This is a transcript of Morningstar analysts talking about the Chinese solar companies.

"Hi, I'm Pat Dorsey, Director of Equity Research at Morningstar. Have you ever heard of First Solar? It's got a $14 billion dollar market cap and the stock was up 10 times in 2007. It's part of a very very exciting industry of photovoltaic panels.

This is an industry that came out of literally nowhere over the past few years. Many of players are based in China and the stocks have been absolutely screamers over the past year but many have been cut in half over the past months. And of course when a hot industry gets cut in half we start looking for opportunity.

-I'm here with analyst Jordan Zounis to talk about the solar industry. Which of these companies are most attractive long term and which might be good buys right now? Hi Jordan, thanks for joining us.

-Appreciated Pat, thank you.

So how did this industry just come out of nowhere all of the sudden? I've never heard of these companies and suddenly they have got $14 billion market caps. So how did this happen?

"It certainly seems as if they came out of nowhere. But the reality is that lot of of them have been around for al long time. But we need a confluence a lot of different events in order to get them in sort of the main stream of our portfolio universe. Just to talk about the big picture driver of what's happened over the last few years. Oil above $50 a barrel will start peeking interest in a lot of different things. And one of the areas has been certainly alternative energy, specifically solar. So that's is a big driver we've seen over the last few years as higher energy prices sort of started this ...the idea of looking of alternative sources of energy and looking at things from more of a public policy and environmental policy. And what that's really done is put to the forefront the big economic driver of solar which is government subsidies. Without government subsidies right now solar would not be a profitable industry however because of all the constituency involved and looking at alternative energy sources government subsidies have been real economic driver to the boom in what we've seen right now in solar stocks.

- So most of these companies are something solar. And it's kind of double play to scorecard to tell how do I differentiate between these different companies? What separates the good from the bad the indifferent from the not so different?

- Absolutely. I think of the things we've seen because these companies have been taking advantage of readily available capital in the market to go public and as you mentioned before some of them have gone up ten fold from their IPOs. What we've tried to focus on is what differentiates a lot of these companies from one another. And we basically focused on three different areas. One of them is a technological differentiation. So what is about their specific technology that is perhaps better than some of the others. What we try to stay away from is the "me too" solar company that's just really trying to take advantage of the huge demand it's out there right now. The other differentiating factor has been the level of integration that we've seen within the industry. Some of them have been veritcally integrated along the solar food chain.

-What does vertically integrated mean?

-Sure. A company that would be completely vertically integrated within the solar chain would go from sort of the raw materials that it takes to make a solar cell all the way to the installation of the solar cell. And lot of the companies are sort of somewhere in the middle. Some do different parts of the value chain but we think for some of the companies definitely makes sense to make a higher level of integration than for others. The final factor we think is important and we highlighted the sort of a potential risk for a lot of companies further down the road is is the technology roadmap. It is not enough to say I've got good technology right now in 2008 and it's going to carry me for the next ten years. It's probably not going to be the case. It's a very much of an involving industry right now involving very quickly. And so we think the better solar companies are positioned towards where technology is potentially going not necessarily where it's at right now and we find it very interesting that we find a very large disparity across a lot of the companies in terms of their technology roadmap.

-So which ones would you put in the "me too" bucket that kind of may have a buck off of cheap labor and cheap capital in China and the ones that are actually adding value via vertical integration or perhaps R&D that puts them on the technological roadmap?

- One of the companies that I will highlight today is Suntech Power. Suntech Power has become most probably the preeminent Chinese crystalline manufacturer of solar cells right now. And if you look at how much they are spending on R&D is about double what lot of the other Chinese companies are spending. And if you look at their distribution channel it's very mature very well thought out and basically there is very little customer hesitation on buying a Suntech panel relative to perhaps some of the Trina Solars of the world that don't have quite the name recognition or the quality recognition that somebody like Suntech Power does.
The other one that I mention is sort of going away from the crystalline manufacturers but is a very good operator in the space and that's First Solar. We are very positive on the company they are arguably the best executor in the space have the lowest cost profile in the industry. We're definitely more constructive when it comes to the stock's price which has been in the stratosphere however as you mentioned a lot of these hase been coming down and it's starting to get to an area where we think they might get attractive a little bit later.

-Both STP and First Solar are down. I think Suntech is the only one that's been trading below fair value. Why you think Suntech is mispriced for the market?

- Currently the stocks's trading at $50 and you're right a lot of these stocks has coming down 40% to 50% over the last couple of months. Suntech in our opinion has some of the best technology when it comes to crystalline manufacturing. There have been a lot of R&D relative to the other Chinese companies but more importantly they have a very high quality differentiation when it comes to customers in the space. Nobody thinks twice about buying a Suntech power panel as opposed to some of the other Chinese manufacturers where they can't get service or customer support that they're used to. And so we currently have a $80 fair value on the stock so we thinks it's relatively cheap we have a five star rating on it relative to the current stock price of $50.

- In any industry that's moving this fast stocks going up 10 times a year, I imagine there is a lot of risk involved. If I do decide to take a flyer on Suntech what risks should I be mindful of?

- We think there are three main risk in the industry right now. Crystalline solar panels are in a need of so called polysilicone the key raw ingredient the industry needs in order to produce these solar panels. That's in very short supply right now. That's the key limiting constrain that should probably ease in the next eighteen to twenty-four months but right now tight polysilicone supply will continue to generate very high solar prices and we don't see that to change over the next 18 months.
The other technology risk if you will is that crystal and solar panels make up about 90% of the market. There are other technologies that are further out there may be two to three years out, that on the horizon promise a lot more power on the watt. It's too early to tell who the early winners will be. We'll have a clear picture two three year from now and cold make a pretty competitive threat to traditional manufacturers.
And finally, big driver from economic standpoint is subsidy in countries like Germany, Spain, Italy and Greece coming to the forefront. Recently U.S. government stalled investment the tax credit that goes towards alternative energy sources including solar. I think part of the drop off these are not viable economic models without subsidies. In the essence of subsidies remember that they are not sure thing around the world.

-What if subsidies will be around in 5 years?

-Most of us believe higher energy prices are here to stay and I have an 85% copnfidence that tax rebeates will be renewed in this country within a few years.

-OK! So there is a roadmap for this industry, probably Suntech and Fist solar are the way to go and Suntech has five stars right now.

-That's correct.

-Thanks Jordan. I'm Pat Dorsey and thanks for listening

PS: link to video creates googleboot errors so we had to remove it. Sorry.

Professional Resources
FREE reports posted at chinavestor.com/tour.asp	Professional Stock Research: Advanced Membership
Exclusive China Newsletter w/ stock picks: Basic Membership	Portfolios: Conservative and Growth