Jan. 17, 2008 (Investor's Business Daily delivered by Newstex) --
If you're looking for a hot sector, you can't get much hotter than the sun.
The promise of solar power (OTCBB:SOPW) is nothing new. But the high cost of harnessing that power has kept it more of a shadow technology than a full force of nature.
That's changing. The rise of government incentives over the past few years has fueled demand in Germany, Japan, Spain, the U.S. and other countries.
The solar industry got kicked into a higher gear in 2004, when Germany started an incentive program that encouraged investments by business and allowed utilities to make profits from harnessing the sun.
Germany has since become the largest solar market in the world, followed by Japan, up and comer Spain and the U.S., especially California. Other growing markets include South Korea, France and Italy.
"Most of the key (solar) markets in the world are subsidized, and that's what is driving growth in the near term," said Paul Clegg, analyst with Jefferies (NYSE:JEF) & Co.
Solar Modules
One of several publicly traded solar companies hopping aboard the speeding power train is Solarfun Power Holdings SOLF.
The firm processes solar cells into marketable solar modules. The modules -- a collection of cells -- are the functional units in a solar power system that convert sunlight into electricity. The more cells in a module, the more sunlight that can be converted into electricity.
Solarfun operates in the $10.5 billion "photovoltaic" market, which comprises the bulk of today's solar power industry. The industry is growing about 40% a year.
The solar power industry is "an amazing success story, but (the industry) has been around for 30 years," said Paula Mints, principal solar analyst with Navigant Consulting. (NYSE:NCI) "It's still a very small industry."
Measured worldwide shipments of solar technology shipped in 2007 came to around 2.9 gigawatts in 2007, up from just 250 megawatts in 2000, Mints says. To put it in perspective, 250 megawatts is enough to power about 80,000 homes in sunny climates such as Arizona.
Solarfun is a relatively small but fast-growing outfit in the solar power market. The company expected to ship 70 to 80 megawatts in 2007, up 210% to 254% over 2006.
Since Solarfun went public in December 2006, it has more funds to grow the business.
The company has been ramping up production capacity. By the end of 2007, it had the capacity to produce 240 megawatts of photovoltaic cells annually and expects to reach 360 megawatts by mid-2008. But that capacity still doesn't put it in the industry's top 10.
"To put it in comparison, Suntech Power STP will be at 1,000 megawatts of capacity by the end of 2008," said Adam Hinckley, analyst with CIBC World Markets.
Other big players include First Solar (NASDAQ:FSLR) FSLR and SunPower SPWR, among others.
Even though it's not exactly a big power in the industry, Solarfun stands to benefit from the improving "macro trend of clean technology," Hinckley said.
"All boats rise with the tide. If more countries come along promoting solar power, then the industry does well."
Solarfun has seen strong growth in Germany, which accounted for 56% of sales in the third quarter. Norway was its second largest market with 16% of sales. But one large Norwegian customer made purchases for installations intended for Spain, where Solarfun expects strong growth this year. Italy and Switzerland are other sizable markets.
Sales in the U.S. are "nominal," said Solarfun's VP of strategic planning, Paul Combs, in a recent conference call.
But stronger pricing in the U.S. coupled with a strategy to sell directly to system integrators rather than distributors could push U.S. sales in 2008 to 10% of the total.
Like many of its rivals, Solarfun is based in China, so it can take advantage of low-cost manufacturers of polysilicon and wafers, the base materials used to make solar cells.
"The wafer costs are a very significant part of our total costs. It's really the key factor you all should focus on," Combs told analysts in the conference call.
The problem: Wafer prices had been going up due to a supply shortage in an environment of higher raw material costs and rising demand. That has squeezed Solarfun and other solar power companies.
But Solarfun says its average wafer cost went down slightly in the third quarter. The company recently locked in long-term contracts below spot prices with key materials suppliers, following in the footsteps of rivals.
Supplier Problems
However, although Solarfun has added new supply sources recently, one key silicon supplier likely will under-deliver on promises due to some internal problems. Supplies are likely to remain tight this year.
Solarfun's shares have dropped sharply over the last two weeks.
Investors apparently discounted the improved pricing trends of late and economies of scale from having more customers, which helped boost Solarfun's margins. Net margin of 8% in the third quarter was up from 4% in the second quarter and minus-1% in the first quarter.
Revenue in the third quarter jumped 312% over last year's same quarter to $100.6 million.
Earnings in the third quarter rose 186% to 17 cents a share. Full-year earnings are expected to rise 17% over last year to 42 cents a share, according to analysts polled by Thomson Financial.
Analysts expect 2008 earnings to rise 200%, to $1.26 a share.
If costs some day drop enough so that solar power reaches parity with more traditional energy sources from the grid, solar power could become a "game-changing technology," Clegg says.
"If you can do solar at the same price or cheaper than what you get from the electric company, why wouldn't everyone want to do it?" Clegg said. | 