March 5, 2010 (Chinavestor) Investors seems to miss one of the most important development regarding the Chinese solar sector: sustainable revenue and earnings growth. Solarfun Power Holdings (NASDAQ:SOLF) reported strong revenue growth as shipments of PV modules soared making up for softening margins. Earnings were below previous quarter but the company made profit still - a huge step up for an industry that was bleeding cash just 6 months ago. We are very pleased with what we've seen so far from JA Solar (NASDAQ:JASO) and Trina Solar (NYSE:TSL) to Canadian Solar (NASDAQ:CSIQ) or Suntech Power (NYSE:STP) just yesterday. Yet investors are hard pressed to believe that the solar sector recovery is for real.I got mixed feeling by looking at the latest numbers of Solarfun Power Holdings (NASDAQ:SOLF). Revenues increased +26.9% from previous quarter but earnings actually fell. This is just partially explained by softening margins. Most of the profit deterioration is a result of a the volatile nature of how this company is financed. According to press release "The loss from the change in the fair value of the conversion feature of the Company's convertible bonds was RMB 71.3 million (US$10.4 million) in 4Q09 as compared to a gain of RMB 82.4 million in 3Q09. The change, arising from the adoption of ASC 815-40, was due to a number of factors, including changes in the Company's ADS price during the quarter. This line item, over which the Company has no control, has fluctuated, and is expected to continue to fluctuate quarter-to-quarter." Basically it says that investors better embrace themselves to significant up swings in profits.
Nevertheless the company is in the black and assuming the upswing is coming, we're going to see strong profits in 2010 Q1. Talking about outlook: the company estimates shipments to increase to 13MW-140MW from current 110MW in the fourth quarter or from 48MW just a year ago. This represents a ~20% increase in production. Given that margins are expected to soften another -10% for the next three months, an 8% increase in revenues looks realistic.
But investors have to look at industry leaders to get the true picture of the sector. Industry leader Suntech Power (NYSE:STP) reported higher profits on increased revenues for the last quarter. Best of all, latest quarterly revenue and earnings growth came on top of three previous quarters with similar trend, suggesting that the turnaround is for real. Shares of the company advanced +5.6% but we're of a view that the stock remains way undervalued. This is clearly demonstrated by looking at the chart below tracking actual revenue and earnings growth AND stock price development.
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