Price Performance 3YR (USD) - ValueWalk - Breaking News ...€¦ · loans [MyPower loans have no...

Equity Research

Alternative Energy – Market Underweight May 4, 2016

DO NOT REDISTRIBUTE and DO NOT FORWARD – This document is solely limited to clients of Axiom Capital Management. DISCLOSURES: Please refer to the end of this report for Analyst Certifications,

Important Disclosures, and Other Disclosures.

Gordon L. Johnson II Senior Analyst/MD

212-521-3811

[email protected]

James A. Bardowski Senior Associate/VP

212-521-3852

[email protected]

Source: Axiom Capital Research, Bloomberg

Fundamental Data

Price Target $7

Current Price $26.45

52 Wk Hi-Low $64-$16

Market Cap. ($MM)

Shares Out (MM) 103

Float (MM) 64

Avg. Daily Vol ('000) 6,300

Exchange NASDAQ

ROE (2016E) -12.4%

Debt-to-Capital (current) 60.9%

Dividend Yield (annualized) NA

Price Performance YTD LTM

SCTY -48.2% -57.1%

S&P 500 1.0% -2.1%

Price Performance 3YR (USD)

$2,723

$0

$20

$40

$60

$80

$100

2013 2014 2015 2016

The Good, the Bad, & the Ugly. In a widely anticipated move (evidenced by the recent outperformance of SCTY’s shrs), yesterday SCTY announced its first-ever cash equity deal w/ John Hancock Financial (“JHF”). Under the terms of the deal, SCTY will sell 95% of the cash flows generated from a portfolio of 201MW of residential & commercial solar projects to JHF over the next 20yrs. The Good: in return for the cash flows, SCTY will receive $227mn in upfront equity, while retaining a 5% minority interest over 20yrs; including tax equity investments + upfront rebates/prepayments, this transaction will raise $3.00/W in total financing (or ~$603mn), & reflects a blend of $2.35/W for commercial projects & $3.24/W for residential projects; the IRR is ~8.2%; the majority of the installations were completed in ’15; the projects are spread over 18 states, w/ no single state comprising >35% of the portfolio; & the avg. FICO score for the residential customers is 744. The Bad: when looking at just the cash equity proceeds from this deal ($227mn) – while we recognize an additional $376mn in cash, ~$346mn of which is tax-equity (“TE”), has already been received, while, technically, TE is available for general corp. purposes, given it’s largely been spent to offset the CAPEX of the systems themselves (meaning, in reality, it is not available), we feel the relevant metric to analyze is the cash equity received, or the cash available for new project investment/debt retirement – adjusting for SCTY’s 5% ownership, a more normalized ≥50% mix of SREC’s from CA, and then applying these metrics to SCTY’s existing installed base of 1.67GW (i.e., 1.8GW of cum. deployed GWs - 177MW of MyPower loans [MyPower loans have no tax equity]), adjusted for debt, the Silevo earn out, unrestricted cash, the book value of MyPower, the full renewal value, & a 35% tax rate, we derive a fair value for SCTY’s PowerCo of just $0.71/shr (Ex. 6). The Ugly: $2.71/W in costs (Ex. 7) - $1.38/W in tax equity (Ex. 8) - $0.07/W in rebates/repayments (Ex. 9) = $1.25/W in funding needs; yet cash equity proceeds from JHF were just $1.18/W, meaning SCTY sold at a loss. Caveat emptor.

Dark Clouds Ahead? We believe a mild bookings trend borne out of SCTY’s decision to leave NV, & withdraw MyPower, will compel an annual guidance cut when the company reports earnings next week.

SOLARCITY CORP. (SCTY – $26.45 – SELL)

Is The Entire Sell-Side Incorrectly Giving SCTY Credit For Cash It Can’t Access?

Note: (1) In accordance with SCTY reporting, non-GAAP EPS are based on consolidated net income. Source: Axiom Capital Research, company filings, Bloomberg

EPS (Non-GAAP1) 2014 2015 Prior 2016E Prior 2017E

1Q ($0.82) ($1.52) ($2.38) ($2.49) UR ($2.44)

2Q ($0.96) ($1.61) ($1.97) ($2.37) UR ($1.82)

3Q ($0.71) ($2.41) ($1.53) ($2.29) UR ($2.00)

4Q ($1.52) ($2.25) ($1.43) ($2.64) UR ($2.51)

FY (Dec.) ($4.05) ($7.91) ($7.30) ($9.79) UR ($8.77)

Consensus ($7.37) ($9.13) ($8.32) ($8.60)

mailto:[email protected]

mailto:[email protected]

SolarCity Corp.

May 4, 2016

Axiomcapital.com DO NOT FORWARD (please help us protect your edge) of 14

Investment Conclusion

SolarCity’s share price has traded down 48.2% YTD, underperforming our custom weighted-average Axiom

Module/Cell OEM Index (i.e., JASO, TSL, YGE, JKS, CSIQ, CSUN, HQCL, SCTY, FSLR, SPWR, Neo Solar,

Motech, Gintech, and E-Ton), which is down 31.0% YTD, and our custom Axiom Polysilicon OEM Index (GCL,

WCH, DQ, REC, OCI, SOL, Sino-Am, and TBEA), which is up 5.4% YTD. Furthermore, along the same YTD

timeframe, SCTY has underperformed our Axiom PV OEM Index (MBTN and ASYS), which is down 35.0%

YTD, while the broader market index (as measured by the S&P 500) has returned 1.0% YTD. See Exhibit 3

below for recent share price performance and Axiom’s ratings for the stocks that make up our custom indexes.

The Good – a Nice Deal… on the Surface. There are a number of anecdotal positives associated with this

deal, to include: (a) it is with a respected counterparty in John Hancock Financial (“JHF”), (b) SCTY is retaining

5% of the cash flows generated from the portfolio of 201MW of residential and commercial solar project cash

flows to JHF over the next 20 years, (c) SCTY is receiving $227mn in upfront cash equity, (d) including tax

equity investments and upfront rebates/prepayments, this transaction will raise $3.00/W in total financing, or

roughly $603mn, (e) this transaction reflects a blend of $2.35/W for commercial projects and $3.24/W for

residential projects, (f) the internal rate of return (“IRR”) on the portfolio is approximately 8.2%, (g) the majority

of the installations were completed in 2015 (suggesting little risk of cherry-picked projects), (h) the projects are

spread over 18 states, with no single state comprising over 35% of the portfolio (meaning California, or the

highest margin state, was not the majority of the portfolio), and (i) the average FICO score for the residential

customers is 744 (in line with the average score for SCTY’s aggregate portfolio of projects).

Yet, and addressing among the key bear points emboldening many of the shorts in this stock, this deal

suggests, at face value, SCTY has resolved the inability to raise capital, through third-party cash-equity and tax-

equity financing, in excess of its current cost (i.e., $3.00/W in total capital raised versus its current cost/W of

$2.71). Stated differently, this implies SCTY has a clear path to generating free-cash-flow to fund growth.

The Bad – a Fundamental Flaw in the Anecdotal Thesis; and Why We Feel the PowerCo is Far Less

Valuable than Previously Assumed. While many of our peers are raving about the $3.00/W in third-party

capital this deal was able to garner, compared to SCTY’s most recent cost structure of $2.71/W, we find two

major flaws with this argument. More specifically: (1) we contend the approximately $346mn in cash tax-equity

associated with this deal is not available to fund growth, or retire debt, as this cash has already largely been

spent to offset the CAPEX of the systems themselves (we believe this represents a general misunderstanding

of how solar tax-equity works versus upfront cash equity injections), and (2) SCTY’s $2.71/W in reported

C4Q15 cost is likely artificially low due to SG&A that was delayed into C1Q16 – we remind our readers that

SCTY originally guided C4Q15 GAAP OPEX to $245mn to $260mn (or $252.5mn at the mid-point), but

ultimately reported $227mn, with S&M well below our estimates (Exhibit 1); while we contend this optically

helped their cost structure look good in C4Q15, we believe the company is now having to reverse these cuts,

likely pushing costs the wrong way in C1Q16.

SolarCity Corp.

May 4, 2016


Valuing the PowerCo. To value the PowerCo, using the JHF as the basis, we note the following assumptions

(in no particular order) – see Exhibit 6 below for buildout:

SCTY has virtually no net-operating-loss-carryforwards (“NOLs”), implying the need to factor in some tax

liability (in Exhibit 6 below, we show the impact with a 35% tax rate and without);

101mn in shares are outstanding;

There are up to $150mn in Silevo earn-out payments due;

The residential/commercial split is 73%/27%;

SCTY’s total current installed base is 1,670MW (or 1,847MW – 177MW in MyPower loans);

$1.5bn in recourse debt outstanding;

$1.2bn in non-recourse debt outstanding;

$150mn in Silevo earn-out payments due;

$394mn in restricted cash;

Exhibit 1: SCTY Guidance 4Q15 and 2016

Source: SCTY C3Q15 Earnings Presentation – Page 10, Axiom Capital research.

Polysilicon >40 players

Ingot/Wafer ~50 players

Cells ~100

players

Module ~ 400

players

System > 5,000

players



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


$251mn book value for MyPower loans (we assume the book value of MyPower as a credit in our valuation

framework – we do not believe SCTY can sell these assets under similar economics as those sold in the

JHF transaction as there is no associated tax equity [the math is much different]); and

$540mn in full renewal value – $782M was the unlevered retained value as of C4Q15 for the renewal

period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not their numbers and

not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to

$540 million untaxed, or $5.3/share.

Summary. When adding it all up, the full value of SCTY’s PowerCo today, using yesterday’s JHF deal as a

precedent, is $111mn (or $1.10/share) excluding taxes, or $72mn (or $0.71/share) including taxes. Under this

backdrop, we remind our readers that when we first initiated coverage on SCTY 10/19/15, we were valuing the

company’s PowerCo and DevCo at $14/share and $9.9/share, respectively, versus our current approach of

valuing the company using a peer group of specialty financial companies. In this fashion, as the lion’s share of

our peers begin to look at the value of this deal using just the cash equity portion – if SCTY had received full

proceeds the company would have reported $3.00/W × 201MW, or $603mn, but that's not the case, and thus

proceeds of $227mn were reported – we believe the lack of value in the PowerCo, and by default DevCo, will

begin to crystalize in the way the Street views the longer-term valuation for this company.

The Ugly – Looking at this from the Most Simplistic of Viewpoints, it Appears SCTY Sold these Cash

Flows at a Loss. While SCTY provides a bevy of financial definitions, some of which we believe continue to

confound our peers on the Street (i.e., tax equity, and its use as a form of upfront cash) as was the case with

SUNE, in the most simplistic way we know how, we attempt to show readers in this section a back-of-the-

envelope approach to figuring out if SCTY made money on the deal with JHF, or lost money. That is, taking

SCTY’s most recently reported cost/W of $2.71 (Exhibit 7) - $1.38/W in tax equity (Exhibit 8) - $0.07/W in

rebates/repayments (Exhibit 9), one can calculate SCTY’s funding needs of $1.25/W. Yet, with cash equity

proceeds from the sale of 201MW of project cash flows to JHF for just $1.18/W, in the most simplistic of terms,

SCTY sold the portfolio to JHF at a loss.

Conclusion. Overall, yesterday, for all intents and purposes, SCTY got an investment from JHF – it was not a

project sale. SCTY retained ownership but, sold off 95% of their cash flows. In our view, what Consensus

appears to have missed in all of this, in addition to the fact that the tax-equity cash flows are not available for

immediate redeployment for growth/debt pay down, is that SCTY sold the cash flows, but kept the debt (this is

not sustainable). While SCTY could indeed use the proceeds from the sale to reduce their growing debt

obligation, they are likely going to use them to grow their installed base.

Stepping back, we ask our readers… would you do this? That is, would you ramp up leverage, in return for

growth, at the expense of negative free cash flows? We don’t think so as it is value destructive (no matter what

SCTY says), and is being done, we believe, to show investors growth at any cost (and, as this deal shows, it is

costing dearly). As this becomes more broadly understood, we expect the shares to come under intense

pressure.

SolarCity Corp.

May 4, 2016


Updated estimates? Based on our updated model, in which we give credit to SCTY for total solar installations

of 1.10GW in 2016, versus guidance of 1.25GW, our 2016 revenue/adjusted EPS estimates adjust to

$665.4mn/-$9.79, from $850.6mn/-$7.30 previously (Consensus estimates of $618.1mn/-$9.13). In addition, we

introduce our 2017 revenue/adjusted EPS estimates, on 1.08GW of total solar installations, of $870.2mn/-$8.77

(Consensus estimates of $942.6mn/-$8.60). Of note, SCTY recently shelved its MyPower loan product and

concurrently confirmed that MyPower will be replaced with another, more superior loan product, yet this product

has not been unveiled; for this reason, our model assumes a greater reliance on leases. See Exhibit 10 below

for our SCTY consolidated pro forma statement of operations.

Valuation. As we see it, at its core, SCTY is an originator/aggregator and servicer of residential solar leases

and PPAs, or a middle man, if you will, in providing homeowners with “solar loans”, allowing consumers, who

otherwise couldn’t afford it, the benefits of having a solar system installed on the rooftop (i.e., lower immediate

energy costs, due mainly to government incentives [i.e., investment tax credit (“ITC”)] and favorable caveats

[i.e., net metering]). By this thinking, we would go so far as to postulate that SCTY is more of a “bank” than a

solar company. However, unlike a bank, which benefits when rates go up by issuing more loans at higher rates,

should SCTY attempt to raise its rates to customers, customer spreads would shrink, materially tarnishing

SCTY’s value proposition – stated differently, we view SCTY as a de facto bank, with all the risks, but none of

the benefits.

In this fashion, as investors move to valuing SCTY as a specialty finance company, which we expect to define

2016, versus what many have historically seen as a high-growth solar vendor, we expect its valuation to move

closer to that of its specialty finance (mortgage) peers.

Thus, looking to Exhibit 2 below, observing SCTY’s specialty finance/mortgage peer group average P/B

multiple of about 0.9x (unchanged from our prior note), which is notably skewed higher by SolarCity’s multiple,

we believe the company’s fair value at present is $7/share (74% downside from yesterday’s closing price),

unchanged from our prior valuation.

Exhibit 2: SCTY P/B Build vs. Specialty Finance (Mortgage) Vendors

Note: Averages include SCTY.

Source: Company documents, Axiom Capital research.



Cells ~100

players

Module ~ 400

players

System > 5,000

players

Price ($) BV/Shr P/B

SolarCity $26.45 $8.53 3.1x

Ellington Financial LLC $16.91 $22.10 0.8x

Ocwen Fincl. Corp. $2.09 $5.95 0.4x

PennyMac Mortgage Invst. Trust $13.17 $20.28 0.6x

PHH Corp. $12.21 $23.96 0.5x

Stonegate Mortgage Corp. $5.60 $10.14 0.6x

Walter Investment Mgmt. Corp. $5.26 $17.74 0.3x

Average $15.80 0.9x



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 3: Recent Stock Performance – Solar

Note: Subgroup averages are weighted based on current market cap; stocks under our coverage are averaged using an equal-weighting.

Note: (*) For comparison, non-US share prices and market caps are converted to USD.

Note: (**) The benchmark S&P 500 market is based on free-floating shares.

Source: Company data, Bloomberg Consensus estimates, Axiom Capital Research.



Cells ~100

players

Module ~ 400

players

System > 5,000

players

Share Price Market Cap Performance (%)

Peer Group Axiom

Company Rating 5/3/2016 ($MM) 1Day 1Mo 3Mo YTD 6Mo 1YR

MODULE/CELL VENDORS

JASO JA Solar Holdings Co Ltd Sell $ 8.40 $400 -1.9% -2.8% -3.8% -13.4% -3.9% -18.8%

TSL Trina Solar Ltd Sell $ 9.01 $833 -5.0% -9.2% -5.1% -18.2% -14.4% -27.9%

YGE Yingli Green Energy Holding Co Sell $ 3.07 $56 -14.7% -33.3% -31.5% -32.2% -59.0% -83.8%

JKS JinkoSolar Holding Co Ltd NC $ 21.04 $660 -6.1% 4.2% 6.4% -24.0% -21.6% -26.9%

CSIQ Canadian Solar Inc NC $ 16.57 $952 -5.4% -12.8% -13.7% -42.8% -28.7% -54.3%

CSUN China Sunergy Co Ltd NC $ 0.21 $3 0.0% -23.6% -73.6% -80.9% -83.1% -88.6%

HQCL Hanwha Q CELLS Co Ltd NC $ 12.52 $1,052 -0.6% -16.7% -26.4% -42.9% -29.6% -48.3%

SCTY SolarCity Corp Sell $ 26.45 $2,600 -10.5% 8.9% -15.7% -48.2% -12.3% -57.1%

FSLR First Solar Inc NC $ 52.85 $5,404 -3.6% -21.7% -20.5% -19.9% -9.4% -7.8%

SPWR SunPower Corp NC $ 18.33 $2,507 -5.6% -18.5% -26.3% -38.9% -33.3% -42.8%

3576 TT* Neo Solar Power Corp Hold $ 0.53 $539 -1.2% -16.6% -16.5% -27.3% -20.3% -35.1%

6244 TT* Motech Industries Inc NC $ 0.98 $530 4.3% -13.0% -17.2% -29.0% -28.6% -18.5%

3514 TT* Gintech Energy Corp NC $ 0.71 $317 3.6% -9.2% -24.6% -28.9% -8.1% 18.8%

3452 TT* E-Ton Solar Tech Co Ltd NC $0.31 $241 -0.5% -9.9% -11.5% -19.4% -20.0% -38.1%

Subgroup: Value-Wgtd Avg -4.6% -12.4% -18.1% -31.0% -18.0% -30.2%

Covered Companies' Equal-Wgtd Avg -6.6% -10.6% -14.5% -27.9% -22.0% -44.5%

PV EQUIPMENT VENDORS

MBTN* Meyer Burger Technology AG Buy $4.07 $369 -7.4% 6.6% -29.5% -35.0% -45.1% -39.6%

ASYS Amtech Systems Inc NC $5.65 $74 -6.8% -7.5% 3.9% -9.7% 6.8% -54.5%

Subgroup: Value-Wgtd Avg -7.3% 4.2% -23.9% -30.8% -36.4% -42.1%

Covered Companies' Equal-Wgtd Avg -7.4% 6.6% -29.5% -35.0% -45.1% -39.6%

POLYSILICON VENDORS

3800 HK* GCL-Poly Energy Holdings Ltd Sell $0.15 $2,706 -2.6% -11.7% 10.8% -2.6% -28.9% -47.9%

WCH* Wacker Chemie AG NC $97.56 $5,088 0.9% 10.7% 40.3% 9.2% 2.3% -24.3%

DQ Daqo New Energy Corp NC $24.69 $258 0.1% 32.7% 56.1% 48.3% 51.1% -9.0%

REC* REC Silicon ASA NC $0.22 $561 1.9% 28.7% 51.3% -0.4% 19.1% -15.4%

010060 KS* OCI Co Ltd NC $107.02 $2,552 6.5% 21.8% 78.3% 64.0% 44.2% 21.8%

SOL ReneSola Ltd NC $1.26 $128 -3.8% -10.6% -12.5% -25.9% -10.0% -25.4%

5483 TT* Sino-American Silicon Products NC $1.09 $634 2.8% -1.1% -12.9% -24.4% -13.5% -17.4%

600089 CH* TBEA Co Ltd NC $1.38 $4,469 2.5% -1.7% 2.8% -24.0% -26.3% -50.3%Subgroup: Value-Wgtd Avg 1.7% 5.7% 29.2% 5.4% -3.5% -27.3%

Covered Companies' Equal-Wgtd Avg -2.6% -11.7% 10.8% -2.6% -28.9% -47.9%

S&P 500** $2,063 $17,829,058 -0.9% -0.5% 7.9% 1.0% -2.2% -2.1%



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 4: SCTY Installation Guidance for 1Q16 and 2016

Source: Page 12 of SCTY C4Q15 Earnings Presentation.



Cells ~100

players

Module ~ 400

players

System > 5,000

players



Cells ~100

players

Module ~ 400

players

System > 5,000

players

Exhibit 5: Required Funding to Meet SCTY’s 2016 Installation Guidance

Note: (1) SCTY has guided 180MW in 1Q16 installations; we assume linear installations for the remainder.

Note: (2) SCTY has raised ~$250mn from its latest ABS issuance and MyPower loans for 1Q16 installations; we apply this to 1Q/2Q16 installations.

Note: We assume a linear decrease in SCTY's development costs during 2016, from a reported $2.71/watt exiting 2015 to $2.50/watt exiting 2016.

Note: Tax equity is estimated from SCTY's 4Q15 financials and assumed to carry unchanged.

Source: Company data, Axiom Capital research.



Cells ~100

players

Module ~ 400

players

System > 5,000

players

1Q16 2Q16 3Q16 4Q16 2016

Installations (MW)1

180 357 357 357 1,250

Dev costs ($/watt) $2.66 $2.61 $2.55 $2.50 $2.57

Tax equity ($/watt) $1.66 $1.66 $1.66 $1.66 $1.66

Net dev costs $1.00 $0.95 $0.90 $0.84 $0.91

Total costs ($MM) $180.2 $338.4 $319.7 $301.0 $1,139.3

Secured debt financing ($MM)2

$180.2 $69.8 $0.0 $0.0 $250.0

Cash equity required ($MM) $0.0 $268.7 $319.7 $301.0 $889.3



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 6: John Hancock Cash Equity Sale Implications for SCTY PowerCo Value

¹ Installed base is calculated by taking deployed MWs less 177MW in MyPower loans (we include a book value for MyPower as a credit, but exclude it from the

deployed base as we don't think they can sell these under the same economics – there is no tax equity, thus the math is different.

² We adjust the residential value slightly lower to reflect the fact that we are applying a value to the entire portfolio, yet don’t know where interest rates are

going (SCTY talked about a 4.5% blended cost of debt 4 months ago – rates have barely moved – and now SCTY's cost of debt is much higher… if rates go

up, the ASP will go down), or if its even possible to sell the entire portolio given counterparties.

³ $782M was the unlevered retained value as of C4Q15 for the renewal period; thus, we change the discount rate impact from 6% to 8% (using a real DCF, not

their numbers and not just taking 8% over 6% which is 33%), which is 31%; thus, the unlevered retained value at 8% comes to $540 million untaxed, or

$5.3/share. 4 We assume a 35% tax rate.

Source: Company documents, Axiom Capital research.



Cells ~100

players

Module ~ 400

players

System > 5,000

players

Total Portfolio 5/2/2016Profit $227MWs Sold 201Profit per MW $1.13% Sold 0.95Profit per MW - Adjusted $1.19Less: SREC Benefit on Mix (forecast) $0.06Profit per MW - Adjusted for SREC's $1.13

% BreakoutResidential 73.0%Commercial 27.0%

Profit per MW Breakout %Residential $/watt $1.20Commercial $0.95Blended $1.13Check $0.00

Total PowerCo Portfolio Size C4Q15Installed Base¹ 1,670

Residential MW 1,219Residential $/watt² $1.15Value $1,402

Commercial MW 451Commercial $/watt $0.95Value $428

Total MW 1,670Total Value $1,830Taxes $0Total Value After Taxes $1,830Less: Recourse Debt $1,512Less: Silevo Earn Out $150Plus: Unrestricted Cash $394Plus: Book Value of MyPower $251Total Value $813Shares 101

Total Value Before Non-Recourse Debt 5/2/2016Total Value $813Total Value/Share $8.05

Less: Non-Recourse Debt $1,242Less: Non-Recourse Debt/Share $12.3

Plus: Full Renewal Value - 8%³ $540Plus: Full Renewal Value - 8%/Share $5.3

Total Value Incl. Non-Recourse Debt & Renewal Value $111Total Value Incl. Non-Recourse Debt & Renewal Value/Share $1.10

Total Value Incl. Non-Recourse Debt & Renewal Value (Taxed)4 $72Total Value Incl. Non-Recourse Debt & Renewal Value/Share (Taxed) $0.71



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 7: SCTY Cost/W Exiting 2015

Source: Page 3 of SCTY C4Q15 Earnings Presentation.



Cells ~100

players

Module ~ 400

players

System > 5,000

players



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 8: SCTY Tax Equity Exiting 2015

Source: Page 2 of SCTY C4Q15 Asset Financing Supplemental.



Cells ~100

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Module ~ 400

players

System > 5,000

players



Cells ~100

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Module ~ 400

players

System > 5,000

players

Exhibit 9: SCTY Rebates/Re-Payments Exiting 2015

Source: Page 4 of SCTY C4Q15 Asset Financing Supplemental.



Cells ~100

players

Module ~ 400

players

System > 5,000

players



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Exhibit 10: SCTY’s Consolidated Statement of Operations – Axiom Capital Estimates 2016-2017

Source: Company data, Axiom Capital Research.



Cells ~100

players

Module ~ 400

players

System > 5,000

players

Fiscal 2015 Fiscal 2016E Fiscal 2017E

Fiscal Year-End: December Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E

Operating leases and solar energy systems incentives $54.8 $78.3 $85.1 $75.4 $81.2 $123.7 $136.6 $115.1 $129.1 $193.8 $210.2 $171.0

Solar energy systems and component sales $12.7 $24.5 $28.8 $40.1 $49.9 $52.9 $54.6 $51.4 $41.9 $42.7 $42.4 $39.2

Total revenue $67.5 $102.8 $113.9 $115.5 $131.1 $176.6 $191.2 $166.5 $171.1 $236.5 $252.5 $210.1

% Change Q/Q -6% 52% 11% 1% 14% 35% 8% -13% 3% 38% 7% -17%

% Change Y/Y 6% 68% 95% 61% 94% 72% 68% 44% 30% 34% 32% 26%

Operating leases and solar energy systems incentives $32.3 $37.4 $46.0 $49.9 $53.9 $60.4 $66.8 $74.4 $79.9 $86.1 $92.0 $99.2

Solar energy systems and component sales $13.5 $22.1 $42.6 $37.1 $46.3 $47.6 $48.2 $46.3 $42.2 $41.5 $42.2 $40.1

Total cost of revenue $45.7 $59.5 $88.6 $87.0 $100.2 $108.0 $115.0 $120.7 $122.1 $127.6 $134.2 $139.3

Gross profit $21.8 $43.3 $25.3 $28.5 $30.9 $68.6 $76.2 $45.8 $48.9 $108.9 $118.4 $70.9

Sales and marketing $86.7 $113.2 $129.3 $128.1 $142.5 $132.6 $126.3 $120.7 $125.9 $102.3 $125.1 $114.9

General and administrative $48.7 $50.2 $69.4 $76.2 $65.5 $96.9 $95.1 $102.8 $76.3 $87.1 $84.4 $98.2

Research and development $12.1 $12.4 $17.7 $22.8 $24.9 $26.5 $28.7 $25.0 $25.7 $35.5 $37.9 $31.5

Total operating expenses $147.4 $175.8 $216.4 $227.0 $232.9 $256.0 $250.1 $248.6 $227.9 $224.9 $247.4 $244.6

Operating profit (loss), EBIT ($125.7) ($132.4) ($191.1) ($198.6) ($202.0) ($187.4) ($173.9) ($202.7) ($178.9) ($116.0) ($129.1) ($173.7)

EBITDA ($89.3) ($94.4) ($147.4) ($150.0) ($149.8) ($129.1) ($109.8) ($131.8) ($103.5) ($35.2) ($43.0) ($81.2)

Interest expense, net $18.5 $20.5 $25.9 $27.1 $34.6 $38.2 $43.4 $48.9 $52.9 $56.1 $60.6 $65.6

Other expense, net $2.1 $2.8 $16.9 $4.0 $4.0 $4.0 $4.0 $4.0 $4.0 $4.0 $4.0 $4.0

Non-operating expenses (income) , net $20.6 $23.3 $42.7 $31.1 $38.6 $42.3 $47.5 $53.0 $56.9 $60.1 $64.6 $69.6

Pretax income (loss), EBT ($146.3) ($155.7) ($233.8) ($229.7) ($240.6) ($229.6) ($221.3) ($255.7) ($235.9) ($176.1) ($193.7) ($243.3)

Income tax benefit (provision) ($0.6) ($0.0) ($0.5) ($2.2) ($2.3) ($2.2) ($2.1) ($2.4) ($2.3) ($1.7) ($1.9) ($2.3)

Consolidated net income (loss) ($146.9) ($155.7) ($234.3) ($231.9) ($242.9) ($231.8) ($223.5) ($258.1) ($238.1) ($177.8) ($195.5) ($245.6)

Less: Profit (loss) attributable to non-controlling interests ($125.4) ($133.4) ($215.2) ($236.5) ($218.6) ($204.0) ($196.6) ($227.1) ($209.5) ($156.5) ($172.1) ($216.1)

Net income (loss) ($21.5) ($22.4) ($19.1) $4.6 ($24.3) ($27.8) ($26.8) ($31.0) ($28.6) ($21.4) ($23.5) ($29.5)

Basic earnings per share (EPS) ($0.22) ($0.23) ($0.20) $0.05 ($0.25) ($0.28) ($0.27) ($0.32) ($0.29) ($0.22) ($0.24) ($0.30)

Diluted earnings per share (EPS) ($0.22) ($0.23) ($0.20) $0.04 ($0.25) ($0.28) ($0.27) ($0.32) ($0.29) ($0.22) ($0.24) ($0.30)

Non-GAAP EPS (diluted) -- consolidated ($1.52) ($1.61) ($2.41) ($2.25) ($2.49) ($2.37) ($2.29) ($2.64) ($2.44) ($1.82) ($2.00) ($2.51)

Basic weighted shares outstanding 96.7 97.0 97.4 97.7 97.7 97.7 97.7 97.7 97.7 97.7 97.7 97.7

Diluted weighted shares outstanding 96.7 97.0 97.4 102.9 97.7 97.7 97.7 97.7 97.7 97.7 97.7 97.7



Cells ~100

players

Module ~ 400

players

System > 5,000

players

SolarCity Corp.

May 4, 2016


Risks to Downside Price Target

While we have strong confidence in our views expressed throughout this report, we do acknowledge a number

of risks to our downside 2016 year-end price target. Below, we provide some perspective on these risks.

Net-Metering Prevails. Core to our thesis is our view that utilities are readily gaining ground against the

whole net-metering argument (i.e., whether customers with solar systems should be excluded from fixed

charges on their utility bills) and will likely eventually prevail. If, however, solar proponents somehow are

able to get everything they want, and the states currently reviewing net-metering policies either maintain or

even strengthen the status quo, our thesis would prove invalid.

Interest Rates Stay Lower for Longer. As we see it, low interest rates enable the beneficially low cost of

capital in SCTY’s solar loans. While higher interest rates would benefit traditional financial intermediaries,

which generate the preponderance of earnings based on where net interest levels are floating, we posit that

SCTY cannot simply pass on higher interest to its customers, as this would erode the costs savings of

installing rooftop solar. However, if the Federal Reserve indefinitely continues to refrain from raising interest

rates, SCTY would be saved from this inevitability, which runs contrary to our long-term thesis.

Financial Engineering...a Sentiment Play. As we have stated countless times before, we view SolarCity

as a specialty finance / leasing company, versus a solar company. We say this given the complex products

that SCTY offers and difficulty in modeling the company with any degree of precision. In other words, due to

the plethora of assumptions that are required to model SCTY, we see this stock driven more by sentiment,

versus fundamentals. Resultantly, following a similar “craze” that surrounded YieldCo.s last year, we

acknowledge that SCTY’s stock may go higher if the company can reinvigorate investor sentiment by rolling

out new, unforeseen financing products or engaging in more aggressive securitizations of its receivables.

While this is a risk that would certainly void our thesis, we believe it would itself be temporary.

High Short Interest and Inside Ownership. Given the high degree of SCTY’s shares already sold short,

we acknowledge that a potential short squeeze could result in a big move higher in the stock. Moreover,

downside to SCTY’s share price could be limited by a lack of selling when considering the high amount of

inside ownership.

Please contact your Axiom Capital Research sales person for our dynamic SCTY company model.

SolarCity Corp.

May 4, 2016


Analyst Certification:

I, Gordon Johnson, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer.

Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this

research report.

Explanation of Ratings

Outperform/Buy – We expect the stock to outperform the S&P 500 Index and post absolute price appreciation of at least 10%.

Neutral/Hold – We expect the stock to perform in line with the S&P 500 Index.

Underperform/Sell – We expect the stock to underperform the S&P 500 Index and post absolute price depreciation of at least 10%

Current distribution of ratings as of May 4, 2016

% Number Rating

40% 14 Outperform/Buy

17% 6 Neutral/Hold

43% 15 Underperform/Sell

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by contacting: Compliance Department at 780 Third Avenue, 43rd

Floor, New York, NY 10017

Valuation Methods for Fundamental Analysis

One or more of the following valuation methods are used in making a price projection: Analysis of the supply and demand for a security to ascertain

how high or low a stock price may move before either overhead supply or underneath demand develops; Analysis of a company’s P/E ratio, price/book

ratio, price/cash ratio, earnings expectations or sales growth as they relate within an industry group or to the broader market; Dividend yield of the S&P

500 vs. the yield of the 10-year government bond; Individual sector analysis along with investor sentiment, and Federal Monetary Policy.

Valuation Methods for Technical Analysis

Valuations are based on technical analysis techniques using some or all of the following inputs: trend recognition, pattern recognition, Japanese

candlestick formations, oscillator readings (short-term), relative performance, money flows, support and resistance levels, volume, sentiment indicators,

and seasonal analysis.

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the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior

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and Axiom Capital Management, Inc. is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.

SolarCity Corp.

May 4, 2016


Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is

made regarding future performance. Information, opinions, and estimates contained in this report reflect a judgment at its original date of publication

by Axiom Capital Management, Inc. and are subject to change without notice. The price, value of, and income from any of the securities mentioned in

this report can fall as well as rise. The value of securities is subject to exchange rate fluctuations that may have a positive or adverse effect on the price

or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk.

Securities recommended, offered, or sold by Axiom Capital Management, Inc.: (1) are not insured by the Federal Deposit Insurance Corporation; (2) are

not deposits or other obligations of any insured depository institution; and (3) are subject to investment risks, including the possible loss of principal

invested. Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment and, in such circumstances; you

may be required to pay more money to support these losses.

We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal

in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to this research.

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The analyst or a member of the analyst’s family holds a stock or options position in the following securities mentioned in this report: None.

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Floor, New York, NY 10017.

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