China Sunergy (CSUN) recorded a strong third quarter, posting record net income, strong gross margin and increases in both production and shipments. The company is planning to increase its solar cell production capacity by 25% by the end of 2010 and has made strategic acquisitions to better position itself in the downstream photovoltaic market as the company continues to develop into a comprehensive solution provider. While the company trades below its 53-week high its short interest has risen above the peer group average. China remained the largest market for the company. Germany is the second largest market for the company, it suffered a significant decline in revenue from Germany.
The company is in the top half of the peer group on many metrics, including free cash flow-to-net income, operating cash flow-to-net income, research & development and cash-to-debt. The company experienced significant changes in its operating cash flow-to-net income ranking from 24th in the second quarter of 2010 to 8th in the third quarter, its free cash flow-to-net income ranking from 14th in the second quarter to 2nd in the third quarter and its SG&A ranking from 21st in the second quarter to 4th in the third quarter. The company’s cash conversion cycle increased in the third quarter. Strong cash balances relative to debt provides the company with more financial flexibility and has the company ranked 10th among the peer group.
We calculated an average cost per watt of $1.16 for the third quarter 2010, up from $1.14 per watt in the second quarter 2010, but down from $1.17 in the first quarter 2010. Total revenues increased by 7.0% in the third quarter of 2010 from the second quarter of 2010. Total MW shipped increased to 87.8 MW in the third quarter of 2010 from 87.3 MW in the second quarter. The calculated revenue per watt was $1.43 in the third quarter 2010, up from $1.35 in the second quarter 2010 and $1.39 in the first quarter 2010. The company says its blended average selling price in the third quarter 2010 was $1.40 per watt, up from $1.31 per watt in the second quarter 2010 and up from $1.26 per watt in the first quarter 2010. Net margin per watt increased in the third quarter 2010 to $0.27 per watt, up from $0.21 per watt in the second quarter 2010 and $0.23 in the first quarter 2010.
Operating cash flow has been in excess of net income six of the past eight quarters and has exceeded the industry average for this metric six of the past eight quarters. On a LTM basis, operating cash flow has exceeded net income in seven of the past eight quarters and has been above the industry average in each of the past eight quarters. We believe a ratio of greater than one is an indication of good earnings quality.
By the end of 2010, the company expects to expand its solar cell manufacturing capacities through the addition of three new solar cell lines. The new lines are expected to add 80 megawatts and cost approximately $13 million in capital expenditures. Capacities are expected to reach 400 megawatts by the end of 2010 and 680 megawatts of module capacity by the end of the first quarter 2011.
The company’s quarterly disclosure is limited and its annual filings are missing various pieces of key information. Quarterly filings fail to provide cash flow statements and full footnote disclosures.
Additional analysis of China Sunergy and its peer group can be found here.