Sunday, January 3, 2010

China Hot Stock: SunTech Power (NYSE: STP)

. Sunday, January 3, 2010

By Stock Wizard

Suntech Power Holdings Co. (NYSE: STP) is China's largest U.S.-listed solar player by market-capitalization.

It engages in the design, development, manufacture, and marketing of photovoltaic (PV) products worldwide and its products include monocrystalline and multicrystalline silicon PV cells; PV modules; and building-integrated photovoltaics products.

Solar panel makers were negatively impacted by the severe turmoil in the credit market as financial players abandoned U.S. solar energy projects last year. The 2008 collapse of top solar financier Lehman Brothers and the freeze-up in the global credit markets drove nearly all banks to halt funding for major new solar projects, forcing the makers of systems that turn sunlight into electricity to slash prices for their products.

However, the industry is now beginning to turn around as margins stabilize and customers return. Over the last few weeks, analysts at various brokerage firms upgraded solar stocks as the just completed quarterly earnings season turned out to be quite encouraging for the sector as a whole. In the recently concluded Copenhagen Summit, the five major polluters of the world agreed to take action to reduce CO2 aggressively, with $100B per year pledged to help developing nations adopt green energy technology to cut greenhouse gas. Meanwhile, the US, China, Brazil and India continue to invest heavily in wind and solar energy with China's $454B in the next 5 year period as the most aggressive one. Solar companies also benefited from tax credits for manufacturers as well as users of solar panels and solar energy systems. As part of the stimulus bill signed earlier this year, the federal government approved around $60 billion in loan guarantee authority and $30 billion in energy grants for renewable energy and transmission companies. Congress has also granted a 30% renewable-investment tax credit to help expand the development of alternative sources of energy.

In November, the Wuxi, China-based company announced its third-quarter profit that topped expectations. Net Income nearly tripled to $29.79 million or $0.16 per ADS, compared to $42.64 million or $0.25 per ADS in the year-ago quarter and $10 million, or $0.06 per ADS, for the second quarter of 2009. Total net revenues declined to $473.11 million from $594.40 million a year ago. Sequentially, revenues were up 47.4% from $321 million in the second quarter of 2009. Analysts, on average, expected the company to report earnings of $0.08 per share on revenue of $426.58 million.

The Chinese solar panel maker will continue to hold PV sale production capacity at 1 gigawatt through the third quarter of 2009, and make a decision on further expansion once visibility improves.

Gross margin for the core wafer to module business was 20% in the third quarter, compared with 19.1% in the second quarter of 2009. Further, the company stated that it saw 100% sequential shipment growth in the U.S. market and the rapid development of a number of non-traditional PV markets such as the Czech Republic, Benelux, China. These complemented the strong growth in the German market.

The company expects fourth-quarter shipments to be at least 10% higher than the hird quarter of 2009. Gross margin for the fourth quarter is expected to be relatively flat compared to the prior-year quarter.

The company also increased its full-year 2009 PV shipment target from 600MW to a range of 640MW to 660MW.

Looking into next year, the company sees at least 75% shipment growth in 2010. Further, the company targets to expand to 1.4GW of PV cell and module production capacity by the middle of 2010, of which 450MW will be Pluto-enabled. Based on that, fiscal 2010 capital expenditures are expected to be approximately $200 million.

Suntech plans to rapidly expand its presence in the US in the coming months. Already, the company has grabbed a 25% market share in the state of California- by far the largest solar market in the U.S, up from only 8% in Q109, according to the California Public Utilities Commission. Thanks in part to the establishment of its North American partner programs, During the third quarter shipment to North America was the highest in Suntech history, up over 100% from previous quarter. According to technology research firm Gartner, the U.S. solar market is on track to grow 35 to 45 percent in 2009 and reach about 460 to 500 megawatts. In November, the company announced a plan to invest $10 million to build its first solar factory in the U.S. The factory, which will be constructed in the Greater Phoenix region in Arizona, will be 80,000 to 100,000 square feet in size and will have an initial PV (photovoltaic) module production capacity of 30 megawatts (MW). It is expected to begin production in the third quarter of 2010. The company estimates that the Arizona plant could serve about 8 percent of the U.S. solar-panel market.

In China, Suntech Power Holdings Co Ltd announced it expects to develop about 20 percent of the 91 megawatts of solar projects under solar rooftop program. Launched in March this year by the Ministry of Finance, China's Solar Rooftop Program, is designed to increase the energy efficiency of buildings through the installation of building-attached and building-integrated PV solar systems. It is estimated that Suntech will get a subsidy of 1.4 billion yuan under the solar rooftop-plan.

Globally, solar industry depends upon government subsidies and incentives. However, recent developments suggest that subsidies will inevitably be reduced or phased out. In June, German legislators voted for steeper cuts to subsidized prices for electricity generated from solar panels. Last year the guaranteed price paid for solar-produced electricity was reduced by 5 percent. Some lawmakers had demanded a cut of as much as 30 percent in the subsidized rate. Spain too has taken similar steps. Since Suntech generates a bulk of its revenue from Europe, a reduction in solar energy subsidy programs, may hurt the company's prospects. Europe as a whole represented approximately 76% of total sales while Germany accounted for 44% of sales in the third quarter.

Shares of the company are currently trading at a forward P/E (fye 31-Jan-11) of 25.56 and PEG ratio (5 yr expected) of 2.04. Looking at the balance sheet, the company has currently 855.74 million in cash and cash equivalents and 1.71 billion in debt. In terms of stock performance, Suntech shares have gained 37% since the beginning of the year 2009.

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