China Sunergy: Riding on the Coattails of a Hot Solar Sector

Leaving aside the less than spectacular fundamentals of China Sunergy (CSUN) for a moment, it is difficult to believe that the stock is still holdings its gains. It is also really surprising that when other small cap solar stocks have risen to the fold to garner the attention of traders, namely Hoku Scientific (HOKU) rising 13.70% on Thursday after it extended its polysilicon agreement with its customers in order to obtain additional financing (It recently signed a deal with Merrill Lynch (MER) to borrow up to $185 million.), and DayStar Technologies (DSTI) which has jumped 19% in the past couple of days on interest in its thin-film solar products, China Sunergy has not fallen even as the momentum flock has gone elsewhere.

The stock still appears to be riding on the coattails of a hot, yet expensive solar sector. Look at this data from the Motley Fool:

SunPower (SPWR) has a $11.1B market cap, a P/E of 671, and a forward P/E of 65.

First Solar (FSLR) has a market cap of $20.9B, a P/E of 195, and a forward P/E of 135.

Suntech Power (STP) has a market cap of $13.5B, a P/E of 96, and a forward P/E of 43.

This is indeed outrageous, but at least those companies are making money and seeing triple-digit earnings growth.

On the contrary, based on company forecasts, China Sunergy is expected to lose $0.16 per share on $233.34 million in revenue in 2007, and lose $0.06 per share on revenue of $420.61 million in 2008. Yet the stock still trades higher and is holding on to a more than 60% gain in the past couple of weeks. Strangely the stock has not sold off even though there the share price has gotten detached from fundamentals, but there are reasons to support the argument that China Sunergy is vulnerable to a major sell-off:

The underlying problem is still there which is the ongoing tightness in the polysilicon supply which will hurt margins and is what largely what caused its third quarter loss of $4.4 million, or $0.11 per share.

The company has yet to produce a greater proportion of high efficiency cells.

The continued need for funding via dilution should put a damper on the common stock.

Watch the key level of $16.50 that has been tested the past few days as a breakdown point which could lead initially to the stock filling the gap at $15.65.

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Dec. 27 Solar Power Exuberance Hits China Sunergy