Solarfun Power Holdings revisited: Fun for investors
Editor’s note: This week we’re revisiting some of the companies that were profiled in this space earlier this year. This update is based on a Nov. 20 article by Paul Rolfes, “Solarfun Power Holdings: Partly cloudy.” At the time, Solarfun was showing signs of strength but analysts were divided. Then came the release of third-quarter earnings.
When SmallCapInvesor.com profiled Solarfun Power Holdings Co., Ltd. (Nasdaq: SOLF) on Nov. 20, the Chinese manufacturer of photovoltaic (PV) cells and modules used to convert light into electricity was just emerging from a slump.
Its first quarter had been bleak, as the company recorded a $0.01 loss per share accompanied by a 23% drop off in stock price. Solarfun’s second quarter, ended June 30, marked the start of the company’s turnaround, when it reported revenue spiked 358% to $61.78 million from $13.48 million in the same quarter last year. PV module shipments jumped 193% to 16.4 megawatts (MW) from 5.6 MW in the second quarter last year. Net income surged 25% to $2.59 million from $2.07 million in the 2006 quarter.
Nonetheless, many analysts were still on the fence. As we noted in our report, “Investors looking to jump into China or into solar are left wondering if Solarfun is a potential sleeping giant that could shine brightly, or if the company is something of a poorly lit bulb in their investment strategy.”
It didn’t take long to flip the switch.
When third-quarter results were reported nine days later, shares bolted 30% in one day. Revenue in the three months ended Sept. 30 surged 312% to $100.6 million, from $24.4 million in the third quarter of 2006, while net income soared 146% to $8 million, from approximately $3.23 million a year ago.
The third quarter clocked in strong as shipments increased on continued robust demand. Also, the completion of additional PV cell production lines in November enabled the company to achieve manufacturing capacity of 240 MW in the quarter, reaching its target manufacturing capacity for 2007 ahead of schedule.
And the fun was not over yet. Management raised guidance for 2007, stating that it plans to continue expanding production capacity in order to meet continued strong demand.
The small cap, which at $1.35 billion is actually now a mid cap, now expects revenues in the range of $280 million to $300 million, up from the company’s previously forecasted sales range of $250 million to $270 million.
Since our report in late November, shares of Solarfun have risen more than 100%.
“Management raised 2007 guidance to the high end of [its] previous shipment range, but we believe upside exists,” CIBC World Markets analyst Adam Hinckley wrote in a research note. “Gross margin should improve as pricing is expected to be stable through the first half of 2008 and wafer costs decline further.”
Analysts, who had a consensus of a “hold” rating on the stock when SmallCapInvestor.com first reported on Solarfun, are maintaining a “hold” on the stock, despite raising estimates on upgraded guidance and an extraordinary third quarter.
Lazard Capital analyst Sanjay Shrestha doubled his estimates for the fourth quarter to $0.18 from $0.09 and raised his estimate for the full year to $0.39 from $0.17. In 2006, Solarfun earned $0.13 and $0.48 per share for the fourth quarter and full year, respectively.
“We believe management is taking the necessary steps to position the company on a longer-term basis through capacity ramp …,” Shrestha wrote in a research note. “[However,] shares could remain volatile in the near term given current trading dynamics in the sector and the need for capital raise to support anticipated growth.” The analyst said he sees potential for further upside once the company addresses its near-term capital requirements.
CIBC’s Hinckley also raised his estimates to $1.40 from $0.62 on a strong outlook for pricing and wafer cost declines, coupled with more than two times year-over-year estimated shipment growth in 2008. “Solarfun’s strong third quarter built on the improved performance in the second quarter and should pave the way for a great fourth quarter,” Hinckley wrote.
In short, it looks like the party’s just getting started over at Solarfun (SOLF).
