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ReneSola Ltd. 2009 Annual Report and 2010 first quarter analysis

|Includes: ReneSola Ltd. (SOL)

ReneSola Ltd. trades at 35.8 times forward earnings. During the global financial crisis at the end of 2008 and beginning of 2009, the company recorded inventory write-downs, impairments of investments and overall poor earnings. The first quarter of 2010 showed promise with improvements across the board, including positive operating cash flow and positive gross and net income margins; however, the company must show this is a trend and not just an anomaly. 

First quarter 2010 earnings and limited disclosure were released May 12, 2010. The company’s 2009 annual report was released June 7, 2010, 87 days after the 2009 fourth quarter earnings release on March 12, 2010. 

The company’s poor financial performance has dropped a majority of its rankings to the bottom half of ReneSola’s peer group. Poor operating cash flows during the second half of 2009 put the company at 27th in terms of operating cash flow-to-net income. Significant inventory write-downs and declining selling prices contribute to the company’s poor gross margin ranking. Considerable debt relative to both equity and cash put the company at 32nd in terms of debt-to-equity and 28th in terms of cash-to-debt. The company ranks 6th in research and development expenses as a percentage of revenues because the company has been investing significant amounts to improve its business. 

The company provides limited information in quarterly filings. It does not provide full footnote disclosures. It does provide statement of cash flows on a half-year basis. The company provides total megawatts sold in each quarterly and annual filing; however, many of the key performance indicators, such as conversion efficiencies, are only found in annual filings. Warranty and allowance for doubtful accounts data can only be found in annual filings. 

ReneSola shares are priced at a premium on all available price-to-earnings metrics, as well as on an enterprise value-to-sales and enterprise value-to-EBITDA basis. Conversely, the company trades at a discount on enterprise value-to-operating cash flow due to a negative last 12 months operating cash flow. A market capitalization of more than $1 billion and significant debt levels of more than $500 million at the end of the first quarter 2010 drive the high enterprise value metrics. 

The company operates in two principal reportable business segments: 1) wafers and 2) cells and modules. The wafer segment involves the manufacture and sales of monocrystalline and multicrystalline solar wafers and processing services.  The cell and module segment involves the production and sale of photovoltaic cells and modules. 

On an annual basis, the company discloses megawatts shipped, revenues and gross profit for the wafer division. In fiscal years 2007, 2008 and 2009, we calculated revenue per watts of $2.53, $2.90 and $1.00, respectively, and cost per watts of $1.98, $2.97 and $1.12, respectively. Using the company’s disclosures of wafer division revenues, we calculated revenue per watt above what the company stated in each fiscal year. 

The company does not explicitly state the megawatts shipped for its cells and modules division, but since the company says it has two business segments, the difference between total megawatts shipped and solar wafer megawatts shipped should be megawatts shipped for the cells and modules segment. 

Revenue per employee has been impacted by a 23.9% decrease in revenue in 2009 compared to 2008 and a 55.7% increase in employees during the same time period. The company is considerably below the industry average, falling to $0.10 million per employee in 2009 compared to the industry average of $0.44 million per employee. 

In fiscal year 2009, the company recorded $93.2 million in impairment, write-offs and provisions, which accounted for approximately 18.3% of total revenue. An impairment of $13.4 million was made for a loss on an available-for-sale investment, a provision of $8.6 million was recognized relating to a receivable from a former joint venture and inventories were written down by $71.2 million to reflect lower market value compared to historical cost. Pre-tax income for 2009 with these items included is negative $112.8 million and negative $19.5 million without. 

In fiscal year 2008, the company recorded a total of $139.2 million in write-offs and impairments, which accounted for approximately 20.8% of total revenue. Inventories were written down $138.4 million to reflect the lower of cost or market and an impairment of $763,426 was made relating to property, plant and equipment. Pre-tax income for 2008 with these items included is negative $61.7 million and positive $77.5 million without. 

Interest expense increased from $11.9 million in fiscal year 2008 to $17.1 million in fiscal year 2009, representing an increase of 43.7%. Interest expense was 3.4% of revenue in 2009 and just 1.8% of revenue in 2008. The increase in interest expense is primarily attributable to a 59.6% increase in debt. 

Production capacity for first quarter 2010 is disclosed only for wafers. After three years of being well below capacity, the company appeared to be at capacity in the first quarter 2010 with an approximate utilization rate of 102%. In total, the company shipped 226.9 megawatts of wafers and shipped 15.4 megawatts of modules. Capacity utilization was 61% on an overall production basis and 64% on a solar wafer basis in 2009, compared to 74% on a total production basis and 48% on a solar wafer basis in 2008.

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