ReneSola (SOL) reported record revenues, earnings and solar product shipments during the second quarter 2010. During the global financial crisis at the end of 2008 and beginning of 2009, the company recorded inventory write-downs, impairments of investments and overall poor earnings. The first quarter of 2010 showed promise with improvements across the board, including positive operating cash flow and positive gross and net income margins; however, the company must show this is a trend and not just an anomaly.
Strong financial performance in the first six months of 2010 has improved many of the company’s rankings. Strong operating cash flows and less capital expenditures have the company ranked 5th on operating cash flow-to-net income and 2nd on free cash flow-to-net income. Significant improvements in two components of the cash conversion cycle has the company ranked 5th. Considerable debt relative to both equity and cash put the company at 31st in terms of debt-to-equity and 25th in terms of cash-to-debt. The company ranks 6th in research and development expenses as a percentage of revenues because the company has been investing significant amounts to improve its business.
The company provides limited information in quarterly filings. It does not provide full footnote disclosures. It does provide statement of cash flows on a half-year basis. The company provides total megawatts sold in each quarterly and annual filing; however, many of the key performance indicators, such as conversion efficiencies, are only found in annual filings. Warranty and allowance for doubtful accounts data can only be found in annual filings.
The company operates in two principal reportable business segments: 1) wafers and 2) cells and modules. The wafer segment involves the manufacture and sales of monocrystalline and multicrystalline solar wafers and processing services. The cell and module segment involves the production and sale of photovoltaic cells and modules. The company began disclosing wafer and module shipments in the first quarter 2010, but it still does not report revenues and costs by segment.
Based on our computations, we calculated an average cost per watt of $0.69 for the second quarter 2010, compared to $0.71 for the first quarter 2010, and $0.84 for the fourth quarter 2009. Fiscal year 2009, we calculated an average cost per watt of $1.03, down substantially from $1.80 for fiscal year 2008. Annual cost per watt for both 2009 and 2008 exclude costs related to the company’s processing services. Megawatts shipped by the company increased substantially in all except one quarter in 2009. Year-over-year, megawatts shipped increased by 50.6% from 350.1 megawatts in 2008 to 526.6 megawatts in 2009. Wafer shipments have increased due to strong demand, increased production output and increased brand recognition. Cost of revenues decreased to $553.6 million in 2009 from $684.7 million in 2008 due to a decrease in polysilicon prices and non-polysilicon processing costs as well as the increased utilization of the company’s facilities. Increased product shipments and decreasing cost of revenues enabled the company to decrease its cost per watt on a quarterly and annual basis.
Revenue per watt increased in the second quarter 2010 to $0.98 per watt, compared to $0.85 per watt in the first quarter 2010. Furthermore, revenue per watt has been significantly below the industry average for the past eight quarters. In 2008 and 2009, annual revenue per watt was calculated to be $1.62 and $0.92, respectively. The company only discloses its revenue per watt for solar wafers, but since a majority of the company’s sales come from solar wafers, our calculations and the company’s disclosure should be relatively similar. In 2009, our calculated revenue per watt was just $0.01 above what the company stated, while in 2008, our calculated cost per watt is significantly below what the company disclosed. The company provided no explanation for the discrepancy.
On an annual basis, the company discloses megawatts shipped, revenues and gross profit for the wafer division. In fiscal years 2007, 2008 and 2009, we calculated revenue per watts of $2.53, $2.90 and $1.00, respectively, and cost per watts of $1.98, $2.97 and $1.12, respectively. Using the company’s disclosures of wafer division revenues, we calculated revenue per watt above what the company stated in each fiscal year.
The company does not explicitly state the megawatts shipped for its cells and modules division, but since the company says it has two business segments, the difference between total megawatts shipped and solar wafer megawatts shipped should be megawatts shipped for the cells and modules segment.
The company’s statement of cash flow disclosure has deteriorated since 2008. Quarterly disclosures were made for the four quarters of 2008, but changed to only half-year disclosures in 2009. Half-year disclosures were equally divided between the two quarters; therefore, the first and second quarters of 2009 have the same cash flow data, while the third and fourth quarters of 2009 have the same cash flow data. Quarterly disclosure of cash flow information remains the same for 2010. A statement of cash flows was provided for the first six months of 2010 after no statement of cash flows was provided for the first quarter 2010. The only disclosure the company gives regarding its first quarter 2010 cash flow is it “generated strong positive cash flow in Q1 2010.” This lack of clear concise information is a disservice to investors.
Free cash flow has been positive for the first half of 2010 after significant capital expenditures in 2009 contributed to already poor operating cash flow numbers to produce negative free cash flow. Free cash flow has exceeded net income twice in the past eight quarters. Compared to its peer group, ReneSola has exceeded the industry average in three of the past eight quarters, primarily due to poor free cash flow-to-net income numbers across the industry. Free cash flow-to-net income on a last 12 months basis is slightly worse, posting a negative metric for eight quarters and exceeding the industry average in none of the past five quarters
On July 27, 2010, the company announced a resolution would be proposed to cancel its AIM quotation at the upcoming annual general meeting on Aug. 20, 2010. Since ReneSola’s ADSs were listed on the New York Stock Exchange [NYSE] in January 2008, it has seen an increasing number of shareholders moving their shareholdings in the company from the AIM to the NYSE due to higher levels of liquidity.
Additional analysis of ReneSola and its peer group can be found here.
Disclosure: No positions