So anyhow a few companies which either had disappointed the street repeatedly, changed leadership (CEOs, CFOs), or shown no ability to make a profit in one of the hottest sectors in the market bar none were making huge gains the past month - such stalwarts as Evergreen Solar (ESLR), China Sunergy (CSUN), Solarfun Power (SOLF), and Canadian Solar (CSIQ). ESLR has been public the longest and breathlessly tells us quarter after quarter it will soon be profitable. I think this has been the case for nearly 2 years running - I don't even follow the stock closely anymore as its been a proverbial loser since being public - that said, they once again are stating they are turning the corner so maybe "this time" it is for real... who knows.
At that point when everything goes up, regardless of their individual stories, you know its frothy. In retrospect I was a few days early - full blown manias are hard to time... this is part of what the article speaks to. In my view scale, size, leadership will matter in this industry as in its core its a commodity business. There will be times when lemmings errr investors don't care about these things and run up the lowest priced stocks - in fact this is a strategy of many momentum players... when a sector is sexy move into the worst stocks (which are the lowest priced) and try to generate a lot more gain. This can work from a 'trading' perspective. But as an investor its a high priced game of chicken in my opinion.
While this will take a long time (years) to play out, my vision is eventually the leaders with scale will get their cost structure down to a point where they can lower average selling prices (ASPs) to a point where it will cripple the small fry in the pond. Some of these smaller companies are having major trouble building their product above cost (gross margins very low), and while the drop in polysilicon prices (65-75% of costs for many Chinese solar companies) will help these smaller companies, it will also be helping the larger companies. So right when these small fry get to the point where their margins reach levels the leaders are enjoying now (1-2 years from now), the leaders will already be onto the next step - expanding volume by dropping prices. And this will mean another crippling era for the smaller players. Even if the overall pie of solar is growing. Again, just a theory but this is how all commodity businesses work, and solar should be no different in the 'long run'. In the short run? Feel free to speculate on any name, because even those that cannot produce profits seem to be run up by speculators simply on the hope that the future will be 'brighter'. (oh, I love puns)
- In a previous stage of solarmania, the shares of companies up and down the value chain seemed to press upward in unison. Now this borderline-bubbly market has seen a bit of bifurcation. While the clearest leaders bound higher, the wheels have begun to come off some of the shakier outfits.
- China Sunergy (Nasdaq: CSUN) was actually the vanguard in this regard. Storm clouds surrounded the company in July, when polysilicon supplies proved elusive. The squeeze prompted a second-quarter flameout and a management shakeup.
- I scoffed at Sunergy's 5% gross margin back then (me too), but that figure's looking downright dreamy compared to the latest number. Yesterday, the firm reported a 2.1% gross margin across its product mix. Had Sunergy not sold some precious polysilicon on the side of its core solar cell business, margins would have been even slimmer.
- The company naturally reported a loss for the quarter, but here's a perverse little tidbit. If the share count hadn't ballooned by 47% sequentially, its per-share loss would have been quite a bit uglier. (sad)
- China Sunergy is targeting doubled output in 2008, which could possibly bode well for the bottom line. Of course, that's assuming both that the firm will sign sufficient supply contracts with silicon slingers, and that these suppliers will be able to deliver in quantity and quality alike. On the call, management noted that a good deal of anticipated supply is coming from two start-ups. Contrast that with Suntech Power (NYSE: STP), which pegged "new entrant" supply at around 5%-10% of its 2008 polysilicon pile.
- The company's base case, which assumes that the polysilicon pours in as expected, pegs gross margin at 4%-5% next year. That's about good enough to hit operating breakeven, in its estimation. Beating this forecast could prove difficult, given that long-term supply deals can require significant up-front deposits. This would likely force the company to issue more shares or debt at a time when cash is pretty tight.
- China Sunergy doesn't have the cell efficiency of SunPower (Nasdaq: SPWR), the scale of Suntech, or the integration benefits of Trina Solar (NYSE: TSL) or Yingli Green Energy (NYSE: YGE). Though I hate to kick a company while it's down (except, of course, when it's totally justified), I see no reason to come within 500 feet of this stock.
Long Suntech Power in fund and in personal account; looking for an entry point in Trina Solar and LDK Solar
