Solarfun Down Despite Reporting a Strong Quarter

by: Kelvin Schulle August 28, 2008 | about stocks: SOLF    

Kelvin Schulle

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Solarfun Power (SOLF) reported a sound quarter on Wednesday, and the stock price dove 12%. Looking into the earning report carefully, Q2 was really a great one. Solarfun reported second-quarter net income of $11.4 million, or 23 cents per American depository share. Revenue came in at $197.1 million. Photovoltaic module shipments reached 43.1 MW in the second quarter, an increase of 162 percent from a year ago. The company guided 2008 shipments of 175-190 MW from previous 160-180 MW.

[Click here for Solarfun's 2Q conference call transcript on Seeking Alpha.]

The margin was little bit down for the quarter. But the media seems only to focus on the negative side. The company should deserve better than that. Merril Lynch Analyst Jason Wright in the conference call said, "We think your company is pretty much undervalued here. You are not being recognized like you should be". In his view, Solarfun should be trading much higher than $19 as of closing price on Tuesday.

There is one sign that investors are betting on SOLF's price coming back up in the coming days/week. The September call volume was 3 times higher than the put volume, that is 16,000 calls versus 5,000 puts. This tells me the selloff yesterday was a panic sell. After further review of Q2 data, investors will likely reverse the price quickly in coming days. Solarfun's earnings are actually better than some other solar companies, such as Renesola (SOL), Trina Solar (TSL), Yingli Green Energy (YGE), and SunPower (SPWR). The rest of these solar stocks are performing very well.

Finally, the media totally ignored the deal with Q-cell, which is a 100MW annual sale contract for three years. I am pretty sure investors will find this a pivotal point for Solarfun power and bid the stock price higher.

Stock position: None.

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This article has 14 comments:

  •  
    Aug 28 10:20 AM
    Well I would actually say their is numerous reason for the stockprice downturn....first they have only presold 100 MW of the expected 272.5 MW output in 2009...and people were complaining that TSL only pre-sold 60% so far so what do they say to 36.6%....secondly if the module prices fall more than 10% solf is going to get crushed(though i do not believe in that scenario since I am a solar bull)...at last I didn't understand why they put so much money in ramping the cell capacity...It appears at year end they will have 360 MW capacity....and adding on 4 more lines each being 30 MW per line...I think they should have concentrated on wafer capacity(as this is one of their two bottlenecks in the supply chain the other being poly)...and maybe only ramp two lines of cell capacity....and invest the rest in wafer capacity...

    On the positive side it doesn't look like their capex next year will force solf to tap the stock market for cash, I think they can do it all by debt...and obviously the Q-Cells deal was quiet good....I think SOLF becomes interesting somewhere in the area of 12-15 depending on market conditions...with kind regards CW

    Long ABX, AUY, CSIQ, ESLR, SSL, TSL

    PS So if SOLF is undervalued what is TSL???
    Reply | Link to Comment
  •  
    Aug 28 12:54 PM
    THE FUTURE IS IN THE HANDS OF GOD - ANYTHING CAN
    OCCURS - LET S HOPE FOR THE BEST - THIS IS VERY ATTRACTIVE
    CO.
    Reply | Link to Comment
  •  
    Aug 28 02:47 PM
    Actually, Q-Cells is one of several huge contracts. Don't forget Martifer (30MW) and Schuco (47MW) in addition to Q-Cells (100MW) for 2009. That's 177MW of 360MW = 50% in just those 3.

    They are working wafer capacity... that's why they purchased Jiangsu Yangguang. It will be ramped to initially cover 20% of their supply and eventually provide 40% of the needed wafers. This is how they will see a doubling of margin (increase of 5%), by Q4 i believe.

    As stated in the conference call, the investment was made in increasing module processing because the return per unit investment was very high. It takes more time and money to develop the wafer equipment and process.
    Reply | Link to Comment
  •  
    Aug 28 04:05 PM
    @Immuni4fun I was only talking about their own production...That means not counting Q-cells actually....Which is only an assembly of parts...

    182.5x1.5=273.75 is their OWN production....at least that was their guidance(I took the median of 2008 guidance and that x 1.5)....so they produce 273.75 MW...I assume the build one line a Q of 30 MW a piece so lets say they have an average capacity of 420 MW in 2009 and only producing 273.75....which is an utilization of about 65% of their cell capacity...(By year end of 2009 they will have a capacity of 480 MW concerning cells obviously again).....So my only point is maybe they could have made some wiser investment choices....If you believe in those choices, as I assume you do since it sounds like you are long, then see how it works out...

    All I am saying their is some risk involved since they are constrained in two parts of their supply chain(poly+wafers) and that is undebatable...so why focus on the part they have plenty off just doesn't make much sense to me...

    And mate they said on their call they have good visibility of 200 MW in contracts in 2009 and pre-sold 50 % of that....so in my math, which might be wrong;), that is 100 MW...So my math in the post above is actually wrong if you want to think about the actual capacity ...100MW/420MW=23% utilization...or lets take the "good visibility" 200/420=47%....I am not saying it will happen I am just saying their are some big risks involved....I am more comfortable with my solar investments(CSIQ, TSL + ESLR though ESLR is just a tiny part of the account not really worth mentioning)...but that is obviously ones own choice....And none of those cells as mentioned above are going toward Q-cells as it is just an assembly...not saying that is a bad business, but also consider this Q cells only signed a letter of intent as stated in the call if the market turns(which i dont believe in but one has to take it into account) they might just pull the plug....Just think about it...with kind regards from Germany CW
    Reply | Link to Comment
  •  
    Aug 28 04:43 PM
    Sorry actually i just read that their is no poly constraint....so then it would be even more wise to invest in wafers....kind regards CW
    Reply | Link to Comment
  •  
    Aug 28 04:44 PM
    concerning next year (poly)
    Reply | Link to Comment
  •  
    Aug 28 06:24 PM
    There have been many articles around SOLF lately and by the title of this article I think that this is clearly a case where the company is doing extremely well but the stock is not doing so well. So we have many investors wondering what is wrong and finding a explanation in the details. In my opinion the risks are minimal and SOLF is poised for phenomenol growth for the foreseeable future. But obviously the market is not pricing the stock this way. I am not sure what amount of certainty the market is looking for here but even further there is certainly strong feelings on the short side as well (e.g. there is a large short percentage in SOLF right now).

    I think this quarter was compelling enough to keep current investors (like myself) to hold but not compelling enough to attract new buyers and motivate shorts to cover.

    Probably stating the obvious here...
    Reply | Link to Comment
  •  
    Aug 29 08:07 AM
    ...not compelling enough:

    The company reported 27.1 million US dollars of gross profit
    for the second quarter, surging 163.7 percent year on year, with
    basic earnings per ADS at 0.24 US dollar.

    Solarfun's net income reached 11.4 million US dollars in Q2,
    posting a year-on-year jump of 285.2 percent.

    Q2 operating profit totaled 17.0 million US dollars, soaring 306.
    6 percent year on year and operating margin dropped to 8.6 percent
    from 11.8 percent in the first quarter of 2008 owing to increased
    spending on R&D and others to support growth.

    Solarfun recorded 197.1 million US dollars of net revenues in the
    second quarter, up 12.7 percent from the previous quarter and 192.2
    percent from the same period of 2007.

    The company has adjusted up its 2008 shipment guidance from 160-
    180 MW to 175-190 MW with gross margin to see improvement in the
    second half of 2008 compared with the second quarter.
    Reply | Link to Comment
  •  
    Aug 29 09:13 AM
    The problem is not SOLF or other chinese companies, the problem is this rotten market and its brainless analysts always ready to scare investors about anything of no importance.So do not try to analyze the logical reasons for this irrationnal behaviour of investors simply because there is none.Why chinese solars have,for most of them, a multiple turning around 10 and american peers around 100.Some will say better technology .What I am saying is xenephobia and mistrust in chinese cos,period.This is stupid and many investors miss the opportunity of a life time to invest in what will be the growing story of this century,CHINA.
    Reply | Link to Comment
  •  
    Aug 29 01:44 PM
    cHINA, yes - and the 100 for American peers is more than likely due for adjustment, downward towards 10, with or without justification.
    Reply | Link to Comment
  •  
    Aug 31 12:27 PM
    I have a more technical Bent as in the Chart of SOLF, which I love. When a stock has High Volume at it's highs it means the stock price should return to those highs. Especially when it makes a low volume low afterwards. Take a look at the May highs made on very high volume then Aug lows made on very low volume. This week we had some volume increase on a "sell the news" earning release but we are now absorbing that by making a low volume consolidation below that price range. As it stands we will need some volume to break above the recent higher volume price Gap up just below 19.

    Perhaps higher Energy Prices due to Gustaf or Hannah could be a near term catalyst for that upsurge. We will soon see.

    Also Dicki careful on AUY that high Volume low at 9.25 will exert a magnetic pull on the Stock Price. If it test's that level with low volume buy with both hands. PM's are my first Love. Take a look at the gold chart Gold has Parabolic tops in Springs of Even years quite often. I'm expecting consolidation over the next year.
    Reply | Link to Comment
  •  
    Sep 01 10:12 AM
    @Quasi Yoda...I'll look into it thanks for the advice kind regards CW
    Reply | Link to Comment
  •  
    Sep 01 02:16 PM
    In yahoo finace Solf 1 year target est 114.70, is that for Chinese yuan or US dollar? Thank.
    Reply | Link to Comment
  •  
    Sep 01 08:22 PM
    kelvin,
    can you shoot me an email about putting your solar articles on solarfeeds.com? i am a big fan. thanks

    sweitzman@gmail.com
    Reply | Link to Comment
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