Next Chinese Solar Flare: Solarfun
QUIDONG, China (
) -- On Thursday,
Suntech Power Holdings
(STP)
reported earnings that beat the street soundly. Next up among the Chinese solar stocks with fourth quarter earnings will be
Solarfun Holdings
(SOLF)
on Friday morning.
Solarfun Holdings seemed to be getting a pre-earnings bump on Thursday afternoon after Suntech was the latest solar company from China to report earnings outperformance.
Since Jan. 11, Solarfun's share price has declined by more than $3.
In the end, Solarfun Holdings has the task given to all the solar firms this earnings season: to make a compelling case that the pressure on average sales price in the second half of 2010 won't far exceed solar industry cost efficiencies. On Thursday, solar investors heard another bullish report about 2010 regardless of the coming feed-in tariff reductions in Germany.
Suntech said it expects rates of return on German solar projects in the third quarter to remain at a level equivalent to the historical returns of 8%.
Some analysts question whether the historical rate of return is good enough to drive demand for new solar projects. One analyst who does not cover Solarfun specifically -- but does cover many of the Chinese solar companies -- noted that it is excess -- not historical -- rates of return that drive demand for solar. "It's not just about the volume; it's about the price that volume can command," said the solar analyst.
Since just about every Chinese solar company that has reported so far has made it clear that their production capacity for 2010 will be large, it is still an open question as to whether the market will be able to absorb all that solar capacity without significant declines in module pricing.
Solarfun was up on Thursday ahead of its earnings, with a gain of 3% in the early afternoon, second-best in the solar sector on Thursday after Suntech, which was up 5% on the strength of its earnings outperformance.
Even analysts bullish on Solarfun say there is reason to expect potential earning per share erosion from currency charges and non-cash charges related to convertible bonds.
Dan Ries, analyst at Collins Stewart, which has a 20 cent earnings per share estimate for Solarfun (versus a street consensus of 24 cents), wrote: " Our EPS forecast does not include the impact of currency charges or a charge due to the change in the fair value of SOLF's convertible bonds, each of which can have a significant impact on the SOLF's reported EPS. SOLF's share price rose in 4Q09, which may drive a 'fair value of derivative' charge over $10M in 4Q09, which would negate most of SOLF's earnings."
The Collins Stewart analyst also said that Solarfun might take a currency charge. He wrote: "We suggest investors focus on our Core-EPS calculation, which excludes the non-cash charge for the fair value of the convert and the highly volatile Forex charge, and
is in our view a more true indication of the company's true underlying performance."
Nevertheless, the euro's slide has exacted its toll on margins in solar. Suntech said in its earnings conference call that the euro slide was a major negative factor in the fourth quarter. Some analysts remain unconvinced in solar companies' ability to effectively hedge this foreign currency risk in the first quarter of 2010, too. Therefore, Solarfun may need to address this question on Friday.
"Solarfun's earnings will be similar to all the Chinese earnings so far, in the sense that we expect them to beat the Street consensus and provide a strong outlook for 2010," said a solar analyst who has covered other Chinese solar companies, but not Solarfun. "However, we don't expect Solarfun, as was the case with the other Chinese companies, to substantiate the reasons for their optimism, given the level of overproduction we see coming," the analyst added.
The Street is also forecasting $184 million in revenues in the fourth quarter for Solarfun.
-- Reported by Eric Rosenbaum in New York.
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