As we pointed out last week, the emerging consensus seems to be that solar is a commodity and that the only thing that matters is cost per watt. Many feel that solar will ultimately be based in China for all the same reasons that cellphones and computers are made there. Too many cooks spoil the broth and, with all of these Chinese solar companies coming to the market, I can’t help wondering if this is the beginning of margin compression in the solar industry. An optimist will tell you the glass is half-full. The pessimist, half-empty. But maybe the glass (in this case the overcrowded Chinese solar space) is twice the size it needs to be.
Photo: bambooly, Creative Commons, Flickr
Some companies are bound to go missing in the horde. SolarFun (SOLF – Last trade $9.62), based in China, manufactures and sells PV cells and modules. On May 30, the morning of their earnings release, SOLF shares tumbled more than 20% in pre-market trading.
The company reported a Q1 loss of -$0.01/share, much worse than analyst estimates for a gain of $0.07/share. Q1 revenues also fell short of estimates. On top of that, the company lowered their FY revenue guidance. Their gross margins decreased to 17.2% from 34.9% in the first quarter of 2006 and 26.8% in the fourth quarter of 2006. They had lower net PV module shipments (6.5MW vs. 7.8MW y/y), and also reported a lower average selling price (ASP) of US$3.77 per watt vs. US$3.98 per watt y/y. Liquidity isn’t looking good either, as the company’s cash balance declined by about 33% q/q.
Being a hopeless optimist, I have spent the last 30 minutes trying to find a piece of good news in the earnings press release. All I could find was some wishy washy PR ("by recognizing the challenge early on, we started to expand and strengthen our international team").
The key point is that SOLF’s earnings point to a weak customer base, with the lack of customer diversification being to blame for module shipment shortfall. SOLF said that there was an inventory build-up among some of their end customers in Spain and Italy, which resulted in unexecuted sales orders from those customers. The drastic price action after their earnings show that investors underestimated the company’s dependence on their smaller customers.
SOLF is going to need all the help they can get to improve the situation, and they have now hired two senior executives with extensive industry experience to improve marketing and procurements. But these "improvements" could come at a cost. Based on working capital requirements and capacity expansion plans, CIBC analyst Jeff Osborne expects that SOLF will need to raise additional capital in 2H07. More capital means a higher cost of capital, and higher costs of capital could ultimately slow down the company’s expansion plans.
Is the worst over for the SOLF stock price? Given the sharp drop in the share price, it is possible that further downside will be limited. But something more important is going on here: Last week we suggested that the the market hasn’t yet separated the winners and losers in the Chinese solar market. This week we can nominate SOLF as the first loser.