GT Solar Not Immune to Solar Cycles

• The Company: GT Solar International, a global provider of ingot casting furnaces and solar-grade silicon reactors.
• The Filing: Form S-1/A Registration Statement filed on July 23 with the SEC.
• The Finding: GT Solar Holdings, LLC, sold 30.3 million shares of its stake in GT Solar International at a price of $16.50 per share, leaving the investment entity with a 78.3 percent controlling interest after the initial public offering. The solar-cell equipment supplier lost about 30 percent in market value in its first two days as a public company, suggesting the heretofore unthinkable -- the growth outlook for solar fabrication makers might be powering down.

In addition, traditional manufacturers, such as Hemlock Semiconductor, Applied Materials, and MEMC Electronic Materials, are repositioning polysilicon production from semiconductor to solar applications.

Approximately $2 billion of 2007 total capital expenditures were spent on new polysilicon production capacity.

A limitation of investments in the main segment (wafer based solar cells) resulted in the much talked about silicon (raw material) shortages. As a result of the supply imbalance, pricing for polysilicon increased from $28 per kilogram for long-term contracts at the end of 2004 to $60 to $65 per kilogram for long-term contracts in 2008 and as much as $400 per kilogram on the spot market during 2008.

The explosion of new entrants combined with able monies being spent to ease the supply crunch is benefitting GT Solar, which had a backlog of approximately $1.3 billion in signed purchase orders for its feedstock and high volume polysicon equipment, as of March 31, 2008.

After relatively long lead times of two to three years, new plants are finally coming online, which will bring demand imbalance back in equalibrium with supply. Solarbuzz estimates -- at the low end of its forecasts and excluding emerging technologies (such as thin-film manufacturing) -- more than 130,000 metric tons in additional capacity will be added by existing producers and new entrants from 2007 to 2012.

And, as the supply shortage will likely to be resolved or materially reduced after 2009, pricing power will shift downstream to the solar module makers, such as SunPower and Trina Solar, dampening demand for further factory build-outs.

Excess in production capacity for polysilicon could adversely affect demand for the equipment for sale by vendors like GT Solar, forcing them to cut fabrication equipment margins to stay competitive.

Like many of its equipment peers, the growth strategy of GT Solar is dependent on the continued dominance of silicon-based wafer and the company's ability to leverage its installed user base to increase sales of other products, parts, and upgrades.

However, GT Solar currently depends on a small number of customers in any given fiscal year for a substantial part of its sales and revenue. During the fiscal year ended March 31, 2008, one customer, LDK Solar, accounted for 62% of total revenue.

The Question: Does a photovoltaic-dependent business plan that ignores the reality of competetive, material-saving technologies, an eventual glut in silicon supply and/or softening in silicon prices expose fabrication vendors to a previous unheard of cyclicity in solar equipment sales?