A leading provider of semiconductor and solar chips, MEMC Electronic Materials Inc. (WFR) recently announced the extension of an agreement with the Electronics Manufacturing Services (EMS) provider Flextronics International Ltd. (FLEX). Under the extended agreement, MEMC Singapore and Flextronics will combine forces to fabricate solar panels for SunEdison, a subsidiary of MEMC. Financial terms of the deal were not disclosed.

The initial agreement, signed in December 2010, entailed production of MEMC-branded panels in the Flextronics’ Ontario facility. Each panel had an annual capacity of 50 megawatts. The panels also met a portion of the local demand emerging from Ontario’s Feed-in Tariff Program. Now, solar panels will be produced from Flextronics’ Malaysia facility, with a yearly capacity of 270 megawatts.

The solar solutions portfolio of Flextronics is a significant competitive differentiator that supports solar OEMs (original equipment manufacturers). The solar panels will facilitate SunEdison to meet the growing demand for solar energy, as can be inferred from the increasing PV project pipeline.

We believe that MEMC will benefit from this solar panel outsourcing deal, as solar modules/panels produced in the low-cost Malaysian facility will definitely be cheaper. Moreover, Flextronics’ facility supports 1 gigawatt of module production, which in turn would allow it to obtain economies of scale.

MEMC’s solar initiatives are encouraging and we remain positive on the recent 50-50 joint venture between the company and JA Solar Holdings Co. Ltd. (JASO). The two companies have agreed to build and operate a solar cell production facility in China.

Though the company’s solar prospects seem bright, given the Solaicx integration and pipeline solar projects, the analysts foresee an oversupply situation in the polysilicon market. This could pull down ASPs as well as margins. Moreover, there is the risk of reduction in feed-in-tariffs, which could affect solar deployment.

Currently, MEMC has a Zacks #3 Rank, which indicates a short-term Hold recommendation.

FLEXTRONIC INTL (FLEX): Free Stock Analysis Report
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MEMC ELEC MATRL (WFR): Free Stock Analysis Report
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