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Michael Lofing
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Michael Lofing, CPA, is the founder of Earnings Expert which provides qualitative investment research focused on in-depth analysis of selected industry groups for institutional investors. The research incorporates fiduciary, business and financial risk of individual companies and the selected... More
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  • JA Solar Holdings Co. Q3 revenue growth and margin improvements
     JA Solar Holdings trades at less than seven times forward earnings which is 64% below its peer average. The valuation is tempered by dependence on a limited number of key customers, limited quality disclosures and related party transactions. The company experienced substantial increases in revenues and an improvement in net income margin. JA Solar was not immune to the tough market conditions at the end of 2008 and beginning of 2009, but it has since increased its revenues, kept strong operating cash flow and improved its financial performance since the beginning of 2009.
    Half of the company’s rankings improved in the third quarter of 2010. Operating cash flow-to-net income improved to 14th from 17th and free cash flow-to-net income to 10th from 12th. The company fell four spots on the cash conversion cycle to 14th; however, the company still boasts superior inventory and receivables management relative to the peer group. Gross margin declined to 14th, despite an increase in our calculated margin per watt. Debt-to-equity improved to 13th from 16th despite an increase in total debt. The other rankings did not change significantly from last quarter.
    Revenues increased 53% in the third quarter of 2010 from the second quarter and 25% in the second quarter from the first quarter 2010. While net margin per watt has increased for six consecutive quarters, stable average selling prices will help the company take full advantage of the reductions in its cost per watt. Net margin per watt increased to ¥1.95 per watt in the third quarter of 2010 after an increase to ¥1.77 in the second quarter 2010.
    Net property plant and equipment increased by ¥595 or 24.4% during the third quarter of 2010. On the earnings conference call the company disclosed capital expenditures of ¥370.7 million. We estimated depreciation of approximately ¥80 million resulting in a difference of approximately ¥300 million of additions to property, plant & equipment that do not come from capital expenditures. The lack of a cash flow statement increases our concern about this discrepancy. The limited disclosures and discussions by the company provide no additional insight.
    Additional analysis of JA Solar and its peer group can be found on
    Michael Lofing
    President, Earnings Expert, LLC

    Disclosure: No positions

    Disclosure: No positions
    Nov 16 10:34 AM | Link | Comment!
  • Solarfun Power Holdings Q2 2010 ownership changes and strong results
    Solarfun Power Holdings recorded its strongest quarter in the past eight quarters during the second quarter 2010. Strong revenues, earnings and operating cash flow assisted the company in exceeding earnings estimates by almost 100%. The company increased its full-year shipment guidance for 2010 by 100 megawatts and claim they are optimistic about the company’s future performance based on early demand indications from key customers for 2011.
    The company is in the middle of the pack relative to its peers on most metrics. While the company has had strong operating cash flows, operating cash flow and free cash flow-to-net income it fell from a number one ranking to 16th and 11th, respectively. Significant debt relative to cash has dropped the company’s ranking on cash-to-debt to 32nd among its peers. A decrease in debt during the second quarter 2010 improved the company’s debt-to-equity ranking from 24th to 19th. A significant increase in the cash conversion cycle moved the company to number 19 among its peers.
    For the past five quarters, the company has been below the industry average in terms of cost per watt. The company provides its total solar modules shipped in megawatts on a quarterly and annual basis, but only provides revenues and costs associated with solar module production and solar module sales on an annual basis. Additionally, solar module production in megawatts is only provided on an annual basis.
    Based on our computations, we calculated an average cost per watt of ¥6.75 for the second quarter 2010, down from ¥7.97 for the first quarter 2010 and ¥9.16 for the fourth quarter 2009. Fiscal year 2009, we calculated an average cost per watt of ¥13.53, down substantially from ¥26.58 for fiscal year 2008.
    On a quarterly basis, the company says its average selling price was ¥11.19 in the second quarter 2010 and ¥12.01 in the first quarter 2010. Revenue per watt on a quarterly basis is less accurate as the company does not provide revenues related to its solar module business and total solar modules sold. Quarterly, revenue per watt has been consistently decreasing, falling from an eight-quarter high of ¥30.35 in the third quarter 2008 to ¥8.55 in the second quarter 2010. Furthermore, revenue per watt has been significantly below the industry average for the past five quarters.
    Net margin per watt has been volatile over the past eight quarters. Overall, net margin per watt has decreased since an eight-quarter high of ¥4.31 in the second quarter 2008. The margin per watt has since dropped to as low as negative ¥7.87 in the fourth quarter 2008 before reaching ¥1.80 in the second quarter 2010.
    At the end of the second quarter 2010, the company had 700 megawatts of annual solar module production capacity, up from 600 megawatts at the end of the first quarter 2010 and 550 megawatts at year-end 2009. In addition to module production capacity, the company had 400 megawatts of annual solar cell production capacity, annual ingot production capacity of 360 megawatts and annual wire sawing capacity of 400 megawatts at the end of the second quarter 2010.
    Prior to the first quarter 2010, operating cash flow had been in excess of net income for seven straight quarters. Operating cash flow recovered in the second quarter of 2010 after a poor first quarter 2010, exceeding net income by 1.5 times. Additionally, operating cash flow has been above the industry average for five of the past eight quarters. On a last 12 months basis, operating cash flow has exceeded net income and the industry average for five straight quarters. We believe a ratio of greater than one is an indication of good earnings quality.
    On Aug. 3, 2010, the company announced it had engaged in a strategic relationship with Hanwha Chemical Corporation, a leading global chemical company headquartered in Korea. Under the agreement, Hanwha Chemical purchased approximately 36.5 million ordinary shares from Solarfun at a price of ¥14.51 per share. The total proceeds to Solarfun will be approximately ¥529 million ($78 million). The company intends to use the proceeds to fund its expansion plans and for general corporate purposes. In the company’s second quarter 2010 conference call, it repeatedly said it could not make further comments on the strategic partnership at the time. It did state the company is looking for the “long term strategic partnership with Hanwha to have a mutual beneficial relationship” and that the company sees a “very strong commitment from Hanwha to get into solar.”
    Hanwha Chemical also entered into separate agreements to acquire from Good Energies II LP and Yonghua Solar Power Investment Holding Ltd., a company owned by Solarfun’s chairman Yonghua Lu, a total of approximately 120.4 million Solarfun ordinary shares and 1.28 million Solarfun ADS, representing all of the ordinary shares and ADSs held by the respective companies. In total, Hanwha Chemical will own 49.99% of the company’s outstanding ordinary shares and hold a 49.99% voting interest in Solarfun.
    Additional analysis of Solarfun Power Holdings and its peer group can be found on
    Michael Lofing
    President, Earnings Expert, LLC 

    Disclosure: No positions
    Sep 09 10:02 AM | Link | Comment!
  • Yingli Green Energy Holding Company 2009 annual report & 2010 first quarter analysis
     Yingli Green Energy suffered through a tough 2009 fiscal year. The company posted a considerable net loss as it recognized several one-time items that helped push the company’s earnings into the red. The first quarter of 2010 showed promise with improvements across the board, including positive operating cash flow, the highest gross margin in the past eight quarters and a positive net income margin. The company currently trades at 12.7 times 2011 earnings estimates.
    The company’s 2009 annual report was released June 25, 2010, 109 days after the 2009 fourth quarter earnings release on March 8, 2010. The company revised its fourth quarter 2009 earnings release to include an increase in bad debt expense of ¥145.5 million. The net loss for the fourth quarter and full year 2009 were increased by ¥61.9 million. A 13.5% increase to the previously reported net loss for the fourth quarter of 2009. This correction was reported as part of the first quarter 2010 earnings release May 24, 2010. We believe this is a material correction to previously reported earnings.
    Despite a poor fiscal year 2009, many of the company’s rankings are near the top of its peer group, including operating cash flow-to-net income (2nd), cash conversion cycle (4th), gross margin (6th), research and development (9th) and SG&A expenses (7th). Significant capital expenditures and an acquisition force free cash flow-to-net income to number 20 among the peer group. The lack of clear disclosure of the amount of receivables sold leaves us unable to quantify the enhancement of the cash flow-to-net income ranking and the cash conversion cycle.  The company relies heavily on debt to finance its operations and expansion, which contributes to the company’s number 28 ranking in debt-to-equity and number 29 ranking in cash-to-debt.
    The company provides limited information in quarterly filings. It does not provide full footnote disclosures or a statement of cash flows. This is a common practice among Form 6-K filers. Furthermore, the company does not provide total megawatts sold or produced in its quarterly filings and many of the key performance indicators are only found in annual filings. Warranty and allowance for doubtful accounts data can only be found in annual filings. Governance is below average because three of the company’s seven directors are not independent. One director serves as the chief financial officer while another director serves as the vice president of the company. Furthermore, the financial controller serves as the internal audit manager and assistant to the chief financial officer.
    We calculated an average cost per watt of ¥10.39 for fiscal year 2009, down from ¥20.30 in fiscal year 2008. Annual cost per watt is calculated using solar module cost of goods sold (COGS). The company makes the statement that its production capacity was at 130% in the first quarter 2010, based on 600 megawatts of capacity. This translates into production of 195 megawatts in the first quarter 2010. Using this figure, first quarter 2010 cost per watt is ¥8.20. Quarterly megawatt shipments are never explicitly stated, but the company claims that it expects second quarter 2010 shipments to increase from the first quarter 2010 by “high-single digit percentage.”
    In 2009, the company received government grants related to the acquisition of assets for the polysilicon plant of ¥122.1 million and recognized the entire amount as a reduction in the cost of the assets. The grants represented approximately 5.4% of 2009 capital expenditures, which will reduce depreciation expense on those assets by 5.4% when put into production.
    The company does not provide statements of cash flow in its quarterly Form 6-K filings. This seems to be the norm among fellow Form 6-K filers. Of the available earnings call transcripts, the company only discloses its operating cash flow in the second quarter 2009, claiming it generated a positive operating cash flow of ¥600 million. For the fourth quarter 2009, the company claims to have generated positive operating cash flow of more than $200 million (¥1.4 billion). For the remaining transcripts available, the company only claims to have achieved positive operating cash flow. Quarterly cash flow disclosure is grossly inadequate.
    In 2009, the company entered into agreements with several Chinese banks to sell without recourse certain accounts receivables. The exact dates of the sales were not disclosed. The accounts receivable were considered sold and were therefore derecognized. The company received net proceeds from the sale totaling ¥1.7 billion and is included in the net cash provided by operating activities section of the statement of cash flows. This amount represents 23.4% of total revenues recorded in 2009. The company recorded a loss on the sale totaling ¥5.9 million and is included in the general and administrative expenses section on the income statement. The exact impact on operating cash flow and free cash flow cannot be quantified. The company’s CFO indicated on the 2010 first quarter earnings conference call that receivables were also sold during the first quarter. The amount and timing were not disclosed.
    In 2009, the company capitalized ¥144.2 million in interest costs for the cost of construction in progress. This represented 6.4% of 2009 capital expenditures, 27.7% of total interest costs incurred and 5.7% of assets under construction in 2009. Total interest expense increased to ¥91.2 million in the first quarter 2010, compared to ¥80.8 million in the fourth quarter 2009. The increase was due to an increase in short-term borrowings from ¥3.5 billion at year-end 2009 to almost ¥4 billion as of March 31, 2010, not including the current portion of senior convertible notes.
    In November 2008, the company paid a deposit of ¥171 million for its acquisition of 100% of Cyber Power, a development stage enterprise, with plans to begin production of solar-grade polysilicon in 2010. At the time, it was controlled by Miao, the chairman and chief executive officer of Yingli Green Energy. On Jan. 7, 2009, the company completed the 100% acquisition of Cyber Power for a total consideration of ¥544.2 million. The company acquired ¥837.3 million in assets, including ¥642.3 in PP&E, ¥78.8 in land use rights and ¥116.2 in other assets. Total assets represent 37.1% of 2009 capital expenditures. The company assumed ¥293 million in liabilities, including ¥266.2 million in accounts payable and ¥26.8 million in other liabilities. The acquisition price was determined based on an approximate 4% discount to the net tangible book value of Cyber Power as of Nov. 30, 2008. No discussion was provided regarding the fair value of Cyber Power.
    At year-end 2009, Tianwei Baobian owned a 25.99% equity interest in Tianwei Yingli, one of the company’s principal operating entities from which it derives the majority of its revenue and earnings. By December 2009, Tianwei Yingli had built 400 megawatts of production capacity and Yingli China had built 200 megawatts of production capacity for each of multicrystalline polysilicon ingots and wafers, solar cells and solar modules. Two-thirds of the company’s total production capacity is attributable to the joint venture.
    The United States and other countries maintain economic and other sanctions against several countries. Baoding Tianwei Group Corporation (Tianwei Group), the parent company of Tianwei Baobian, was acquired by China South in March 2008. The company states in its 2009 Form 20-F it has been reported that China South, Tianwei Group and Tianwei Baobian conducted construction activities in or exported transformers to some sanctioned countries, including Iran and Sudan. Additionally, China North Industries Corporation (Norinco), an affiliate of China South, was designated by the U.S. State Department as engaged in the transfer to Iran of equipment and technology having the potential to make a material contribution to the development of weapons of mass destruction. Norinco also was reported to have had activities in and exported products to some sanctioned countries, including Iran, Sudan and Syria.

    Disclosure: No positions
    Jul 07 3:41 PM | Link | Comment!
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