JA Solar: Watching And Waiting

| About: JA Solar (JASO)

Summary

JA Solar may go private at $9.69 per share.

Trina Solar may finalize private buyout at $11.60 per share.

China may cut solar subsidies rate, possibly spiking installments.

JA Solar (NASDAQ:JASO) stock has plummeted from over $10 last year to below $6 this year. Today, it is trading below $6.40.

The plummet has made very attractive a buyout offer of $9.69 per share made by its Chairman and CEO Baofang Jin last June. At a stock price of $6.40, this would represent a premium of over 51%.

If JA Solar signs a "definitive agreement," as Trina Solar (NYSE:TSL) did recently, to go private, JA Solar stock may gap up immediately to over $8.60 per share. The estimate is based on how Trina Solar stock soared to within about $1 of its buyout price of $11.60 per share on the day that the agreement was announced.

Such a jump in JA Solar stock would represent an immediate gain of about 35%. At the time that the buyout offer was made, many JA Solar stock holders believed that the offer "stunk." But at current prices, I'm calling on JA stock owners to demand acceptance of the buyout offer.

Where is the offer, by the way? Apparently, the Chairman himself is still considering the options. From the Q2 conference call:

I am pretty sure he's actively working and consider all alternatives here available at this moment and hopefully we can update you sometime soon.

The "he" here is the Chairman, but these "alternatives" are unknown. Could, for instance, the Chairman be considering selling off just the development wing of JA Solar? While not talked about much, this wing will build out about 300 MW in projects this year and it may build out another 300 MW next year.

JinkoSolar (NYSE:JKS) recently agreed to sell off its development wing for $250 million.

Are there any other alternatives out there? A merger with, say, JinkoSolar or Canadian Solar (NASDAQ:CSIQ) to create a solar panel mega-company pumping out 10 gigawatts per year?

The final alternative the Chairman may consider may be to drop the buyout offer completely and let the company continue to operate as is. At current prices, this may actually lift the stock price as the buyout offer may be acting as a ceiling for the stock. That is, people may avoid buying the stock thinking that the highest it can go is $9.69.

Right now, the pessimism must be high. The assumption may be that withdrawal of the buyout offer would sink the stock further. The price/earnings ratio is currently about 3.25. JA Solar is one of the top solar panel producers in the world. It represents a major piece of the climate solution. While there is a supply glut, JA Solar continues to make profits, and it will likely price many of the second and third tier producers into bankruptcy.

We've been through this before. JA Solar has weathered through every supply glut in the solar sector because its costs are extremely low, and with new wafer production coming online, its costs will likely drop even further.

One of the areas of growth is in India, where low prices of Chinese-made solar panels is causing financial stress for domestic manufacturers. But the low prices for top quality panels such as JA Solar's panels are being described as a "bonanza" for Indian developers who can help electrify this underdeveloped nation at a low price. The bonanza will result in a massive solar buildout in India, and JA Solar sees a 5 gigawatt increase in 2017.

While JA Solar will not sell its panels at the rock-bottom prices of 36 cents per watt, it offers panels that are top of the line and demand a higher price. During its Q2 conference call, the company seemed confident about maintaining its margins and its sales, including increasing sales in the United States, where Sunpower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) have been citing Chinese panels (such as JA Solar's) representing profit-stealing competition in the solar market. Hence, Sunpower's plummet and loss of projects.

The supply glut is seen to last for a year and will bankrupt numerous smaller producers, and JA Solar will emerge with increased production and increased revenues, a solid margin still, and therefore greater profits. At that point, the p/e will likely be more like 7 - if oil prices go back up, the p/e will scoot toward 10 or more. I am basing this on historical pricing.

If Axiom Capital is correct, the supply glut may soon turn into a major supply shortage if China decides to cut the solar subsidy. This may "pull forward" over 20 gigawatts of project development, according to the firm, in 2017 alone.

It looks like Hillary Clinton may easily win the presidency and possibly with a Democratic Congress. This bodes well for worldwide solar panel sales as she works with China and other nations to lead the planet into climate rescue mode.

My guess is that this buyout offer will either be taken, voted on, or abandoned long before the supply glut is drained. The Chairman may want to buy the company out at the bargain prices now when the taking is good.

Disclosure: I am/we are long JASO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.