Solarfun published a sound Q2 report on Wednesday. By June 2008, Solarfun reported revenue reaches US$ 197.1 million, which increase by 12.7% on quarter-over-quarter (QoQ) basis and 192.2% on year-over-year (YoY) basis. Although current stock market does not perform well due to the high inflation global economics, we still recommend investors holding this stock. As green energy supplier, Solarfun owns its born advantage given current unfavorable energy market. Besides, through objective and rational analysis on current capital market, we believe that behind systematic risk in global market, values for individual stock needs to be emphasized and analyzed from specific angles and be considered within long term time horizon.
Global economic recession and high inflation
Following the economic recession in America, global economy entered into high inflation growing. Although Federal Reserve announced relieved result for GDP growth in the second quarter 2008, increasing crude oil and high inflation in China together bring investors worries about capital market. Under such circumstance, we recommend investors analyzing market rationally. That is not rushing in making decisions and to consider individual stock with view of its long term performance and from its specific perspectives.
Estimate (RMB)
SALES (in millions)
EARNINGS (per share)
Quarter Ending Sep-08
1784
0.44
Quarter Ending Dec-08
2356
0.59
Year Ending Dec-08
3110
0.77
Year Ending Dec-09
9441
2.35
High technology Company with high growing rate
As high technology company and provider of necessary part for re-generating energy equipment, Solarfun has high growing rate which is the same nature as other similar companies. Furthermore, Solarfun currently displays significant financial feature of starting its expansion. For the investors who interested in risking for high return, we recommend to include this stock into portfolio to enjoy star light in the dark sky.
1. Earnings suffer great loss due to increased G&A expense and low investment return
Solarfun suffered earning loss in the second quarter 2008 by 25%, compared to earnings in the first quarter. Basing on the common size analysis on company’s 3 month income statements, this loss mainly comes from the increase in G&A expense and huge loss from long term investment.
G&A increased by 0.9% from quarter one as a percentage of total revenue. As what is shown below, this increase, according to the analysis, is normal and acceptable. At first, revenue increased accompanied with the need of more cost; secondly, the percentage level is still in normal range which could be referred to corresponding number in 2007; thirdly, company enhanced vertical management which may lead to more coordinating expenses; at last, series demand and supply contracts have been signed during this quarter. These negotiations could have incurred necessary cost.
Interest expense does not put significant burden to company’s financial status, whereas company’s long term investment suffered huge loss because of unfavorable movement in global economy, especially the shock in Chinese stock markets.
All these factors together influence Solarfun’s quarterly record, although sound revenue had been created.
Operating Cost Structure
2008 Q2
2008 Q1
2007 Q4
2007 Q3
2007 Q2
Total Revenue
100.0%
Selling/General/Admin. Expenses, Total
4.5%
3.6%
7.4%
6.5%
6.9%
Research & Development
0.6%
0.4%
0.9%
2.2%
Other Op. Expenses, Total
0.1%
0.8%
-0.4%
Total Operating Expense
93.2%
89.4%
93.1%
91.5%
95.3%
Total Debt
Interest Expense, Net - Operating
2.3%
1.2%
1.1%
Long Term Inv. & Ass., Total
Interest/Investment Income - Operating
2.7%
10.6%
-2.3%
2. U.S economic rebound and high oil price offer growing opportunity for solar industry
On 31st August 2008, American economy allegedly had achieved 3.3% increase in the second quarter, which is much greater than its growth for the first quarter that only 0.9%. Moreover, given rigorous fuel consumption in current worldwide industries and day-after-day increasing petrol price, re-generating energy faces great opportunity to increase market share. From our viewpoint, the up trend for crude oil price is inevitable, which also depends our analysis on other factors including high inflation in global economy and the oil shortage which seemed fails to feed current industry consumption. Under such circumstance, re-generating energy industry will be given good developing opportunity.
9/2/2008 Session Overview
Last
Most Recent Settle
Change
Oct-08
116.50
115.46
+1.04
Nov-08
116.93
115.85
+1.08
Dec-08
117.50
116.31
+1.19
Jan-09
117.35
116.68
+0.67
Feb-09
118.17
116.94
+1.23
Mar-09
n/a
117.14
0.00
Source: New York Commodity Exchange
3. Low price developing strategy is applicable
According to company’s Q2 report, its average selling price during the second quarter of 2008 improved to $4.17 per watt from $4.07 per watt in the first quarter. Solarfun, however, warned average selling price is expected to decline 5 percent to 10 percent from expected fiscal 2008 price. This prediction led to shares price dropped by $1.52 to $17.42 on the date Q2 report released. According to our analysis, decline in price is applicable. It may benefit from company’s vertical management which brings down raw material expenditure. Moreover, that behind it probably is the low cost strategy used for winning larger market share.
4. Sound performance and growth rate compared with industry average level
As producer of high technology silicon ingots, Solarfun grows following with high technology industry.
Compared with industry average level, Solarfun display fantastic performance and growth rate. Its P/E ratio exceeds industry average level by over 100% and this outstanding advantage leads its sound return on assets and equity. Besides, Solarfun’s profitability margins are obviously higher than almost other solar companies.
5. Undervalued performance offers market with good expectation
Compared with Suntech Power Holdings Company Ltd (Suntech) which is regarded as top-ranked solar company and operate similar business as Solarfun, Solarfun also displays strong momentum for future development. Considering Market Capital/Total Assets ratio for these two competitors, Solarfun and Suntech are 1.00 and 2.68 respectively. Specifically, Suntech’s market capital is 9.64 times more than Solarfun’s whereas total assets are only greater at 3.64 times. By 30th June 2008, Solarfun achieved 192.20% growth rate on revenue while Suntech grew at 51.30%. Currently, although Solarfun’s P/E and P/S ratios are far lower than Suntech’s, Solarfun’s 5-year growth rate for P/E ratio indicates its great momentum for its stock price. Given the same industry environment, it is reasonable to believe that Solarfun has been undervalued by market and its predictable future performance is optimistic.
Solarfun
Suntech
P/E (ttm):
17.59
37.26
P/S (ttm):
1.23
4.21
PEG (5 yr expected):
0.73
0.71
Qtrly Rev Growth (yoy):
192.20%
51.30%
Gross Margin (ttm):
15.61%
22.07%
Oper Margins (ttm):
9.75%
14.48%
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