GT Solar IPO Off to a Cloudy Start

Rewarding the company's pre-IPO investors hasn't done much for future liquidity.
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It's been a dark beginning for

GT Solar's


long-awaited market debut, unless you're one of the company's pre-IPO investors.

GT Solar's stock fell 12% on its first day of trading Thursday with more than 20 million shares traded, equal to two-thirds of the 30 million shares sold in the offering.

On Friday, the stock fell as low as $9.56, or $42 below its $16.50 offering price. It since recovered to $12.89 in recent trading.

GT Solar's underwriters, led by Credit Suisse and UBS, somehow envisioned the IPO sailing smoothly into rough waters. But Thursday was just another bad day to go public as indices tumbled; and Friday brought news that

LDK Solar


- whose $180 million contract signed last summer accounted for 62% of GT's revenue last fiscal year -- signed a new contract with rival equipment maker JYT Furnaces.

GT Solar was prompted on Friday to say the move by LDK didn't affect its backlog, nor its internal targets or projections.

So GT was the grim exception in the solar sector Friday, which otherwise rallied following several days of losses.

JA Solar





were up 4% to $14.55 and $13.59, respectively.

Yingli GreenEnergy


was up 3% at $14.99.

Given demand for polysilicon, GT Solar's equipment is likely to remain in demand with or without LDK. So it makes sense to consider longer-term questions: Is GT Solar a worthwhile investment in the long run? And if so, is its early stumbling providing a chance to buy the stock at a price that's even cheaper than the IPO provided? Or is it just going to sink further?

That requires a closer look at GT Solar's business. First, the company is different from a lot of solar stocks that already trade on


or the


. It makes equipment that solar module makers and some chemical companies need to produce their goods.

Specifically, it makes directional solidification system units -- which melt polysilicon and cast ingots used to make wafers -- and chemical vapor deposition reactors, which produce polysilicon, the highly sought-after raw material in solar cells.

If that sounds technical, you're not alone. GT counts on its specialized knowledge to make some of its revenue. "The use of our products requires substantial technical know-how and most of our customers rely on us to design and optimize their production processes as well as train their employees in the use of our equipment," the company said in its prospectus.

Like a lot of China-based solar companies, GT has seen an explosion in revenue during the past year. In its fiscal year ended March 31, GT brought in $244.1 million in revenue, more than four times its revenue of $60.1 million in the previous fiscal year. The year before that, GT's revenue was $46.8 million.

Despite the significantly larger revenue, economies of scale haven't started to show up on the income statement. Gross margin was 37.8% last year, down slightly from 39.6% in fiscal 2007.

Part of the reason may be that GT has been building up a massive backlog of orders, as much as $1.3 billion worth at the end of March. The company estimates that it will convert close to half that figure into revenue in the current fiscal year. If so, then revenue is on track to more than double in the period.

Where GT has gained ground in margins is at the operating level. R&D fell to 4.3% of revenue last fiscal year from 6.3% in the previous year. Sales, general and administrative costs fell to 13.1% from 30.5%.

As a result, the company moved to an operating profit of $46.9 million last year from an operating loss of $13.7 million a year earlier; and a net profit of 36.1 million, or 25 cents a share, from a loss of $18.4 million, or 13 cents a share. That represents a 19.2% operating margin and a 14.8% net margin.

On a valuation basis, GT Solar still isn't what many would consider cheap. Its market cap was $2.35 billion at the offering, but fell to $2.08 billion by the end of its first day of trading. At that lower level, the stock was nearly 9 times last year's revenue and 58 times its net profit.

If GT keeps seeing strong growth this year, however, it will soon become a bargain at its current price.

But investors will want to keep in mind the proceeds of the $500 million the company raised Thursday. Although GT is in a capital-hungry business, the entire proceeds will go not into the company's coffers, but into a big fat one-time, half-billion-dollar payout to its pre-offering investors.

That's an awfully rich dividend from a company that has recorded only $416 million on its books. It may even prove negligent if the company needs to borrow heavily to finance its growth. As it notes fleetingly in its prospectus, "we may need to obtain a new credit facility or similar financing arrangement ... to meet our future working capital needs."

For now, GT Solar has the cash flow to keep financing its rapid and promising growth. But with the proceeds from this IPO being squandered on early investors, it will have fewer options if liquidity gets tight later on. That's something new investors in GT Solar might keep in mind.