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Solarfun Power Holdings (SOLF)Stock (Solar Cell Manufacturers Industry, Semiconductor - Specialized Industry, Solar Power Industry)
 Solarfun's growth has been extremely rapid, with an almost 370% revenue increase between the first nine months of 2006 and the first nine months of 2007. The company's margins have declined, however, a product of the rising silicon prices that have driven up costs in the solar industry. These growing pains threaten the success of Solarfun as a company and solar power as an industry. However, rapidly rising oil prices, the developing efficiency of solar panels, and strong government legislation in favor of alternative energies help offset the high prices of PV modules. If Solarfun is to compete, however, it will have to develop stronger efficiency technologies or lower-cost production technologies, as 17.2% efficiency[2] panels that cost $2/watt[3] to manufacture don't compare well against competitors like SunPower or First Solar, with 22% efficiency[4] and $1.40/watt[5] manufacturing cost respectively. Other major competitors for the company include Sharp, Kyocera, and Suntech Power Holdings.
[edit] Business and FinancialsSolarfun 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[6]). 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[7] 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.[8] 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. [edit] Trends and Forces[edit] Solarfun's Lower Production Costs Don't Compensate for its Lower PV EfficiencyWith a maximum production efficiency of 17.2%[9], Solarfun produces less efficient cells than major competitors like SunPower (22%[10]), Suntech Power Holdings (18%[11]), and Kyocera (18.5%[12]). Even with lower production costs from using low-wage Chinese labor, Solarfun's 4Q06 manufacturing cost of about $2/watt[13] is not as low as some competitors like First Solar, with a cost of $1.40/watt[14]. 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. [edit] Solarfun Must Hedge Itself Against Rising Polysilicon PricesSolarfun 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[15]. 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[16]. 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. [edit] Government Support for Renewable Energy is Vital to the Growth of the Solar Industry...and SolarfunGovernments worldwide have implemented legislation to encourage alternative energy production, due to political pressure from public concerns about climate change and energy independence. Examples include:
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. [edit] Competition and Market ShareThough 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[17]. Assuming it makes its goal, the expansion would put Solarfun solidly in the top 10 solar companies worldwide. Other competitors, with 2005 market share[18], include:
 Solarfun Power Holdings2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Notes
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