ZachStocks

Solarfun Power Holdings Co., Ltd. (ADR) (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 they 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.

SOLF Notes

FD: Author has a long position in SOLF

Additional Reading:

Zachstocks on LDK Solar

Trader Mark on Trina Solar

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