Deli Solar: Take a Bite out of this Chinese Microcap

| About: China Solar (CSOL)

Chinese solar companies are hot. It seems that every week a new solar equipment IPO raises several hundred million dollars or more, largely spurred by government incentives in the PRC and some European countries. There are a number of microcaps in this industry. After initial review, I bought shares in one of them Thursday, Deli Solar (DLSL.OB).

dlsl2 Look past the funny name. Deli Solar makes solar-powered water heaters and a range of coal and alternative-energy fired boilers, not pastrami on rye. Deli Solar primarily sells into rural Chinese markets, where basic electrical and gas utilities are often unreliable if available at all. It sells through a network of 585 distributors and 2000 retailers in 27 Chinese provinces. The Company says that new laws encourage sales and give it tax incentives:

The National People's Congress, the equivalent of the parliament of the PRC, passed the China Renewable Energy Act, effective January 1, 2006. This law creates new opportunities for the growth of the solar power industry in that it promotes the installation of both solar hot water and space heating systems, the integration of these systems into new construction, the application of solar energy in rural China and affords certain financial incentives to these projects. The National Development and Reform Commission will develop a data base of renewable resources energy projects that are supported by the government. If a company's project is on this list, it can apply for preferential treatment including loan and tax incentives. The Chinese Government hopes that this law will boost the renewable energy sector's share from negligible to about 10 % of total energy supplied. Deli Solar, which focuses on the development and commercialization of renewable energy resources, will be important to China's future economic growth.

Deli is profitable. Last quarter it earned $.07 per share (fully diluted) on $6.56M in revenues. Annualized, that would be $.28 on approximately $26M in revenues, giving the company a P/E ratio on the run rate of under 5, and a P/S of under 0.5.

The numbers get even more amazing when you consider the cash on the balance sheet. At the end of last quarter, Deli had almost $4.6M in cash and no debt, or almost $.60 per fully-diluted share, approximately 6.2 million common shares and 1.8 million warrants outstanding.

There are a few caveats. The company's tax rate will increase in the coming year as a 100% exemption is scaled back to 50%. The exemption will remain at 50% through 2010, when it expires. The company is also growing rapidly (including building two major production lines). A failure to execute could be costly. Also, Deli Solar has entered into Memoranda of Understanding to purchase two other Chinese companies. These acquisitions, if completed, would utilize much of the company's cash hoard. I don't know whether the targets are currently profitable, or whether the proposed acquisitions would be accretive or dilutive to Deli Solar shareholders. More information is available in the latest 10-QSB.


Disclosure: Author is long DLSL.OB. He is short various other midcap and largecap Chinese solar companies.