The China Solar Hotbed

"Solar is a commodity and the only thing that matters is cost per watt...This industry will ultimately be based in China for all the same reasons that cellphones and computers are made there."

--Jesse Pichel, analyst at Piper Jaffray & Co.

In today's Wall Street Journal (reproduced here for fair use purposes):

By JANE SPENCER
May 23, 2007

Chinese solar-power companies are descending on U.S. stock markets, offering investors a new way into one of the fastest-growing corners of the renewable-energy industry. But things aren't all sunny.

The latest frenzy over Chinese solar stocks was in evidence last week, when Nanjing-based China Sunergy Co. (NASDAQ: CSUN) made its debut on the Nasdaq Stock Market, rising 51% in its first day of trading on Thursday. Its shares were up 46 cents, or 3.19%, to $14.90 yesterday, giving the company a market value of about $570 million.

Some investors are hoping for a repeat performance when two other Chinese companies that make solar-energy equipment -- LDK Solar Co. and Yingli Green Energy Holding Co. -- list on the New York Stock Exchange in the next few weeks. And a Chinese company already on NYSE, Trina Solar (NYSE: TSL), has just filed for a secondary offering.

LDK is slated to list June 1, and its initial public offering could raise as much as $470 million, which would make it the largest IPO by a mainland Chinese company in the U.S. since 2004.

The IPO boomlet reflects a growing interest in clean-technology stocks, and demand from investors for more plays on China's economy. The solar industry is being fueled by new government policies in the U.S., China and dozens of other countries wanting to boost alternative-energy use. Chinese companies are now rising to the fore, threatening rivals in the U.S., Europe, and Japan, and illustrating how China's manufacturing advantages extend to the emerging clean-technology industry.

"Solar is a commodity and the only thing that matters is cost per watt," says Jesse Pichel, a clean-technology analyst at Piper Jaffray & Co. "This industry will ultimately be based in China for all the same reasons that cellphones and computers are made there."

Chinese solar stocks began to heat up in late 2005 when Suntech Power Holdings Co. (NYSE: STP), one of the world's largest producers of photovoltaic cells, listed on the Big Board. The $455 million IPO was the largest by a Chinese company in the U.S. that year and the shares doubled in price in the first month before retreating.

In 4 p.m. composite trading yesterday, Suntech's stock, offered originally at $15, was up 17 cents to $34.79. Suntech, which has a market value of about $5.5 billion, currently trades at about 19.2 times projected per-share earnings for 2008, according to CIBC World Markets.

Since Suntech's listing, four other Chinese solar companies have sold shares in the U.S., and several have racked up considerable gains. All that activity raises concerns about a possible solar bubble.

"The excitement, to some extent, is warranted, but some of the valuations are getting out of hand, says Jeff Osbourne, director of equity research at CIBC. On April 17, he downgraded two new Chinese stocks, JA Solar Holdings Co. (NASDAQ: JASO) and Solarfun Power Holdings Co. (NASDAQ: SOLF), to "hold" from "buy" after their stocks passed his price targets.

Analysts say many investors viewed Suntech's initial success as a bellwether for the overall Chinese solar industry, but some newcomers mightn't be as well positioned to deal with current industry dynamics. "The market doesn't yet separate winners and losers," Piper Jaffray's Mr. Pichel says.

There are risks for investors. Piracy problems in China mean U.S. and European companies may be reluctant to outsource production of cutting-edge solar technologies to Chinese suppliers. In addition, tough competition could prompt Chinese manufacturers to sacrifice margin in the quest for market share.

Moreover, solar power isn't a panacea for the world's energy woes. While the price has been dropping for decades, solar is still significantly more expensive than power purchased from an electrical grid in most parts of the world, and the industry relies heavily on government subsidies.

And, right now, the entire solar industry is battling a shortage of polysilicon, a material used to convert sunlight into energy -- and that could weigh on some shares.

Because silicon wafers account for about 50% of the price of a solar panel, the price companies pay for the material over the next several years will have a big impact on margins. Companies like Suntech, which have long-term silicon supply contracts, could pay lower rates than competitors that have to buy it on the spot market, according to some analysts.

That is one factor brightening prospects for LDK. The company contains costs by using recycled polysilicon, which is relatively inexpensive to buy. LDK makes silicon wafers, a key ingredient in solar cells, which in turn are used in solar panels. LDK is expected to sell 7.4 million ordinary shares -- about 17% of the company -- at between $25 and $27 each.

Access to silicon is also a plus for Yingli. Like Suntech, it is vertically integrated, producing things including silicon ingots and finished panels. Yingli has secured several long-term silicon supply contracts. The company aims to raise about $350 million, and is likely to price its IPO around $11 to $13 a share, according to a person familiar with the matter.

Silicon supply concerns have made some analysts cautious about the secondary offering by Trina Solar, another integrated player. The company released first-quarter earnings Monday, which showed that operating margins fell to 10.5% from 15.1% in the fourth quarter of 2006, a sign that rising silicon prices may be cutting into profitability.

American depositary shares of Trina, which listed on the NYSE in December and has a market value of $1.2 billion, have tripled compared with the IPO pricing. The stock traded up yesterday 1.51, or 2.8%, to $55.65. Last week, the company filed for a secondary offering of 5.4 million shares, which is expected to raise about $315 million.

The company's shares trade at about 14.9 times earnings per share for 2008, according First Call.

--Kate Linebaugh contributed to this article.