Solarfun Will Lead Its Sector Higher with Surprise Earnings

Solarfun Power Holdings (SOLF) has been great outperformer in terms of earnings. The company made consistent progress in the last few quarters with average 110% surprise on the upside. It has a parabolic profile of sales!

However, the stock price has been under pressure recently due to the overall market meltdown and cash-raising through an offering. The newly raised capital is imminent as the company stated several times in the past that it is undergoing aggressive expansion due to the massive panel demand from overseas. Look around, all solar companies that reported earnings had great quarters (except those US counterparts).  LDK (LDK) beat estimates by a tremendous margin. Canadian Solar (CSIQ) beat consensus with higher guidance for 2008.

Look back at the new releases in the last couple of months. We believe Solarfun will be the earning leader again for current quarter.

Here are some hints that investors will gain confidence: The company is expanding aggressively and you should expect a great quarter.

• On August 12, the company announced a $71M market equity offer. A market offering is a way to raise capital that current shareholders favour, as the offering buyers look for more upside of the stock price from here. Likely, buyers have some insight into current quarterly earnings. This is positive for the stock price.
• On July 31th, Solarfun signed a 30MW sales contract with Martifer Solar. This project alone may be worth $300-350M.
• On July 17th, Solarfun Power was covered by well known Jefferies & Co. with a "Buy." This is important as this opens a door to high net worth investors from Jefferies' customers.
• On July 14th, Solarfun and Schuco entered into a 47 MW sales contract. This is the largest ever contract SOLF has signed.
• On June 20th, Solarfun offered 9M shares ADR at $20.20, totaling $180M raised for new project expansion.

Looking forward, we expect this time Solarfun will exceed earning expectations with 140-150% upside surprise, which will bring earnings of CNY $3.1~3.4/share to investors. With oil bouncing back, SOLF should retest $27 easily, and I don't think this time the stock will experience a pullback after earnings, simply because Wall Street sees the potential and a well-run company should prevail.

Pay attention to the higher guidance for coming quarters due to the two big contracts signed recently.

Stock position: Long.

Comments

[tilut:]

Great article Kelvin, I am a fan of this company for more than one year and I am disgusted to see its stock price so ridiculously low. I hope this will change rapidly , this stock should be around $40.00.I must also admit that this reality applies to many chinese solar companies.

2008 Aug 14 08:56 AM

[buystocks:]

CSIQ and TSL is a much better play. TSL with US currency will give it an advantage since the appreciation of the US dollar.

2008 Aug 14 09:18 AM

[akapital:]

Great article. Thought I would mention one of the main reasons for SOLF big drop down in late June, early July from the mid 20s to the low teens was the Goldman Sachs downgrade. One of the rationales for this downgrade along with selling in SOLF as well as the sector in general were fears of a reduction in Spanish subsidies as well as concern of the drop in subsidies in other countries as well.

I said then and I will say it again, these concerns are anachronistic. There was a time when solar growth was entirely dependent on gov't subsidies. With greater parity with other energy that is no longer a great dependency. It is a dependence but not as significant. Much more significant, as you point out, is the phenomenal growth of solar even in the face of potential subsidies.

Why the Goldman downgrade then? I don't believe that traditional brokerage understands that things have changed and that subsidies are no longer the driving force.

Lastly, to those who don't think that solar or other alternative energies can survive without subsidies. Consider both the explicit and implicit subsidies that oil has received over the last 50 years - a driving factor in the foreign policy of most industrial nations. Localized energy like wind and solar does not require this type of subsidy but of course Goldman and other traditional brokerages don't get this.

Also, because of this reason, cheaper oil will not result in less demand for alternative energies because most countries understand these geo-political concerns, know there is an alternative, and are doing something about it.

Anyway, great article, just wanted to supplement it with some of the reasons why this stock and other alternative energy interests have been unduly battered, and why now is still a great buying opportunity.

2008 Aug 14 07:59 PM

[Spider jones:]

interesting article, thanks.. SOLF completed acquisition of an ingot and wafer facllty. SOLF now has an new advantage of producing solar panels with 100 % in house resources.. SOLF is a new leader and I believe will outperform. Smart $, imho, goes long here on SOLF.

2008 Aug 15 07:58 AM

[User 226214:]

Investors don't realize that SOLF is shipping more tham 250 MW products this year. They only guided 160 to 180mw, however if you look carefully, you will find out that they are out of capacity for this year which is 250mw on Q4 2007 report to mid 2008, and 360mw after the mid 2008 which makes it about 290mw to 300mw capacity this year. And SOLF announced two contracts and all of these 2 contracts starting to ship on the beginning of 2009. If you think about it, why don't they ship immediately and wait until 2009 for these 2 new contracts?

Only one answer is they are sold out for this year.

2008 Aug 15 06:06 PM