its home solar market, Wacker has been quick to
increase its supply of silicon to the PV industry. In addition to off-cuts, Wacker is currently
trialling a fluidised-bed process for SoG silicon production, with the first two pilot reactors
recently starting operation. The company believes that this method, which is scheduled
for commercial production in 2006, should cut costs by a third. Current capacity of 5000t
is expected to rise to 9000t by 2007.
Wafer manufacturers
Wafer manufacturing is a core high Required in the production of crystalline silicon PV cells, wafer manufacturers grow
value-added part of the crystalline
silicon PV production process ingots (both mono and polycrystalline) from silicon feedstock. For monocrystalline ingots
using the traditional Czochralski approach, the silicon feedstock is placed into a quartz
crucible, which is melted at high temperature. A seed crystal is then dipped into the
molten silicon and extracted under constant rotation. For the simpler production of
polycrystalline ingots, the silicon is melted in the crucible and then directionally solidified
in a carefully controlled thermal environment. Once the ingot has been produced, the
silicon is sawed into blocks and then wafers using specialised wire saws. Such a process
can waste up to half of the material in saw slurry. Key to cutting costs is the development
of thinner wafers, while maintaining structural strength.
Although both the emergence of thin-film technologies and an increased move to in-
sourcing suggests that independent wafer manufacturers are unlikely to experience the
same rate of long-term growth as the overall solar industry, it remains a high value added
part of the solar value chain.
PV wafer manufacturing market shares
Company %
Deutsche Solar 14
M.Setek 14
Kyocera 10
ScanWafer 10
BP Solar 9
PV Crystalox 8
Shell Solar 7
JFE Steel 4
Sanyo 4
SUMCO 4
RWE Schott Solar 3
Sharp 3
Other 10
Source: SolarWorld
► Deutsche Solar: See section on SolarWorld for details.

► M.Setek: M.Setek produces monocrystalline ingots and wafers and had a 2004
production capacity of 1260t/yr and 80MW, respectively. Given its strong domestic
presence in Japan, production capacity is slated to increase notably in the coming years.
► ScanWafer: Established in 1994, ScanWafer began manufacturing polycrystalline
silicon wafers at the end of 1997. The company, which is based in Norway, has been a
wholly owned subsidiary of the Renewable Energy Corporation since mid-2004 and as
such is benefiting from having access to silicon from its sister company, Solar Grade
Silicon. The production volume reached 78MW in 2003 and it processed product equal
to 128MW in 2004.
► PV Crystalox: In 1994, the UK silicon ingot manufacturer Crystalox separated from its
then owner, Elkem, via a MBO and in 1999 allied with the German wafer manufacturer,
PV Silicon. According to the company, sales surpassed €81m in 2003, a 15-fold
increase in just 5 years. Wafer capacity reached 185MW in 2004.
37
► JFE Steel: The Japanese conglomerate predominantly manufactures polycrystalline

ingots. Capacity of 500t/yr was targeted in 2004, increasing to 600t/yr in 2005.
► SUMCO Solar: A subsidiary of the Sumitomo Mitsubishi Silicon Corporation, SUMCO
Solar produces polycrystalline ingots and wafers. Capacity, according to a recent IEA
report, is currently around 30MW/year.
Solar cell manufacturers

Most conglomerates are located in Between 1995 and 2004, global solar cell production has increased by a CAGR of 34%.
the cell manufacturing stage
Of the top 25 cell manufacturers in 2004, based on production volume, 17 were domiciled
in the three key solar markets of Japan, Germany and the US (6 were Japanese
(including the top 2), 6 were German and 5 were American).
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
No. Company MW % MW % MW % MW % MW % MW % MW % MW % MW % MW % MW %
1 Sharp 2 2.9 4 5.2 5 5.6 11 8.4 14 9.0 30 14.9 50 17.5 74 18.9 123 21.9 198 26.4 324 25.8
2 Kyocera 6 7.9 6 7.9 9 10.3 15 12.2 25 15.8 30 15.1 42 14.6 54 13.8 60 10.7 72 9.6 105 8.4
3 BP Solar 6 8.8 7 9.3 8 9.5 11 9.0 13 8.7 15 7.2 42 14.5 54 13.9 67 11.9 69 9.2 85 6.8
4 Mitsubishi Electric 11 3.9 14 3.6 24 4.3 42 5.6 75 6.0
5 Q Cells 9 1.6 28 3.8 75 6.0
6 Shell Solar 14 19.5 17 22.2 17 19.2 22 17.5 20 12.9 24 12.0 30 10.2 48 12.2 56 9.9 62 8.3 72 5.7
7 Sanyo 6 7.9 5 6.6 5 5.2 5 3.7 6 4.1 13 6.5 15 5.2 16 4.1 30 5.3 35 4.7 65 5.2
8 RWE SCHOTT Solar 3 4.3 4 4.8 3 3.4 6 4.8 7 4.5 11 5.5 14 4.9 23 5.8 30 5.3 44 5.9 63 5.0
9 Isofoton 2 2.2 2 1.9 2 1.7 3 2.1 4 2.7 8 4.0 10 3.3 19 4.8 27 4.9 35 4.7 53 4.2
10 MoTech Solar 4 0.9 8 1.4 17 2.3 35 2.8
11 Suntech 8 1.1 35 2.8
12 Photowatt 2 2.6 2 2.6 3 2.8 6 4.5 12 7.7 10 5.0 13 4.4 14 3.5 17 3.0 17 2.3 29 2.3
13 Deutsche Cell 1 0.2 17 2.3 28 2.2
14 GE Energy 2 2.4 3 3.2 3 3.2 4 3.4 7 4.5 12 6.0 18 6.3 26 6.7 30 5.3 0 0.0 25 2.0
15 Kaneka Solartech 8 2.0 8 1.3 14 1.8 17 1.4
16 Ersol 9 1.6 9 1.2 16 1.3
17 United Solar 1 0.7 2 1.4 2 1.4 3 1.5 3 1.0 4 1.0 4 0.7 7 0.9 14 1.1
18 Sunways 5 0.9 7 0.9 11 0.9
19 Scancell 2 0.2 10 0.8
20 MHI 4 0.7 3 0.4 8 0.6
21 Photovoltech 1 0.1 8 0.6
22 Antec 2 0.3 5 0.7 8 0.6
23 Evergreen Solar 3 0.3 7 0.6
24 E-Ton Dynamics 2 0.2 8 0.6
25 Photon Semiconductor 1 0.1 6 0.5
Solarex 8 10.8 10 12.2 11 12.2 15 11.8 16 10.3 18 8.9
Other 21 30.7 19 24.2 23 26.1 27 21.1 28 18.3 27 13.5 41 14.2 34 8.8 50 8.8 54 7.2 75 6.0
Total MW 69 78 89 126 155 201 288 391 562 750 1256
YoY growth 12 14 42 23 30 43 36 44 34 67
Source: Photon International, P.Maycock - PV News
► Sharp: Sharp has led the market for solar cell production since overtaking Kyocera in
2000. Its market share has risen from just 3% in 1994 to 26% in 2004, with the company
recording average annual growth of more than 66% during this time period. Reflecting its
dominant position, Sharp’s production volume was over three times higher than its
closest peer in 2004. The company currently operates 5 manufacturing sites (3 in Japan,
1 in the UK and 1 in the US), with a combined production capacity of 400MW as at the
start of 2005. From a product perspective Sharp focuses on polycrystalline technology,
though it has limited monocrystalline silicon cell production and it has a small-scale pilot
production (10MW) of a tandem a-Si/c-Si thin-film cell. Sharp is focused on cell and
module manufacturing.
38
► Kyocera: Although still the second largest PV cell manufacturer in 2004, Kyocera
continues to lose market share (down from a peak of 15.8% in 1998 to 8.4% in 2004).
Kyocera is a highly vertically integrated polycrystalline solar cell manufacturer. While this
has its benefits (security of supply in particular), it may also be contributing to the
company’s slow growth profile due to the higher level of investment required. The
company has recently implemented a global supply strategy and now has local
production to supply all key markets. Facilities are in operation in Japan, China (through
a JV with Tianjin Yiqing Group), the Czech Republic and Mexico. After a period of
relatively low growth, Kyocera is planning to expand production to 240MW by mid-2005.
► BP Solar: Headquartered in the US, BP Solar operates production facilities in Australia

(33.1MW in 2004), Spain (23.5MW), India (14.1MW – through a JV with Tata Group) and
the US (14.2MW). The company became a significant player in the solar industry after
buying out its JV with Solarex in 2000. BP Solar operates a degree of vertical integration,
with part of its wafer supply manufactured in-house. After years of being loss-making, the
company announced that it turned profitable for the first time in 2004. From a technology
perspective, BP Solar is concentrating on traditional crystalline technologies and, to that
end, closed its thin-film factories in late 2002. Production capacity is expected to rise from
the current 90MW to 200MW by 2006.
► Mitsubishi Electric: After only initiating mass production in 2000, Mitsubishi Electric has
grown rapidly to become the fourth largest solar cell manufacturer. The current capacity
of 90MW is planned to rise to 135MW by the middle of 2005 and 230MW by 2006. The
company is exclusively focused on polycrystalline technology.
► Q-Cells: With production only initiated in 2002, the German-based Q-Cells has
aggressively expanded its crystalline silicon business. The company was the fastest
growing manufacturer in the top-ten in 2003 and second fastest in 2004 and is currently
the largest European PV cell manufacturer. Production capacity is targeted to rise from
170MW in 2004 to 290MW by the end of 2005. In support of its core crystalline cell
offering, Q-Cells has recently signed a JV agreement with Evergreen Solar (“EverQ
GmbH” - with Q-Cells holding a 24.9% stake), in order to set up a 30MW string ribbon
facility in Germany by mid-2006. The company also has a stake in CSG Solar, a start-up
PV company looking to commercialise its Crystalline Silicon on Glass technology.
Commercial production on a 12MW facility is schedule to begin by 2006.
► Shell Solar: The company was created in 2002, following Shell’s decision to buy out the
stake of its JV partners (Siemens and E.ON) in Siemens Solar. Operating a similar
business-model to its oil major peer, Shell Solar is active across the value chain from
wafer production to end consumer. The company manufactures both mono- and
polycrystalline cells and is currently developing a CIS thin-film product. According to the
company, its main aim is profitable growth and as such it is only looking to grow inline
with the market at best. Production capacity is expected to reach 110MW in 2005.
► Sanyo: The Japanese Sanyo was the largest manufacturer of thin-film PV cells in 2004.
The company’s main product is a Heterojunction with Intrinsic Thin Layer (HIT) solar cell.
The cell, which is made up of a single crystalline wafer surrounded by a-Si thin-film
layers, achieves a high module efficiency (14-15%) and better power output than
conventional modules in high-temperature conditions. After under-growing the market
since the mid-1990s (market share fell from 8% in 1994 to 5% in 2004), the company has
taken the decision to speed up expansion plans. 2004 production capacity of 88MW
(83MWp of HIT cells and 5MWp of a-Si cells), is expected to rise to 160MW by the end of
2005 (153MW HIT, 7MW a-Si).
39
► RWE SCHOTT Solar: A joint venture between RWE and SCHOTT Glas, RWE Schott
Solar is involved in the manufacture of crystalline silicon technology (wafers, cells and
modules), aSi thin-film cells and EFG ribbon cells. The latter accounted for 56% of the
company’s 2004 production volume. Production capacity is targeted to more than double
from 55MW at the start of 2004 to 133MW in 2005. To support expansion, production of
multicrystalline wafers is expected to rise from 25MW in 2004 to 30MW in 2005.
► Isofoton: As the second-largest independent cell manufacturer in 2004, the vertically

integrated Isofoton focuses on the production of crystalline solar cells as well as on
concentrator systems using high efficiency Galium Arsenide cells. The company, based
in Spain, had a capacity of 60MW in 2004, which is expected to increase to 90MW in
2005 with the opening of a new facility.
► MoTech Solar: The Taiwanese conglomerate MoTech Industries began mass production
of crystalline PV cells in late 2000 and has enjoyed strong growth. The 35MW produced
in 2004 was made up of 32.5MW of polycrystalline and 2.5MW of monocrystalline cells.
The company plans to increase production to 70MW in 2005 and is expanding production
capacity to as much as 300MW by 2006.
► Suntech: This Chinese-Australian JV is the largest domestic solar cell manufacturer in

China. From a technology perspective, the company manufactures crystalline silicon PV
cells, predominantly for export. Production capacity reached 50MW in 2004 and plans are
in place to expand this to 150MW by the end of 2005.
► Photowatt: Set up in 1979, this French vertically integrated polycrystalline silicon cell
manufacturer was acquired by the Canadian-based ATS Group (Automation Tooling
Systems) in 1997. In collaboration with another ATS subsidiary, Spheral Solar Power, the
company is developing an innovative flexible thin-film cell using silicon spheres.
► Deutsche Cell: See section on SolarWorld for details.
► GE Energy: GE acquired the US assets of AstroPower from bankruptcy in March 2004

for US$19m. It is as yet unclear how aggressively GE plans to expand the business – the
divisional head has, however, been quoted as saying that the solar division could
contribute US$1bn of sales by the end of the decade, implying 300-500MW of production
depending on assumed cost.
► Kaneka Solartech: As part of its industrial offering, the Japanese Kaneka established its
solar business in 1998. Capacity of its a-Si thin-film product was 25MW in 2004 and is
expected to reach 50MW in 2005. The company focuses on supplying the rooftop
application market.
► Ersol: Based in Germany and founded in 1997, Ersol is a manufacturer of both mono-
and polycrystalline solar cells. Since 2002, Ersol has been majority owned by the
renewable developer, Umweltkontor. Current production capacity is 25MW, which is
expected to rise to 60MW by the end of 2005.
► United Solar: The US-based company is a subsidiary of the renewable energy company,
Energy Conversion Devices (ECD). United Solar manufactures flexible a-Si thin film cells
with a current production capacity of 25MW. The company is looking to double capacity
by adding another production line in the near future.
► Sunways: Incorporated in 1993, Sunways is a listed German manufacturer of inverters

and polycrystalline silicon solar cells. The company produced just under 7MW in 2003
and has a current capacity of 10MW.
40
► Scancell: The Norwegian Scancell is the solar cell manufacturing subsidiary of the
Renewable Energy Corporation. Using wafers from its sister company, Scanwafer,
Scancell is focused on producing crystalline cells.
► Mitsubishi Heavy Industries: MHI began mass production of its a-Si product at the end
of 2001. Current production of 10MW is targeted to expand towards 30MW by the end of
2005.
Module manufacturers
Module manufacturing tends to be a According to Photon Magazine, 78 different manufacturers (including integrated cell
labour-intensive process. We see
limited long-term value-added here manufacturers) were producing modules in 2004. Of the top twenty-five module
producers, 11 are pure-plays in this area (though only two in the top ten). For those
manufacturers, the constrained supply of cells creates a reasonable short-term barrier to
entry if supply contracts can be obtained. Whether this barrier to entry remains in place
longer-term is, however, debatable.
Module production (MWp)
No. Company Country MW 2004
1 Sharp Japan 310

2 Kyocera Japan 106
3 BP Solar US 76
4 MSK Japan 75
5 Mitsubishi Electric Japan 75
6 Shell Solar US 72
7 Sanyo Japan 57
8 Isofoton Spain 41
9 Solon Germany 35
10 RWE SCHOTT Solar Germany 32
11 Suntech Power China 32
12 Solar World (Solar Factory/GPV) Germany 31
13 SMD (Aleo Solar) Germany 28
14 Photowatt France 28
15 Total Energie France/South Africa 27
16 Solarwatt Germany 21
17 GE Energy US 18
18 Solar-Fabrik Germany 17
19 Kaneka Japan 17
20 United Solar US 14
21 Scheuten Germany 12
22 Solara Germany 10
23 Shanghai Solar China 10
24 Sun Tech Solar China 10
25 Jumao China 9
Source: Photon International, DrKW Equity research (Those pure-play module manufacturers are shaded)
► MSK: This Japanese company has been specialising in PV module manufacturing since
1984. At the end of 2004, the company announced the opening of a new facility, bringing
its total capacity up to 180MW. The next target is to expand to 250MW. MSK has a
domestic distribution agreement with BP Solar.
► Solon: As a German listed module manufacturer, Solon produces both standard PV

modules and tracking systems. Production capacity reached 30MW in 2004 and is
targeted to expand to 90MW in 2005.
► Solar-Manufaktur Deutschland: Selling under the Aleo Solar brand, SMD began
module production in mid-2003 with a 13MW capacity. In 2004, 28MW was produced and
plans are in place for this to rise to 55MW in 2005.
► Total Energie: The French company, a JV between EDF and Total, has a subsidiary in
South Africa producing PV modules for exportation. The company’s current production
capacity is 35MW.
41
► Solarwatt: The German company has grown from a 2-person business in 1993 to a
workforce of 262 by 2004. Production capacity in 2004 reached 22MW with its fourth
production line opened. The company is targeting sales to almost double, from €75m in
2004 to €140m in 2005.
► Solar Fabrik: Established in Germany in 1996, the listed Solar-Fabrik produces and sells
solar modules and inverters for solar applications. By the end of 2004, production
capacity reached 20MW.
Systems Integrators
Low capital intensity allows systems The final stage of the PV value chain is the systems integrators, who source and
integrators to grow rapidly. Long-
term, however, the lack of barriers to distribute the various components and oversee a solar project’s implementation. Such
entry may pressure industry margins companies require lower levels of capital employed than companies positioned further up
the value chain, which reduces the level of funding needed to match industry growth.
As with the module manufacturers, the barriers to entry in this area are currently
reasonably high as supply of cells is constrained. As a result, those companies with
supply contracts are benefiting. Longer-term, however, we question whether this area will
enjoy the same barriers to entry as the industry matures and the supply imbalance is
corrected.
Companies mentioned in this report
Company Currency Share price
ATS Group C$ 14.8

BP GBp 629.0
Corning US$ 18.2
Degussa € 34.4
Dow Chemical US$ 48.1
E.ON € 74.3
ECD US$ 23.0
Evergreen Solar US$ 6.5
General Electric US$ 35.3
Kaneka Yen 1304.0
Komatsu Yen 947.0
Kyocera Yen 8590.0
Mitsubishi Electric Yen 603.0
Mitsubishi Heavy Industries Yen 287.0
Mitsubishi Materials Yen 272.0
MoTech Solar TWD 488.0
RWE € 53.6
Sanyo Yen 291.0
Sharp Yen 1738.0
Shell GBp 1838.0
Shin-Etsu Handotai Yen 4340.0
Siemens € 64.3
Solar Fabrik € 10.2
Solon € 27.0
Sumitomo Yen 199.0
Sunways € 13.7
Tata Group INR 192.0
Umweltkontor € 0.1
Vestas DKK 101.3
42
Disclosure appendix
Disclosures under US regulations
The relevant research analyst(s), as named on the front cover of this report, certify that (a) all of the views expressed in
this research report accurately reflect their personal views about the securities and companies mentioned in this report;
and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
views expressed by them contained in this report.
Any forecasts or price targets shown for companies and/or securities discussed in this report may not be achieved due to
multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of
complete and accurate information and/or the subsequent transpiration that underlying assumptions made by DrKW or by
other sources relied upon in the report were inapposite.
Recommendation history charts

Past performance is not an indicator of future performance.
Dresdner Kleinwort Wasserstein Research – Recommendation definition

(Except as otherwise noted, expected performance over next 12 months)
Buy: 10% or greater increase in share price Sell: 10% or more decrease in share price
Add: 5-10% increase in share price Reduce: 5-10% decrease in share price
Hold: +5%/-5% variation in share price
Distribution of DrKW Equity recommendations as of 30 Jun 2005

All covered companies Companies where a DrKW company has provided
investment banking services (in the last 12 months)
Buy/Add 270 47% 43 54%

Hold 212 37% 27 34%
Sell/Reduce 92 16% 9 11%
Total 574 79
Source: DrKW
Additional disclosures under other non-US regulations

The disclosures under US regulations above should be read together with these additional disclosures.
Recipients should note that DrKW may have submitted a draft of this report (with recommendation/rating, price
target/spread and summary of conclusions removed) to the relevant issuer(s) for factual review and that amendments
may have been made following that review.
In respect of any compendium report covering six or more listed companies, please refer to the following website for all
relevant disclosures: www.drkwresearch.com/disclosures/
Unless otherwise noted, the securities mentioned in this report are priced as of 19 July 2005 at 4:30pm. Time given is
local to the address shown at the bottom of the first page of this report.
Disclaimer
This report has been prepared by Dresdner Kleinwort Wasserstein, by the specific legal entity named on the cover or
inside cover page.
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DrKW Equity research

Renewable Energy | Germany

► Stock picks: We initiate on SolarWorld, a vertically integrated PV manufacturer, with a

Solar industry overview

Industry growth drivers

Risks to industry growth

Barring a significant decline in political support, we do not expect demand to be the

Equity opportunities – Solar vs. Wind

Solar industry overview

Annual installations of solar power (MWp)

Germany Japan USA Total

Source: IEA, DrKW Equity research

Annual PV installations by application in selected IEA countries

Source: IEA, DrKW Equity research

► Potential for market growth: The government is targeting 4.8GW of PV capacity by

US state-wide support for PV (as at the start of 2005)

Austria No specific PV programme at present

Rest of the World

Industry growth drivers

Rising political support

Australia 108 Austria -13

Annual CO2-savings from investments of €5bn

Reduction Mn tOO 2/a

System design and

Source: United Nations Environment Programme

System lifetime (years) 25

Sun hours per year

Cost per kW/h (€)

From a technology perspective, an increase in cell size, a reduction in the thickness of a

► A typical crystalline solar module currently achieves an efficiency of 14-17%, compared

Competitiveness is application dependent

► Centralised grid-connected applications: For the foreseeable future, solar power is

► Distributed grid-connected applications: In our view, the most interesting medium-term

Solar power curve vs. spot electricity prices

Source: Fraunhofer Institute

A selection of residential electricity prices

Change in the US power industry’s long-term gas price assumption

US residential electricity price (US cents/kWh)

Utility peak power (lower-end) Utility peak power (upper-end)

Source: RWE Energie AG, DrKW Equity research estimates

Risks to industry growth

Changing political support

Geographic diversification of the industry and technological improvements should

During a period of semiconductor industry weakness at the start of the decade, an

Interest rate rises

Solar vs. Wind

Balance sheet risk

Relative pricing power

PV industry investment criteria

► Module manufacturers: As with wafer manufacturers, module manufacturers are

Vertical integration or specialisation?

1 Sharp Focused 74 324 338%

Investment options are currently limited

With relative size likely to be an increasingly important competitive advantage, as

► High value-added production processes: Although we question the long-term value-

► Technological change: Through a highly vertically integrated business model,

► Deutsche Cell: Deutsche Cell is the cell-manufacturing subsidiary of SolarWorld. The

► GPV/Solar Factory: As mentioned earlier in this report, module manufacturing tends to

EBIT margin by division (%)

Sales 51 82 109 98 200 305 454 589 729 900 1,110

Change in inventories of finished goods 3 2 3 26 (15)

Operating cash flow (pre WC) 7 13 24 48 88 102 93 102 111 124

Cash flow statement