Hanwha SolarOne, A Forgotten Stepchild Of The Chinese Solar Boom

| About: Hanwha Q (HQCL)

As we expected, the early days of 2014 are the early days of the solar market boom - and this boom is not going to stop for a long while. Coming out of 2013 with the best scorecard return, the industry and individual stocks have grabbed a lot of attention. Some of the companies will make high earnings per share this year and with modest price to earnings, PE of 12, will hit lifetime highs. The pursuit after the most capable names appears to be on daily.

I have made a number of choices from the first lineup of contenders and built my portfolio with Canadian Solar (NASDAQ:CSIQ), JinkoSolar (NYSE:JKS) and Trina Solar (NYSE:TSL). The market does not seem to be confused about the first two, while Trina has not convinced everybody yet. I personally warmed up to Trina after a couple of critical releases last year. The joint venture with Yabang, taking over the capacity of 400MW of Changzhou NESL Solartech Co., Ltd. and expanding it to 500MW was one of them. The second one, which made me buy Trina, was a 1GW project in Xinjiang with a completion of 300MW of the Trina project portfolio during 2014. It sounds like the company is finally taking on the path of either the domestic CSIQ, to sell solar plants to the Chinese buyers now popping up everywhere, or of Jinko, holding them for FIT collection.

There is a second tier of companies, which have not been the obvious choice. For the most part they are not preferred because of their lack of earnings ability or lack of any obvious advantages. One of them is Hanwha SolarOne (HSOL). The company made headlines in Q3 by having the worst result out of the pack. In the quarter that every single company beat their prior gross margin, HSOL did not. The explanation of paying for the EU tariff penalties was not a great one to clarify the rising cost, while the company recording $46M of non-cash charges from valuation allowance against deferred tax, made it simply awful. Then, three days later, to make matters worse, the company announced at-the-market offering of ADS for some $70M, bringing potential share count to about 100M plus. The only analyst who was present at the company's conference call will probably not show for the Q4 call based on those outcomes. However, from this point on, the stock and the company started looking a lot more interesting.

Let's assume that 100M shares will be there after sales, which may or not may be executed. At $345M market cap or so, HSOL has the smallest market cap among the companies with meaningful module sales. What is not normal, however, is the non-cash and one-time nature of the impact on Q3 results. I can see that eliminating those events and bringing the absolute ASP to a higher level of $0.61 per watt, while at the same time reducing cost by one cent, can make a potential surprise of 10% GM, a 100% improvement.

Since the third-quarter conference call, the company has issued six news releases summing up some 330MW of contracts and projects, most notably with 213MW Chinese corporations, a record activity, compared to none for the prior 11 months. On December 2nd news came out, this time about the credit agreement from Bank of Beijing issuing $574M credit facility to the company. I quote Chief Financial Officer of Hanwha SolarOne Mr. Jay Seo's words about this event: "This is an important component to support our emphasis on a strengthening downstream business in China. We currently have 250MW in our pipeline. We expect to build up our EPC competency and project track record and develop an IPP business, including through strategic partnerships in China now under active discussion." That portfolio of 250MW came to me as a surprise. Then I found Ki-Joon Hong's statement, Chairman and CEO, who said the following in prepared remarks during the third-quarter conference: "We will for sure enhance profitability with a focus on expansion in high-end markets including the EU residential as top segment, exploit first-mover advantage in Japan and also higher price segment of U.S. market." Ki-Joon Hong continued with the 2014 strategy: "Strengthen PV downstream business in China, our EPC competence and develop IPP business with consolidation through our alliance with strategic partners. Differentiate from Chinese peers with high-quality, low-cost production driven by increased manufacturing automation and cooperation with Q-CELLS. Develop market initiatives in Hanwha growth, leveraging the long-term reliability, network and revenue." The news on December 4th about Strategic Partnership MOU with Jiangsu Zhongtian Technology to Develop Downstream Opportunities in China, gave the full meaning of the transformation, including a 150MW module supply from Hanwha.

If considering other points of the strategy, Hanwha is certainly delivering a different momentum in the last 40 days. Certainly, I expect the company to have the highest deliveries to Japan out of the peer group, followed by large (for them) contributions to the US and South Korea during Q4. While I am not a big enthusiast of OEM, Hanwha has been talking about synergies with Q-CELLS, parent company Hanwha Group's other solar company, for some time. In my interview with Jonghyun Shin, General Manager at Hanwha Group, in July 2013, I learned about plans for China, but I was not thrilled with the loss of space to Q-CELLS in the US and EPC business being left to them, in organizational reshuffles. However, with those December releases and the fact of Hanwha's mother backing, and now Chinese banks, SolarOne is becoming a lot more attractive at its current price, particularly when altered into an independent power producer.

Thus far, looking at the market action, I think this momentum shift is missed and most are completely oblivious to the list of improvements spelled out for Q4 by management. Those include shipments in the area of 380MW, where I hope for 400MW, gross margins' expansion and average selling prices supporting at least the same $0.68 per watt (and absolute price per watt shipped at $0.61 including OEM service). Finally, cost reduction and manufacturing efficiencies for wafers and cells with the introduction of new, E STAR II cell technology, reportedly improves average module efficiency by 3 to 5W and reduces silver paste intake by some 45%. With some 15 grams of silver per average 60-cell panel the cost reduction could be up to $0.04 per watt, something which could help with results in Q1, 2014. I also hope for less OEM and more third-party sales during Q4, while having as much as 100MW shipments domestically in China. More than half, 63MW, were confirmed with China Huaneng Group on December 10 and Jiangsu Zhongtian on December 11.

Of course, Hanwha is not going to hit profitability any time soon. Yet the realization of the above conditions could suddenly accelerate HSOL, something which is not yet palpable.

Disclosure: I am long CSIQ, JKS, TSL, HSOL, . 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.

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