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SOLF AT A GLANCE

 

 

 

 

 

 

Solarfun Power Holdings manufactures Photovoltaic (PV) cells and PV modules, provides PV cells services to convert silicon wafers into PV cells, and supplies solar power system services in China.^[1] Unlike many of its competitors, Solarfun manufactures in PV products in house and sells them directly to system integrators or to third-party distributors.^[2] The company has four PV cell production lines and four multicrystalline PV cell production lines and a total manufacturing capacity of 240 megawatts. In addition to its production plants, the company owns 40 monocrystalline ingot production furnaces, with up to 37.5 megawatts of annual manufacturing capacity.^[3]

For 2008, net revenue increased 106.6% due to higher product and service prices as well as a 120% increase in PV shipments.^[4] The sale of PV modulus and PV cells comprised 98% of the company's revenue in 2008, and, as a result, the company's earnings almost completely depend on the demand for solar energy.^[5] Although revenues increased in 2008, the demand for PV cells and modulus has declined substantially beginning in the second half of 2008.^[6] As a result, the price Solarfun's PV products and the overall price of raw materials has declined substantially. In the fourth quarter of 2008, gross margin was negative 33.7% as the price of its PV products declined and its product inventories increased due to weak demand.^[7] As a result, Solarfun had to make provisions for inventory write-downs and unsalable products that totaled $ 60.7 million.^[8] Beginning in the last quarter of 2008, Solarfun has moved to producing PV cells using lower cost materials in an effort to reduce operating costs and increase profits.^[9]

Business and Financials

Solarfun is involved in three intermediate steps of the solar industry: mono- and multicrystalline ingot and wafer manufacturing, mono- and multicrystalline photovoltaic cell production, and solar module production. Mono- and multicrystalline ingots are refined chunks of polysilicon that are futher refined into wafers used in the production of photovoltaic (PV) cells. PV cells turn light to electricity, and are arranged into boards, or modules. After production, Solarfun sells its modules internationally (with over 90% of sales in Europe^[10]). The modules can be sold to distributors, to be installed on buildings and factories, or to integrators, who incorporate the power generated by arrays of modules into the utility grid.

Solarfun does not produce enough of its own ingots and wafers to match its PV production, so the company must purchase from other wafer manufacturers. For example, the company has a 3-year, fixed price multicrystalline wafer supply contract with LDK Solar. Since silicon prices are trending upwards, this fixed-price contract should provide some cost-saving opportunities for Solarfun, assuming silicon prices don't fall in the near future.

Solarfun is sensitive to a relatively small customer base. In the first three quarters of 2006, the Italian S.E. Project made up 31% of Solarfun's revenues, Spain's Social Capital contributed 16%, Suntaics, 14%, Solar Projekt, 15%, and various other customers the remainder. Though Solarfun's rapid expansion in 2007 probably means that the company has quite a few new customers, with so few customers responsible for large portions of the company's revenues, Solarfun is extremely vulnerable to the loss of any one of them.

Source: 3rd Quarter 2007 Earnings Release^[11] Click for Currency Conversion

Solarfun's revenue increased by almost 370% in 2007. Margins declined, however, possibly because of the increasing cost of polysilicon. The supply shortage and high cost of polysilicon materials continued to hurt Solarfun's margins in the third quarter of 2008. Despite revenues that were nearly 70% higher than in third quarter 2007, Solarfun had a net loss of $6.5 million in the third quarter of 2008 due to an inventory reevaluation and a supply shortage of polysilicon material. The inventory reevaluation included a provision for $16.5 million due to rapidly declining raw material costs, low-quality materials deemed unusable, and supply pre-payments that are likely to be unrecoverable.^[12] The majority of Solarfun's business lies in the sale of PV modules, though the company does sell its cells to other module manufacturers and offers cell processing services to some of its silicon providers.

Trends and Forces

Solarfun hurt by falling Solar-cell prices at the end of 2008 and Beginning of 2009, looks to Chinese Government for Help

For the fourth quarter of 2008, Solarfun reported revenue that was 12% lower than in the third quarter of 2008.^[13] The drop in fourth quarter revenue in part was due to a $47.8 million write down on its inventories.^[14] Many of Solarfun's lower quality poly-silicon, solar cells, and solar modules have dropped in price substantially.^[15] Analysts at Motley Fool believe that the drop in solar material prices have the potential to force Solarfun to reduce production of lower-quality solar cells in order to produce more high-quality products.^[16]

The price of solar cells has continued to drop during the first three months of 2009.^[17] The company expects to ship 35 megawatts at an average during the first quarter of 2009 at a selling price that is 15% below fourth quarter pricing.^[18] Despite expectations for lower prices in 2009, Solarfun will fund its operations from cash on hand and a line of credit from Chinese banks.^[19]

In response to falling solar cell prices and rising production costs, the Chinese government included solar subsidies as part of its "Green" stimulus package.^[20] Subsidies from the Chinese Government's Economic stimulus package have the potential to improve the profitability of producing and selling solar cells for Chinese solar companies like Solarfun.^[21] In June 2009, the government outlined its plans for China's first national solar subsidy program. In the plan, Chinese solar companies have to install a minimum of 50 KW to receive the $2.93 per watt subsidy for solar energy.^[22] $1.45 billion has been slated for the subsidy, which is enough to supply an additional 500 megawatts of energy.^[23] While the opportunity to receive government subsidies is available to over 50 solar companies operating in China, analyst predict that the government has the potential of giving 95% of the subsidies to the top ten solar producers including JA Solar Holdings, (JASO) , Suntech Power Holdings (STP), Solarfun Power Holdings, ReneSola (SOL), and YINGLI GREEN ENERGY HLDG CO (YGE).^[24]

For the first quarter 2009, revenue fell 43% year over year and 39% sequentially.^[25] The drop in revenues resulted from a 11.4% decline in module shipments as well as lower product prices.^[26] Amid declining sales and lower prices, Solarfun's management plans to reevaluate its 2009 strategy and budget. For 2009, Solarfun plans on using its cash on hand in addition to commercial bank credit lines for its 2009 expenditures.^[27] The company's CEO, Garold Hoskens, announced his retirement effective of June 30, 2009.^[28]

Like many of its competitors, Solarfun experienced a net loss for the second quarter amid slumping demand and tight credit.^[29] Although shipments rose 49% from a year earlier, and were up 80% from the first quarter, oversupply remains a problem for Solarfun. Prices declined 4.3% during the second quarters as a result of oversupply and contributed to the net loss of $46.8 million. In the second quarter of 2008, Solarfun had a net profit of $11.5 million.^[30] Solarfun has the potential of cutting production more in the second half of 2009 in order to reduce its inventory levels and increase its prices.^[31]

Chinese solar industry is reliant on government support for growth in second of half of 2009

Solar companies like Yingli Green, Renesola, Suntech, and Solarfun have raised their third quarter and fourth quarter 2009 guidance based on strong anticipated growth and rising product prices.^[32] Many of these companies have raised their guidance because of rising demand in the U.S. and Germany as well as the Chinese government's indication that it favors solar power over wind power.^[33] Despite this, many solar companies continue to count on government contracts and government spending as a major source of future revenue.^[34] In September 2009, Solarfun agreed to a 650MW solar farm project in inner Monoglia. Along with its projects in Mongolia, Solarfun is also building a 100MW facility in Germany to meet demand and has a strong position in Japan.^[35] Although demand has the potential of increasing through the second half of 2009, Solarfun and many companies depend of spending and support from a limited number of governments.^[36]

Easier access to credit has the potential of giving Chinese solar companies a financial advantage over American solar manufacturers.^[37] In the third quarter of 2009, Solarfun secured a $58.6 million credit facility from the Bank of Shanghai.^[38] By securing credit during the global recession, Chinese solar companies have been able to continue expansion projects despite falling module prices and weak demand.^[39] With easier access to credit compared to solar companies in the U.S. and Europe, Chinese companies like Solarfun are cutting module prices and increasing production in an effort to expand into Western markets. Increased customer bases have the potential of improving module sales if module prices rebound.^[40]

Management Expects Higher Shipments and Lower Costs in 2009 Despite Slow Energy Industry

Amid the global recession beginning in 2007, management at SolarFun is remaining optimistic about the future of renewable energy sources. In the third quarter of 2008, revenue was 69.1% higher than a year earlier, but 5.7% lower than in the second quarter 2008.^[41] On the other hand, profit fell 61.6% from the third quarter of 2007 due to high raw material costs and an inventory readjustment to account for the declining price in poly-silicon materials.^[42] While the demand for and price of photovoltaic-based solar products has fallen in the second half of 2009, SolarFun’s management argues that the faster falling price of poly-silicon materials will reduce production costs and make solar power a more viable price-competitor to gasoline and coal.^[43] In 2009, SolarFun expects product shipments to increase 50% due to binding contracts signed in early 2008.^[44]Until demand for solar power increases from its end of 2008 levels, the company has postponed planned capacity expansion and acquisitions in 2009.^[45] Instead, SolarFun plans to restructure its facilities in order to increase wafer volume from in-house facilities and reduce production costs.^[46]

Solarfun's Lower Production Costs Don't Compensate for its Lower PV Efficiency

With a maximum production efficiency of 17.2%^[47], Solarfun produces less efficient cells than major competitors like SunPower (22%^[48]), Suntech Power Holdings (18%^[49]), and Kyocera (18.5%^[50]). Even with lower production costs from using low-wage Chinese labor, Solarfun's 4Q06 manufacturing cost of about $2/watt^[51] is not as low as some competitors like First Solar, with a cost of $1.40/watt^[52]. Solar panel efficiency is important because Oil and gas prices have trended upwards over the past several years. As rising oil and gas prices lead to more expensive commercial electricity, consumers may start to demand new, cheaper sources of power. Solar power is less efficient than other energy sources, even wind. Sunlight, however, is available in massive quantities for half the day, and is free, unlike oil or coal. For these reasons, when oil and gas prices rise, solar power becomes a more viable alternative, despite its inefficiency. Concurrently, as solar power's efficiency rises, it becomes more competitive with oil and gas. The solar industry's R&D focus is on increasing this efficiency while minimizing the use of inputs like polysilicon. If solar companies can develop technology that allows more electricity to be produced with thinner PV cells, for less money, then solar power will become more competitive. On this front, Solarfun appears to be lagging.

Solarfun Must Hedge Itself Against Rising Polysilicon Prices

Solarfun uses polysilicon for the majority of its products, as do most solar power companies; this has led to a worldwide polysilicon shortage caused by a lack of silicon refining capacity. In the past, companies like MEMC Electronic Materials (WFR) produced silicon wafers for the semiconductor industry. Now, with the rapid growth of solar power, demand for polysilicon has increased, leading to its undersupply as production capacity is not enough to meet demand. This undersupply has led to rising prices for solar equipment, which in turn raises the price of solar power compared to other clean energy production technologies such as wind and ethanol. Furthermore, higher silicon prices mean higher production costs for solar companies - and lower margins.

Throughout 2007, Solarfun was unhedged against these demand fluctuations, as some of the polysilicon manufacturers that the company dealt with had signed contracts but were not able to expand capacity to meet Solarfun's needs. For example, one of Solarfun's major suppliers, Jiangsu Zhongneng PV Technology Development Co., Ltd., was not able to meet delivery expectations in late 2007 because its subsidiary, Jiangsu Yangguang Solar Technology Co. Ltd., only delivered 27 of the 50 tons that it was supposed to^[53].

In January 2008, however, the company signed a fixed-price contract with an unnamed Korean silicon manufacturer to buy $230 million worth of polysilicon over the next seven years^[54]. What's more, the pricing in the contract will decline over time. If the Korean company is able to deliver the way it has promised, Solarfun will have an easier, lower-cost opportunity to meet its expansion goal of 360 megawatts worth of production by mid-2008.

Government Support for Renewable Energy is Vital to the Growth of the Solar Industry...and Solarfun

Governments worldwide have implemented legislation to encourage alternative energy production, due to political pressure from public concerns about climate change and energy independence. Examples include:

• California's mandate that 25% of electricity come from clean sources by 2020 and 75% by 2050
• California's One Million Solar Homes initiative that gives subsidies to developers to build fully solar powered homes
• The European Union's stated desire to get 22% of its energy from clean sources by 2010
• China's Renewable Energy Law aiming to raise the total percentage of renewable energy used in the country to 10% by 2020

Emissions caps and clean energy mandates that are supported by subsidies and tax cuts make solar energy relatively cheaper. This means that corporations and utilities companies may turn to clean energy sources to generate electricity for manufacturing facilities and power plants, directly benefiting solar power companies like Solarfun. Without government support, however, solar companies will have difficulty vending their products, as solar energy is less cost effective than coal or natural gas.

Drafted in February 2009, the U.S. Economic Stimulus bill includes $42 billion in investments for energy-related products, including solar technology.^[55]The bill is a good indicator that the Obama administration plans to invest in alternative energy forms like solar power.^[56] However, SolarFun will have to compete with competitors like SunPower (SPWRA) and First Solar (FSLR) for federal money. SunPower (SPWRA) ) has already singed a contract with the Department of Energy to install a 205-kilowatt solar panel on the roof of its headquarters in D.C.^[57]

Competition and Market Share

Though Solarfun previously had an insignificant share of the solar market, its $135 million IPO in December 2006 gave the company the confidence to aim for an end-of-2008 capacity of 360 MW^[58]. Assuming it makes its goal, the expansion would put Solarfun solidly in the top 10 solar companies worldwide.

Other competitors, with 2005 market share^[59], include:

• SunPower (SPWR) (insignificant in 2005) - One of the fastest growing solar companies, with one of the most efficient cells around
• Sharp Electronics (24%) - The largest photovoltaic cell manufacturer in the world
• Suntech Power Holdings (4%) - A Chinese photovoltaic cell company that is muscling its way into world solar markets
• JA Solar Holdings, (insignificant in 2005) - A Chinese PV company that only sells monocrystalline solar cells; it lets its customers take care of building the modules and systems.
• Evergreen Solar (insignificant in 2005) - A solar company that produces string ribbon PV cells and operates at all production levels from silicon wafer to power system.
• Kyocera (8%) - A Japanese electronics company that is also a major manufacturer of solar cells
• Q-Cells (9%) - The world's largest solar cell manufacturer, based in Germany.
• First Solar (insignificant in 2005) - A thin cell solar panel manufacturer that uses cadmium telluride instead of silicon for its cells.
• BP (5%), Mitsubishi (6%), and Sanyo (7%) - Not primarily photovoltaic cell manufacturers, but heavy market competitors nonetheless.
• EMCORE (insignificant in 2005) - A Concentrated Photovoltaic System manufacturer that uses Gallium arsenide PV cells and got its start in the solar business making power cells for satellites.
• Energy Conversion Devices - This company uses amorphous thin-film silicon in its ultra-thin, albeit low-efficiency solar cells.

Notes

1. ↑ Reuters: Company Profile for SOLF
2. ↑ Reuters: Company Profile for SOLF
3. ↑ Reuters: Company Profile for SOLF
4. ↑ Solarfun 2008 Earnings Reports
5. ↑ Solarfun 2008 Earnings Reports
6. ↑ Solarfun 2008 Earnings Reports
7. ↑ Solarfun 2008 Earnings Reports
8. ↑ Solarfun 2008 Earnings Reports
9. ↑ Solarfun 2008 Earnings Reports
10. ↑ Morningstar Report, SOLF, 12-07-2007
11. ↑ SOLF 3Q07 Earnings News Release, http://investors.solarfun.com.cn/releasedetail.cfm?ReleaseID=279084
12. ↑ Solarfun Third Quarter Results
13. ↑ 247Wallst.com: Another Bad Day in the Sun (SOLF), March 2009
14. ↑ Fool.com: Skip this Solar Stock, March 2009
15. ↑ Fool.com: Skip this Solar Stock, March 2009
16. ↑ Fool.com: Skip this Solar Stock, March 2009
17. ↑ 247Wallst.com: Another Bad Day in the Sun (SOLF), March 2009
18. ↑ 247Wallst.com: Another Bad Day in the Sun (SOLF), March 2009
19. ↑ 247Wallst.com: Another Bad Day in the Sun (SOLF), March 2009
20. ↑ Seeking Alpha: China's Solar Stock Rally: Avoid Being Burn, April 2009
21. ↑ investerms.com: Will China’s Solar Subsidies Meet Expectations?, April 2009
22. ↑ China's First Round of Solar Project Applications, June 2009
23. ↑ China's First Round of Solar Project Applications, June 2009
24. ↑ China's First Round of Solar Project Applications, June 2009
25. ↑ Seeking Alpha: Solarfun Q1 Revenues, May 2009
26. ↑ Seeking Alpha: Solarfun Q1 Revenues, May 2009
27. ↑ Seeking Alpha: Solarfun Q1 Revenues, May 2009
28. ↑ Seeking Alpha: Solarfun Q1 Revenues, May 2009
29. ↑ WSJ: Solarfun Swings To 2Q Loss On Provisions For Supplier Payments, August 2009
30. ↑ WSJ: Solarfun Swings To 2Q Loss On Provisions For Supplier Payments, August 2009
31. ↑ WSJ: Solarfun Swings To 2Q Loss On Provisions For Supplier Payments, August 2009
32. ↑ Seekingalpha.com: Asian Solar Names to Raise Guidance for Q3, Q4, September 2009
33. ↑ Seekingalpha.com: Asian Solar Names to Raise Guidance for Q3, Q4, September 2009
34. ↑ Seekingalpha.com: Asian Solar Names to Raise Guidance for Q3, Q4, September 2009
35. ↑ Seekingalpha.com: Asian Solar Names to Raise Guidance for Q3, Q4, September 2009
36. ↑ Seekingalpha.com: Asian Solar Names to Raise Guidance for Q3, Q4, September 2009
37. ↑ WSJ: Power Plays, October 2009
38. ↑ WSJ: Power Plays, October 2009
39. ↑ WSJ: Power Plays, October 2009
40. ↑ WSJ: Power Plays, October 2009
41. ↑ WSJ: Solarfun Reports Third Quarter 2008 Results, December 2008
42. ↑ WSJ: Solarfun Reports Third Quarter 2008 Results, December 2008
43. ↑ Barron’s: Solarfun Q3 Revs Come In Light; Stock Slides Again
44. ↑ WSJ: Solarfun Reports Third Quarter 2008 Results, December 2008
45. ↑ WSJ: Solarfun Reports Third Quarter 2008 Results, December 2008
46. ↑ Barron’s: Solarfun Q3 Revs Come In Light; Stock Slides Again
47. ↑ Solarfun Website, http://www.solarfun.com.cn/Cells_Products.php
48. ↑ SunPower's New Solar Panel Is 22% Efficient; http://www.renewableenergyaccess.com/rea/news/story?id=46286
49. ↑ Forbes - Sun King; http://www.forbes.com/free_forbes/2006/0327/062.html
50. ↑ Kyocera - Solar Timeline; http://kyocerasolar.com/about/timeline.html
51. ↑ SOLF 4Q06 Earnings Transcript, Q&A, http://seekingalpha.com/article/28933-solarfun-power-holdings-q4-2006-earnings-call-transcript?source=side_bar_transcripts
52. ↑ 2006 First Solar Annual Report, Item 1 (Pg. 3)
53. ↑ MSN Money, Solarfun Announces Update on Sales and Polysilicon Supply, http://news.moneycentral.msn.com/ticker/article.aspx?Feed=BW&Date=20080111&ID=8025480&Symbol=SOLF
54. ↑ CNNMoney.com, Solarfun Enters Silicon Supply Seal, http://money.cnn.com/news/newsfeeds/articles/apwire/ccfefd558fe6dc974add91bf369efd07.htm
55. ↑ Seeking Alpha: Solar Energy Brightens up on Stimulus, February 2009
56. ↑ Seeking Alpha: Solar Energy Brightens up on Stimulus, February 2009
57. ↑ Seeking Alpha: Solar Energy Brightens up on Stimulus, February 2009
58. ↑ Solarfun Website, Why Choose Solarfun, http://www.solarfun.com.cn/Why_Choose_Solarfun.php
59. ↑ CIBC Initiating Coverage, SOLF, January 29th, 2007
60. ↑ ^{60.0 60.1} [http://www.renewableenergyaccess.com/rea/news/story?id=46286
61. ↑ Forbes - Sun King; SunPower's New Solar Panel Is 22% Efficient
62. ↑ SharpUSA Product Brochure
63. ↑ Kyocera - Solar Timeline
64. ↑ Solarfun Website
65. ↑ http://jasolar.com/Web/products-en.asp
66. ↑ TSL 20-F 2007 Pg. 7
67. ↑ ESLR 2007 Earnings Call Transcript, Page 1
68. ↑ EMCORE.com: Terrestrial Solar Cells and Receivers"
69. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
70. ↑ DSTI 10-k 2007 Pg 1
71. ↑ Ascent First Quarter 2008 10-Q Pg 23