Solar Stock Winners: China Sunergy

NEW YORK ( TheStreet) -- China Sunergy ( CSUN) is rising by 10% on Thursday after announcing fourth quarter earnings that beat Wall Street expectations.

Earnings per share of 37 cents from China Sunergy were four cents ahead of the Wall Street consensus of 33 cents, but it wasn't a perfect earnings report from the Chinese solar company, either, with revenue and gross margin numbers providing minor disappointments.

Revenue fell short of the Wall Street consensus, at $169.6 million, versus Wall Street consensus of $174 million. Shipments came in a little below expectations, resulting in the revenue miss.

Gross margin expectations for the first quarter have been dialed back to 9%-10.5%, significantly below the fourth quarter gross margin level of 16%, which was 1% better than China Sunergy's previous guidance.

For the first quarter, China Sunergy expects shipments will be between 98 megawatts and 110 MW. For the full year of 2011, China Sunergy expects to ship 670 MW to 690 MW of solar modules.

Solar earnings season has demonstrated, in many cases, the "anything less than perfection" selling action. Yet even with the revenue shortfall and gross margin guidance weakness -- both of which have been triggers historically for negative solar trading -- China Sunergy was experiencing heavy bullish action on Thursday morning,

The 10% gain in China Sunergy shares was backed by four times the Chinese solar stock's daily volume of trading within the first two hours of the market open.

The positive response to the China Sunergy earnings could be described as a relief rally for an inexpensive stock, combined with weaknesses in the results that don't necessarily indicate structural flaws in the company model, and that executed in the fourth quarter after a series of acquisitions made to improve cost structure.

From a trading perspective, China Sunergy shares had been as high as $4.80 just a month ago. On Thursday morning, after the 10% rise, China Sunergy shares were trading at $4.35. "It's a round trip for the stock, nothing too ugly here," said Christine Hersey, analyst at Wedbush Securities, who noted that it doesn't take much with a $4 stock to generate an outsized return.

The Wedbush analyst also noted that the revenue miss was minor, and a miss for a company that is not covered by many analysts. Additionally, while China Sunergy guided gross margins down, the input costs responsible for the gross margin weakness don't look to be long-term in nature.

The gross margin weakness comes back to two input costs: cells and wafers. China Sunergy is currently producing 70% of solar cells in-house, and indicated on its conference call that it will still have to buy third-party cells in the first quarter. China Sunergy also noted that its wafer purchases remain at elevated levels, quoting 92 cents a watt for solar wafers in the first quarter. Recent market checks have shown wafer prices lower below 90 cents.

The Wedbush analyst said that in the case of China Sunergy there could be a lag effect on wafer pricing, since its contracts with suppliers reset at the beginning of quarters.

"They reported in line with expectations and it you want to polish it, you can argue that external cell and wafer costs won't remain as high, and internal cell production will increase," the Wedbush analyst said, adding, "It was a status quo report and wafer prices won't be 92 cents per watt for the whole year, and that will take care of the gross margin weakness."

The in line performance in the fourth quarter comes after China's Sunergy shift to in-house module manufacturing following the acquisitions of CEEG (Shanghai) Solar Science & Technology Co., Ltd and CEEG (Nanjing) New Energy Co., Ltd.

In terms of solar industry read-through, China Sunergy reported an average selling price for solar modules of $1.70, a little bit below the top tier 1 Chinese module vendors, though not far below the range of $1.75 per watt average selling price that has been reported by other solar module companies.

The larger industry issue of potential overcapacity and subsidy changes in key European markets like Italy remains an important issue for China Sunergy, but the Wedbush analyst said that at this point China Sunergy doesn't have any more visibility than any other company in the solar sector.

Two of the leading Chinese solar module companies, Yingli Green Energy ( YGE) and Suntech Power ( STP), were among the solar companies pressed on input costs and European sales outlook in their recent earnings.

Yingli Green Energy, for example, noted that in the second half of 2011 gross margins will be very sensitive across the industry. Yingli also anticipates pricing declines for every quarter in 2011, with the second half of the year showing a low single-digit to mid-single digit decrease from the first-half level.

Yingli Green Energy also guided its gross margins down for the first quarter from the fourth quarter level, and like China Sunergy also exceeded its fourth quarter gross margin target, at 32.9%.The Yingli gross margin guidance for the first quarter was 30% to 31%.

Suntech said in its earnings that fourth quarter gross margin business was 17.4% due to outsourced production and spot market purchases of wafers to facilitate higher-than-expected production. Yet Suntech, which is internalizing wafer production, said wafer costs used in production should drop by close to 15% in the first quarter of 2011.Suntech expects a rebound in gross margins in the first quarter to 20% due to the higher internal wafer production.

All solar companies were asked during earnings about the impact of higher commodities prices, including non-silicon inputs like aluminum, steel and silver paste.

China Sunergy CEO Stephen Zhifang Cai, said in the earnings release, "We believe the PV market is poised for growth, despite incentive program adjustments in Europe. Demand there remains strong while emerging markets will continue to grow. 2011 will be another year of growth and progress for China Sunergy as we continue to focus on cell efficiency improvement, cost control, sales network expansion and further vertical integration."

Suntech said that even given the near-term uncertainty in the new policies in development, it was confident that Italy will continue to support a healthy market due to the dependence on energy imports, high retail cost electricity and high solar radiation. "The bottom line is that Italy really has the perfect conditions for a healthy long-term market, and that's why we plan to continue to invest there," Suntech said during its earnings conference call.

The analyst noted that China Sunergy did indicate its mix of business is shifting from a 70%/30% split (sales to systems integrators/distributors), to a 50%/50% split. In theory, this could make visibility on the sales channel even more difficult for the Chinese solar company, because instead of selling to the end user, the system's integrator, it is selling more to redistributors that could ultimately ship solar modules to many markets. Yet the Wedbush analyst concluded that the tilt in the direction of distributors wasn't a reason to be concerned, as China Sunergy is still a relatively small player in the solar market, and the percentage of its business mix can be skewed quarter to quarter based on its size.

-- Written by Eric Rosenbaum from New York.

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