American Technology Research Analyst David Edwards initiated covered on Suntech with a "Buy" rating Friday. Exerpt from his note to clients:
We are initiating coverage of Suntech with a Buy rating. Suntech is one of the leading manufacturers of silicon solar cells and modules in the world. Benefiting from a low-cost manufacturing infrastructure in China, the company leads the market in terms of profitability, with a gross margin of 30% and operating margins of 18%. We are bullish on the solar market long-term and believe that it will provide compelling investment returns. More specifically, we believe that Suntech's cost advantage and local-market advantage in China will allow it to remain a leading player for the foreseeable future. We recommend that investors add STP to their energy technology portfolios and consider it our favorite solar stock under coverage.
We see three key reasons to own STP:
1. Low-Cost Provider. In a market which is focused on driving down costs to increase volume, we think it is smart to focus on the low-cost providers. In the solar business, costs can be driven down by low silicon usage, high efficiency products and low-cost manufacturing. Due to the benefits of being in China, Suntech has healthy margins today and we expect margins to continue to
expand over time.
2. Chinese Market Access. Although the Chinese solar market has not materialized yet as a significant end market, we believe it is only a matter of time. Based on the government's goal of increasing the percentage of energy generated by renewables from 7% today to 15% by 2010, China's market growth may not be too far off. We believe that Suntech's local position will give it an advantage over non-Chinese companies.
3. Growth & Profitability. The company is at the beginning of a large, long-term expansion that could drive revenue from $200M+/year today to $1,000M/year in 2008 given successful capacity build-out and ASP declines of about 5%/year starting in 2007. Much of the advantage in Suntech's model is in the operating margin, which we expect could increase from 18% today to 32% in 2008.
STP chart below; click to enlarge.