ReneSola (SOL) - The Sun Shines On

Quite a staggering good result from ReneSola (SOL) this morning; the stock has had a huge run since we began adding a week ago so some pullback might happen but it won't be for fundamental reasons. The revenue growth they had sequentially (quarter over quarter) is more than most companies do year over year - 40%! Research and Development spending jumped $3M from the previous quarter - that was much higher than I expected; if it had held steady from last quarter their net income would of went up from $23.3M to $26.3M and their EPS would of came out even more impressive. The only issue I have with SOL is their high share count for such a young company which makes it hard to grow earnings PER share - but the operating metrics are improving across the board and the year over year growth is off the charts. They "only" lost $800K in currency so unlike other companies in this space it was not a huge effect (especially spread over so many shares) - which was one reason we sought this name out for this quarter.

Despite tremendous growth in the near term it's all about "beating the numbers" game - analysts were in at $0.32 EPS and $141M in revenue. The company blasted those figures.

Note - they have an accounting treatment which I am not going to get into but it's spelled out in the earnings report. I'm just using the first set of numbers they reported.

• Net revenues for the second quarter of 2008 were US$173.0 million, an increase of 40.7% sequentially and 289.0% year-over-year. The increase in second quarter revenues was primarily attributable to an increase in output from the expanded production capacity and increasing wafer ASPs.
• Gross profit for the second quarter of 2008 was US$42.8 million, a 57.1% increase sequentially and 330.0% year-over-year. The gross margin for the second quarter 2008 was 24.7% compared to 22.1% in the first quarter of 2008. (that is a huge difference in just 1 quarter - 2.6%) The increase in gross margin was primarily attributable to a further reduction in the silicon consumption rate to 6.24 grams per watt from 6.30 grams per watt in the first quarter of 2008, the continuing reduction in non-raw material related production costs, and increases in wafer ASPs due to a high demand for our wafer products.
• Operating profit for the second quarter of 2008 was US$34.5 million, an increase of 48.9% sequentially and 328.4% year-over-year. The operating margin was 20.0% in the second quarter compared to 18.9% in the first quarter of 2008. (we love seeing those percentages increase, even with a huge increase in R&D spendings) The increase in operating expenses was primarily attributable to a substantial increase in R&D expenditure relating to our investment in developing alternative silicon feedstock materials.
• Net profit during the second quarter of 2008 increased 31.9% sequentially and 294.6% year-over-year to US$23.3 million. (EPS diluted came in at $0.38)
  

Polysilicon Project Update

• On May 14, 2008 ReneSola announced that it had increased the planned annual polysilicon manufacturing capacity to 3,000 tonnes at the wholly-owned facility in Meishan, Sichuan Province, China. Construction of this facility is on track, with completion expected in early 2009. The facility is expected to be operational in the first half of 2009.

Feedstock Procurement (big issue in solar world)

• As a part of ReneSola's diverse feedstock procurement strategy, the Company recently signed a number of polysilicon procurement contracts with international and domestic suppliers with terms ranging from one to five years. With two long term polysilicon procurement contracts signed in 2007, a total of 2,500 tonnes of polysilicon will be delivered during 2008 and 2009, with the majority to be delivered in 2009.

Production Capacity

• As a part of ReneSola's ingot manufacturing capacity expansion to 645 MW by the end of 2008, the construction of a facility to house 160 MW of multicrystalline furnaces is now complete and ready for delivery of the furnaces which will occur during the third and fourth quarters of 2008.
• Construction has begun on a new multicrystalline wafer facility that will hold an additional 355 MW of multicrystalline furnaces as a part of ReneSola's 2009 wafer manufacturing capacity expansion plan. The facility is expected to be complete in January 2009. The furnaces are contracted to be delivered in batches, and the last shipment is expected to be delivered in early third quarter of 2009.

Third Quarter, 2008 and 2009 Outlook

• Production output in the third quarter of 2008 is expected to be in the range of 90 MW to 95 MW, compared to 82.5 MW in the second quarter of 2008 and 36.0 MW in the third quarter of 2007. Gross margin for the second half of 2008 is expected to remain stable at the level under the Equity Accounting Method for the Company's investment in the Joint Venture.

• Based on strengthened wafer ASPs and increased production output we are once again increasing our annual production output and revenue estimates for 2008 and expect output to be in the range of 340 MW to 350 MW from the previously guided 330 MW to 340 MW, and expect estimated annual net revenues to be in the range of US$640 million to US$670 million from the previously guided US$570 million to US$590 million. (that's a substantial jump from their side - analysts are in $612M)
  

• We maintain our wafer production capacity target to be 1 GW by the end of 2009 and our 2009 annual production output is expected to be in the range of 650 MW to 750 MW, including output from tolling arrangements in the range of 100 MW to 150 MW.

So at this point the $1.29 2008 analyst estimate is obviously in jeapordy - they've now done $0.28 and $0.38 = $0.66 in the first half of the year. If they had zero growth from here and just replicated this quarter's performance that's another 76 cents. Due to an increase in share count from dilution which I believe on first glance is not showing on this earnings report I don't have an exact model on where they should be going for the year - also the question of R&D spending is an open one - does it continue at this new higher rate or does it fall back to a more normalized level - or somewhere in between. But it seems in a very back of envelope way that with the new guidance, $1.45-$1.50 seems likely for the year. Growth rates of 200%+ cannot continue but even if ReneSola "slows down" to 75% growth rates in the coming 2 years, perhaps they can get a better forward PE ratio than the current 12.

But that's just me, and fundamentals don't matter to this market.

Favoritism by investors seems to switch from company to company each quarter - and unfortunately they do all tend to trade in one band - despite the individual pros and cons - but for this current round it seems the 2 Chinese wafer makers have the best combination of momentum, lack of headwinds, and investor sentiment. Not to mention, despite huge runs in th past week, they still are dirt cheap - trading below Home Depot (HD) valuations.

[Aug 12: Some Adjustments to Solar Patch & New Position in ReneSola (SOL)]

Long ReneSola in fund and personal account