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Solarfun Power Holdings: Expect a Rally from Key Support

by: Zachary Scheidt August 19, 2008 | about stocks: SOLF    
Zachary Scheidt

Zachary Scheidt

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Solarfun Power Holdings Co., Ltd. (SOLF) has had quite a bit of volatility during its 20 month span of being a public company.  The Chinese manufacturer of solar products came public at $12.50 towards the very end of 2006.  The company is expected to earn $0.93 per ADR this year and should grow earnings 25% or more in the following year.  With an earnings announcement coming up at the end of the month, and solar names beginning to catch a bid across the board, I thought it would be worth a closer look.

The latest quarterly report from SOLF revealed a company that is beating expectations and expanding capacity.  While IBD mentioned in January that the company expected to ship 70 to 80 Megawatts in 2007, the 2008 numbers are even more impressive.  Management raised its full year guidance to 160-180 MW and is increasing capacity at its factory.  The second quarter alone is expected to come in with 40-45 MW shipped.  Oppenheimer is expecting revenues of $713.2 million for 2008 and believes SOLF will increase that to $1.02 billion for 2009. 

The solar industry saw a sharp drop last month when Spain announced a significant cut to its planned subsidies in the industry.  While this cut has a short-term negative effect on solar power demand, the implication is that the industry is maturing to the point where it can stand on its own two feet without needing government intervention.  This would be a strong endorsement of long-term demand for solar panels.

Since Solarfun receives 46% of its revenue from Spain, and another 36% from Germany, the news hit the stock especially hard eventually driving it a bit below the $12.50 IPO price.  However, the stock has since rallied to cross $16 in an amazing show of strength.  The technical ability of the stock to rally off the IPO price and cross through the 50 day average is constructive, and the fundamental growth story should continue to propel the stock price. 

Looking forward to the second quarter earnings release, there are a few items that will be critical to watch.  First the company needs to show it can obtain affordable polysilicon.  Since poly is one of the largest input costs and the supplies are short on a worldwide basis, this raw material must be obtained.  Margins have been under pressure as selling prices of wafers have been relatively stable while poly costs continue to rise.

The second issue that must be addressed is manufacturing capacity.  If the company is able to keep construction within the expected timeline and management affirms 2008 and 2009 capacity for the entire company, expect to see the stock trade up.  However if these two issues are not addressed to investors' satisfaction, the current run could peter out and there will be less of a reason to hold the company long-term. 

Standard & Poors recently issued a report bumping the company to a “buy” rating from its previous “hold.”  It seems that with sentiment so low, and investors expecting little good news out of the stock (and industry) the stock price may be at an attractive level.  I believe it is worthwhile to take a diversified approach and add a bit of capital into the solar area with SOLF as one candidate for those investment dollars.

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SOLF Notes

FD: Author has a long position in SOLF.

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This article has 10 comments:

  •  
    Aug 19 01:33 PM
    Just to restate the obvious, the stock has been acting very well considering what has happened - not only w/ SOLF, but also w/ the other solars. Whenoil would fall, all the solar stocks would fall as well. Now, it just ain't so. I'm long SOLF going into the earnings on 8/27 BEFORE the open.
    I'm new to Seeking Alpha; I've found nothing better!!
    Reply
  •  
    Aug 19 10:49 PM
    we made 400% on LDK now i added 17.50 calls today at $1.70
    Reply
  •  
    Aug 20 07:37 AM
    navellier like solf and is very optimistic of the company 2Q report!
    "This solar stock will deliver spectacular earnings on August 27—and possibly issue guidance by August 22. YOU MUST SNAP UP THE STOCK BY AUGUST 22—or sooner! Don’t you dare miss out.
    Reply
  •  
    Aug 20 07:46 AM
    Thanks for the comments guys, I think SOLF offers a great opportunity in this environment where Solar stocks are finally making a comeback. But of course volatility makes risk management necessary. Good luck with the positions.

    Singh - enjoyed visiting your site. Would be interested to know more about your investment style/focus. email me if you have time - zds@stearmancapital.co...

    Best,
    Zach
    zachstocks.com
    Reply
  •  
    Aug 20 11:39 AM
    Go look at the entire solar sector for earnings. SOL up, TSL up, YGE up, CSIQ up, STP up, and LDK up. SOLF announces 8/27. It really shows that solar is for real -- even in this relatively poor world economy. The efficiencies from volume production should continually improve their profit margins. Contracts are covering 2008 and many have a majority of 2009 in place already. No other sector really can compare with this. Incidently, WIND stocks are also doing well. Alternative energy has a bright future in efforts to help reduce pollution of our earth and to reduce oil use.
    Reply
  •  
    Aug 20 12:02 PM
    Anyone have any comments on the very low forward 12mos. P/E (adding up estimated earning for next 4 quarters) for SOLF and YGE?
    Reply
  •  
    Aug 20 12:55 PM
    singh, I'm not sure how options work. Does that mean you make a profit at $17.50 + $1.70 = $19.20 or is the $1.70 for the 100 lot and thus equal to $.17 per share? What is your time period that is given with your call option?
    Reply
  •  
    Aug 20 08:27 PM
    why is institutional ownership so low? also, debt is over 4x cash at last report, so... i would look at cash flow at next earnings as STP had great #'s, but cash went from $1billion to $600million with debt staying at $1.5billion
    Reply
  •  
    Aug 20 11:00 PM
    For now, SOLF is too expensive to go. I just added large position on CSIQ and TSL.
    Reply
  •  
    Aug 22 01:23 AM
    Top Reasons to hold this stock
    -It seems to ride fairly independent of oil contracts
    -Forward PE (expected annual are all >$.90) meaning the price is the PE (P/1) = P, FLSR has a forward PE of 80 fill in the blanks
    -First quarter the support was 8.5, the sector was not that good, this intermission we had 12. Next is ?? your guess is as good as mine.
    -MM are not going to miss this one this time, especially not GS.
    -I am bullish on the Market, I think its ready to roar and I cannot sleep for that reason. Financials want to rally, GS, Merryl just said they were sorry at 8pm there was a Bloomberg article.
    -solar is not done.

    Top Reasons to sell
    -You cannot take the risk (I say this seriously, If you are overextended this is not a play for you.
    -You cannot set a price target and stick to it.
    -Oil may affect us, it likely will in the short run, and its moves will be amplified.
    -Last quarter we peaked @ 29. There WILL be selloff in the mid twenty region it will NOT be easy to overcome.

    Critics wanted.
    Reply
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