Wall Street's Half-Reports on the Solar Industry's Bright Future: Part 2

Includes: AAPL, JASO
by: Clearwave Capital

<< Return to Part 1

As mentioned in the article, "Wall Street's Half-Reports on the Solar Industry's Bright Future," Wall Street analysts and reporters have been downgrading or publishing negative reports on solar stocks for a couple of years.

Bloomberg (Ben Sills and Reed Landberg) and Gordon Johnson are some of these reporters and analysts.

They have been successful in beating down the Chinese solar stock prices to the dungeon. However, they have been wrong for several years about the fundamentals.

This Barron's article by Eric Savitz gives evidence that Gordon Johnson has been bearish on the solar market since January 2009. According to this September 2009 article, Barron's interviewed Gordon Johnson who stated:

  • Demand for photovoltaic solar will be 4.5 GW in 2009.
  • Demand for photovoltaic solar will be 6 GW in 2010.
  • There will be an oversupply for both years. "This oversupply will have a bruising effect on the whole industry."

However, I could not find any article about Gordon Johnson reporting EPIA's (European Photovoltaic Industry Association) numbers, which stated that the solar market grew 17.6% in 2009 to 7.2 GB and 129% in 2010 to 16.6 GW, and the Chinese solar companies took market share from companies of other countries.

Gordon Johnson has been wrong for so long, Wall Street reporters still continue quoting him. So much for reliable reporting.

Wall Street analysts and reporters have been picking at the trees, keeping your focus away from the forest. Every few months they come up with another tree to pick at. These include European subsidy cuts, falling prices, margins, over-capacity, etc., etc., etc. However, they never talk about the forest and give you the full truth. They never tell you that JA Solar (JASO) and other Chinese solar companies have grown their REVENUE and NET PROFIT faster than most companies on the NYSE and Nasdaq.

It has become a tale of two extremes:

  1. Extremely beaten down share prices, with P/Es lower than P/Es of stagnant value stocks.
  2. Extremely fast revenue and net profit growth, faster than for Netflix, LinkedIn, Salesforce.com, etc.

This is especially true for JA Solar, which has grown faster than most Chinese and US solar companies.

The latest tree from Wall Street is polysilicon.

According to this Bloomberg article published on July 7, 2011, JASO cannot take advantage of the falling polysilicon prices. Gordon Johnson states:

JA Solar “is going to have a major revenue and profitability problem.”

How does Gordon Johnson know this and how is he so sure? Even if JASO has to pay the same polysilicon prices for the remainder of 2011 as they did in 2010 and first half of 2011, why would it be a major problem for their revenue and profit, when it was not in 2010 and first half of 2011?

Let's say that you run a lemonade stand and you've been paying $1 for lemons for all of last year and this year. The price is expected to stay at $1 for the remainder of this year. Why would this affect your revenue or profit?

Bloomberg and Gordon Johnson did not mention that JASO gave this outlook for 2011:

.".. Company currently expects total cell and module shipments to exceed 2.2GW in 2011, representing an increase of approximately 50% compared to 2010. Module shipments are expected to be approximately 500MW to 600MW. Sales contracts signed to date for 2011 delivery amount to more than 2GW, representing approximately 90% of the Company's expected shipments for 2011."

On their May 10, 2011 SEC filing, JASO reiterated/maintained this outlook:

"The Company’s current estimate for total cell and module shipments for full year 2011 remains unchanged at 2.2GW."

JA Solar expects 50% increase and 90% of expected shipments for 2011 is under contract already. Most companies on the NYSE and Nasdaq wish they had this kind of revenue problem for 2011.

This seems to be another example of Wall Street's half reports on Chinese solar stocks.

If JASO cannot take advantage of polysilicon price drops because these prices are locked in, this might affect them materially. It is possible that the affect is that they cannot expand their profit materially. Nowhere does it say that their revenue is going to drop or profit is going to be squeezed.

If Bloomberg and Gordon Johnson are competent, they should know that JASO gave guidance that 90% of their expected shipments for 2011 are under contract. If Bloomberg and Gordon Johnson are referring to 2012 and beyond, then they need to qualify their prediction. Besides, they do not know that polysilicon spot prices will not go back up. JA Solar's experience is that polysilicon prices are volatile.

If Bloomberg and Gordon Johnson are competent and had known about JA Solar's 2011 outlook, then are they deliberating giving half reports? If not, then maybe they should be stating something like this instead:

"I do not have any evidence, but I'm making a wild guess that JA Solar is wrong or lying when they gave guidance that 90% of the expected shipments for 2011 is under contract. This is why I think they are going to have a problem with revenue. I also think that JA Solar is wrong or lying about their contracts with polysilicon supply. I don't think polysilicon prices are going to stay the same for JA Solar. I think that polysilicon prices are going to increase for JA Solar (for some unknown or wild reason), even though they are falling for everybody else. This is why I think JA Solar is going to have a problem with profitability."

If Gordon Johnson gave the above statement, that might give a better explanation of why he thinks JA Solar is going to have revenue and profitability problems.

Furthermore, according to JASO's July 7, 2011 SEC filing that Bloomberg and Gordon Johnson are referring to, it was an amendent to the polysilicon risk already listed in the "Risk Factors" section of their 2010 annual report. The amendment also states:

"Due to the decrease in prices of polysilicon and silicon wafers in the second half of 2008, we had renegotiated the unit price and volume terms of many of our long-term supply agreements and had entered into amendments for many of them. Although prices of polysilicon and silicon wafers have increased since the second half of 2010, in view of the significant volatility of the polysilicon prices during the past few years, we believe it is possible that the prices of polysilicon and silicon wafers may decrease again."

JASO locked in lower polysilicon prices in 2008 and then these prices increased in the second half of 2010. I searched for a bullish report on this positive scenario for JASO from Bloomberg or Gordon Johnon but could not find it. Maybe you might have better luck.

Now that polysilicon prices have fallen, Bloomberg and Gordon Johnson do not explain if it had fallen below the price before it went up in 2010. Furthermore, JASO entered these supply contracts in 2008. We do not know if JASO locked themselves into 10% or 100% annual growth of supply because this information is confidential, as shown in their SEC filing.

It is unlikley that JA Solar give this confidential information to Gordon Johnson. If not, how does he know that JA Solar will have a "major revenue and profitability problem"?

Furthermore, the supply contract includes paragraphs on the ability to negotiate price:

"2.3 Price negotiation mechanism

A. Party A and Party B agree that, if the market price for the polysilicon, the material for manufacturing the silicon wafer, increases, then Party B has the right to adjust the unit price set out in above Table A and Table B for *** of supplied goods for the month. Party A and Party B agree to confirm the adjusted unit price by negotiation by the 20th day of previous month. In principle, the adjusted price should not be higher than ***. If negotiations fail, then the adjusted unit price for *** of supplied goods set out in Table A and Table B for that month shall be implemented as ***

B. Party A and Party B agree that in 2011 the negotiation on goods unit price will be conducted quarterly, and the unit price will be decided by the two Parties before the 20th of the last month in each quarter. If Party A and Party do not reach consensus regarding the price for a new quarter, then the price of previous quarter shall be implemented. Note: Above mentioned unit price includes 17% value-added tax.

C. Party A and Party B warrant that when the market price is floating beyond *** of the unit price of the month, they will renegotiate the unit price of the Silicon Wafer.*** "

Furthermore, based on JASO's amendment in the July 7, 2011 filing, the contract allows for price adjustments and they fully expect to re-negotiate the prices:

.".. Some agreements provide for fixed pricing or pricing adjustable within a relatively small range of plus or minus 5% to 10%, substantial prepayment obligations, and/or firm purchase commitments that require us to pay for the supply whether or not we accept delivery."

"Although we plan to continue to renegotiate the unit price and volume terms of our long-term supply agreements if market prices fall significantly below our contracted prices ..."

In the worst case scenario, JA Solar has contemplated of not buying from these suppliers, albeit with consequences:

"Furthermore, we may choose not to procure polysilicon, ingots or wafers under certain contracts if we deem the prices under such contracts are unfavorable to us under prevailing market conditions and/or we are unable to renegotiate the price or volume terms to our satisfaction. In the event we choose not to procure polysilicon, ingots or wafers under these contracts, we may be forced to forfeit certain prepayment amounts to, and face contractual damage claims from, these suppliers if no mutual agreement can be reached."

JASO is one of the largest solar manufacturers in the world. It would seem unlikely that that these suppliers will be so unreasonable as to risk losing a large customer.

Furthermore, all companies have to state risk factors in their SEC filings, no matter how remote the possibility.

JASO stated this risk about polysilicon prices in their 2010 annual report:

"Our ability to adjust our raw materials costs may be limited as a result of our entering into long-term supply agreements with many of our polysilicon and silicon wafer suppliers, and it may be difficult for us to respond in a timely manner to rapidly changing market conditions, which could materially and adversely affect our cost of revenues and profitability."

The key word is "could." It does not state "will."

Here are some other risk factors that JASO included in their 2009 annual report:

"The increase in the global supply of solar cells and modules, and increasing competition, may cause substantial downward pressure on the prices of such products, resulting in lower revenues and earnings."

"The reduction or elimination of government subsidies and economic incentives or change in government policies may have a material adverse effect on our business and prospects."

"The execution of our growth strategy is dependent upon the continued availability of financing to our customers as well as third-party financing arrangements for the end-user of our products, and is affected by general economic conditions."

"We currently sell a significant portion of our solar cell products to a limited number of customers. Our dependence on these customers may cause significant fluctuations or declines in our revenues."

"We are in the process of further penetrating the market in China and exploring opportunities in other markets. In light of our efforts to grow, we may face risks associated with the marketing, distribution and sale of our products domestically and internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business overall."

"We generally do not have long-term agreements with our customers and accordingly could lose customers without warning, which could cause our operating results to fluctuate."

"We compete in a highly competitive market and many of our competitors have resources greater than ours."

"Problems with product quality or product performance may cause us to incur warranty expenses, damage our market reputation and prevent us from achieving increased sales and market share, or result in a decrease in our revenues and market share."

"Prepayment arrangements for procurement of silicon wafers and/or polysilicon from Jinglong Group (a related party), GCL, Shunda and other suppliers expose us to the credit risks of such suppliers and may also significantly increase our costs and expenses, either of which could in turn have a material adverse effect on our financial condition, results of operations and liquidity."

"Fluctuation in the price of polysilicon, increased competition, the global economic crisis and other changing market conditions may cause further decline in the demand and average selling prices of solar cells and may continue to increase the level of our earnings volatility and reduce our profitability."

"We have entered into long-term, firm commitment supply agreements, including prepayment provisions, that could result in excess or insufficient inventories and financial loss and place us at a competitive disadvantage."

"We obtain certain manufacturing equipment from sole or a limited number of suppliers and if such equipment is damaged or otherwise unavailable, our ability to deliver products on time will suffer, which in turn could result in order cancellations and loss of revenue."

"Our failure to further refine our technology and manufacturing processes and develop and introduce new solar power products could render our products uncompetitive or obsolete, and reduce our sales and market share."

The above is just a subset of risks listed in their 2009 annual report. Nevertheless, JA Solar grew their revenue from 2009 to 2010 by 211%. Compare that to the growth from other growth companies.

Every company has a laundry list of risk factors filed with the SEC. Check out the lists of risk factors for the other companies that you own. If you think they are highly probable, you would be selling most of your stocks.

Check out the 28 risk factors that Apple (NASDAQ:AAPL) filed with the SEC. If you think those are highly probable, you would never buy Apple's iPhone or stock.

The key words are "could" and "may cause." Instead, Gordon Johnson states:

JA Solar “is going to have a major revenue and profitability problem”

Many of the above risk factors exist for most solar companies, including U.S. solar companies, but the P/Es for U.S. solar stocks are 13 to 43 and the P/Es for Chinese solar stocks are 2 to 4, even though Chinese solar companies have been growing faster.

Furthermore, Bloomberg and Gordon Johnson reported on JASO's July 7, 2011 SEC filing where they can pick out a potential negative about polysilicon. What about the other SEC filings, such as this from last month on June 15, 2011:

"1. Hefei High-tech Industry Development Zone (“Hefei High-tech Zone”) [Party A] is one of the first China National Economic and Technical Development Zones approved for establishment by the State Council of the PRC. As the administrative body of Hefei High-tech Zone, Party A highly appraises the performance achieved by Party B [JA Solar] in new energy field, hoping Party B to introduce advanced technology and management concept for the construction of new energy industrial base of Hefei High-tech Zone.

2. Party B, as the world largest solar cell manufacturer and a diversified business operator in new energy field, specializing in R&D and production of solar polycrystalline silicon ingot, polycrystalline silicon wafers, solar cells and modules, owning the most advanced production technology and equipment in the world and a complete solar energy industrial chain, has the desire to introduce advanced technology and management concept for the construction of new energy industrial base of Hefei High-tech Zone.

3. The Parties would like to strengthen the mutual cooperation on the follow-up projects in new energy field and build up a strategic cooperation relationship, following the investment by Party B in the silicon wafers, solar cells and modules production project in Hefei High-tech Zone."

"Party A will assist the Project to ***, assist the Project Company to apply for and enjoy related supporting policies provided by the State, Anhui province, and Hefei local government."

"7. Party A will coordinate with related authorities such as power supply department, to assist Party B to establish a solar energy sample project with the annual capacity no less than 10GW."

According to the above filing, Hefei government will help JA Solar set up 10GW for authorities such as power supply department. According to the EPIA, the whole world installed 16.6 GW in 2010.

I could not find any report from Bloomberg or Gordon Johnson about the above.

Then there is this SEC filing from JASO on April 7, 2011:

"JA Solar ... one of the world’s largest manufacturers of high-performance solar cells and solar power products, today announced that it has entered into a two-year strategic partnership with Jabil Circuit, Inc. (“Jabil”) (NYSE: JBL), a leading global electronic product solutions company headquartered in St. Petersburg, Florida. Under the partnership framework, JA Solar expects to supply Jabil with up to 400MW of solar cells over two years, as well as certified module designs to Jabil for the manufacturing of up to 200MW per year of modules with JA Solar cells.

JA Solar intends to provide solar cells and additionally grant Jabil the right to manufacture JA Solar’s portfolio of OEM modules at Jabil’s solar facilities, including those in Mexico, Poland and China. The companies will further collaborate on marketing and selling JA Solar modules to customers, especially in the U.S.

The duration of the alliance is for two years. Module production is expected to commence in the third quarter of 2011."

Gordon Johnson does not seem to take this into account or explain the lack of significance of this on potential revenue increase.

Yes, I am biased because I am long JASO. It is also possible that Wall Street analysts and reporters are biased as well. I have not seen their full disclosure that they and their friends, family or associates are not short Chinese solar stocks. Even if they provide this disclosure, you need to do due diligence. Gupta, an ex-director of Goldman Sachs, probably signed many disclosure documents. He still provided insider information to his hedge fund manager. According to even Jim Kramer, every commentator is biased and has an agenda.

If you agree with this article, please share it with others and recommend it. Even though SeekingAlpha is reputable, big Wall Street firms such as Bloomberg and Barron's still have a lot of influence.

Disclosure: I am long JASO.

Continue to Part 3 >>