Solarfun Power Holdings: Partly cloudy

Paul Rolfes | Nov 20, 2007 6:20am EST | Comment

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Combining two hot investing topics—solar energy and China—seems like a win-win proposition. But when it comes to China’s Solarfun Power Holdings Co., Ltd. (Nasdaq: SOLF), investors seem to have taken a dim view following a December 2006 offering in the U.S. markets.

Based in China’s Jiangsu province, Solarfun Power makes the photovoltaic (PV) cells and modules that are used to convert light into electricity, and provides services and supplies to make solar systems work. Founded in 2004, Solarfun sells its products primarily in China. Production capacity makes Solarfun the world’s sixth-largest PV cell manufacturer and is the second-largest U.S.-listed Chinese cell maker after global leader Suntech Power Holdings Co., Ltd. (NYSE: STP).

When Solarfun’s American Depository Receipts were offered on the Nasdaq Global Stocks market last Dec. 20, the IPO was priced at $12.50. Solarfun closed its first day of U.S. trading at $9.96—and has seemingly been treading water since then.

Despite some flickers of hope since the stock offering, including a 52-week high of $17.69 seen in April, analysts remain lukewarm about Solarfun: four analysts surveyed by Thomson Financial all have this relative newcomer at the equivalent of a “hold.” The stock closed at $12.27 on Monday.

Investors looking to jump into China or into solar are left wondering if Solarfun is a potential sleeping giant that could shine brightly, or if the company is something of a poorly lit bulb in their investment strategy.

There has been a gold rush of solar-related Chinese companies following the successful IPO of Suntech in December 2005, which has seen its share price nearly triple over the past two years.

Interest in solar overall has skyrocketed as prices for energy products derived from petroleum have risen dramatically in the last few years. In turn, the demand for polysilicon, a necessary component in solar energy technology, created a shortage that has driven up prices for the key material.

Solarfun competes with Suntech in an increasingly crowded marketplace for PV cells. On Thursday, Suntech reported its net income nearly doubled in the third quarter and said it’s expecting “extremely strong demand” for solar cells in 2008, according to a press release.

Results from Solarfun Power have shown promise, for the most part. Second-quarter financials released in mid-August revealed a turnaround from a bleak first quarter: net income grew to $2.5 million from $2 million in the comparable 2006 period, as revenue increased to $60.8 million from $13.3 million the year before. PV module shipments rose dramatically to 16.4 megawatts, from 5.6 megawatts in the 2006 quarter, and the 6.5 megawatts seen in the first quarter.

By contrast, competitor Suntech said its third-quarter PV production capacity rose to 450 megawatts and the world’s largest producer of solar cells is predicting 1-gigawatt production capacity by the end of 2008.

When Solarfun Power reported its first-quarter results that included a $300,000 net loss in late May, its shares dropped 23%. However, the company had warned that it expected the first quarter to be difficult, which bore out with the loss of a penny a share; a Thomson Financial forecast had called for earnings of $0.07 a share. Solarfun closed at a low point since the IPO of $8.28 on June 12.

Despite some setbacks, Solarfun is not standing still. The company has jolted its executive suite with some new faces, and has announced several supplier and customer contracts.

A Sept. 20 midquarter update included some progress on Solarfun’s plans to boost solar cell production capacity, which the company expects to increase to 360 megawatts by the end of 2008 from 240 megawatts in 2007. Solarfun also said that it landed three unnamed European customers in September at a large trade show in Italy and that it was hooking up with its first non-Chinese wafer supplier in a long-term commitment.

Solarfun also sought to allay investors’ fears last month following tumultuous news from one of its big suppliers. Solarfun said on Oct. 16 that it had signed a $266 million contract with LDK Solar Co., Ltd. (NYSE: LDK) to supply polysilicon wafers at a fixed price from 2008 through 2010. Earlier, LDK announced that it would investigate claims by a former employee that the company had misstated its polysilicon inventories—allegations that LDK has continued to deny.

Analysts have issued reports to their clients containing some restrained optimism about Solarfun Power’s potential.

Bank of America Securities analyst Eric Brown initiated coverage of Solarfun this month with a “neutral” rating and a $14 price target. In a Nov. 6 research note, Brown cited the company’s rebound from the dismal first quarter with management and marketing changes that “have already paid dividends, as Solarfun has increased its customer base more than threefold since 1Q07 (to over 20 customers). However, execution risks remain as the company looks to grow rapidly in a very dynamic solar market.”

The Bank of America analyst, who’s looking for Solarfun to report strong results for the final six months of 2007, cautioned investors: “Consistent with our industry view, we would be very cautious on the Chinese solar names due to a number of expected pressures on margins,” because of polysilicon supply problems and a highly competitive market.

Adam Hinckley of CIBC World Markets has had Solarfun Power at “sector perform,” without issuing a price target. Following the second-quarter financials release, he reiterated his guidance but raised his 2008 estimates, saying, “We are warming up to SOLF, as much of the concentration risk apparent in 1Q has been removed.” He’s currently looking for 2007 earnings of $0.17 per share, a cut from $0.21, while increasing his 2008 estimate to $0.62 from $0.52.

Hinckley had an opportunity to visit Solarfun’s operations in China in mid-September, triggering an optimistic research report on Sept. 18 concerning the company’s silicon supplies. However, he remains cautious because of liquidity concerns as the company plots its expansion, and he expects Solarfun to “seek out financing to meet its obligations.”

Lazard Capital Markets’ Sanjay Shrestha initiated coverage of Solarfun with a “hold” rating on Oct. 23, noting that he believed the share price was fairly valued. Similarly, Goldman Sachs analyst Cheryl Tang placed Solarfun at “neutral” in June.

Solarfun announced this morning that it will release its third-quarter results on Nov. 29. The consensus estimate of analysts surveyed by Reuters calls for earnings of $0.03 per share; the Zacks estimate is slightly more optimistic at $0.05 EPS. Full-year earnings are expected to come in at $0.13 per share for Solarfun, according to Reuters estimates, and at $0.18 per share according to Zacks.

When the results are released, the gloomy cloud hovering over Solarfun Power (SOLF) might lift, and investors could find a sunnier outlook for the stock.