Sunny Side Up

Gordon Johnson, alternative energy analyst at Hapoalim Securities, sees a bright future for a handful of solar energy stocks

Is your first pick one of these Chinese companies?
Yes, GT Solar (SOLR). The market dynamic I described created a significant benefit to GT Solar. Its primary line of business is installing equipment to produce polysilicon. It is a leader in this segment of the market. However, given the onset of the financial crisis, and a massive spending pullback in Spain, demand virtually collapsed. At the same time, many of the polysilicon companies that purchased equipment from GT Solar didn’t have the scientific and manufacturing expertise to do well. We believe many of these companies now need GT Solar to help them correct manufacturing issues. It’s a very costly, contract based endeavor that will require GT Solar’s help for at least six to 12 months. While many solar companies are suffering right now due to oversupply, we believe the recent weakness in GT Solar’s shares creates an opportunity as our analysis suggests a material revenue opportunity for the company providing polysilicon production engineering expertise and equipment. Any small pickup in demand for its products will have a significant impact. We do not believe this dynamic is fully understood by Wall Street. So GT Solar offers an attractive opportunity to play solar volume, because you need equipment to get output—as prices go lower, volumes will likely grow. GT Solar is best positioned to benefit here.

Are there other Chinese solar companies that are positioned to do well?
Well, many Chinese solar manufacturers haven’t yet worked through the higher-cost inventory they built in 2007 and 2008. This means it will take longer for them to fully realize and show the benefit to gross margins as a result of lower raw material costs. However, while other solar cell/module vendors such as Suntech, Trina Solar, Yingli, and Canadian Solar have all experienced tremendous share price appreciation year-to-date, the value of China Sunergy’s (CSUN) shares are actually down year-to-date. Considering that China Sunergy’s production costs are in line with all of the Chinese solar module companies that have outperformed this year, this dynamic is somewhat interesting. China Sunergy’s inventory levels actually fell by 50.8% between fall 2008 and spring 2009. So we believe it is clearly positioned to reap the benefit margins of lower input costs much sooner than any of its peers. Given the stock’s significant underperformance versus its peer group, it is our opinion that there is a 40% to 50% upside potential for the shares over the next three to six months. We see this as a great near-term growth play for investors with a high risk-high reward investment profile.

Does anyone have a chance against these Chinese manufacturers?
Despite its 39.22% share price increase year-to-date, I think German manufacturer SMA Solar Technology (S92) represents a great buying opportunity. Unlike other companies in the sector, it doesn’t carry significant technology or execution risk. The company develops and sells solar inverters, the central components used in every solar photovoltaic system. SMA benefits when sales, or volumes, increase. Thus, unlike solar PV companies, who rely on technology and low prices for outperformance, SMA is as close a pure play on value as you can get in this sector. Furthermore, there are barriers to entry in the inverter market—such as elaborate certification procedures to become a distributor—and we believe the risk of new entrants into this market is low. We believe SMA is among the best positioned in the solar industry to benefit as demand improves. SMA is a pure play on the overall growth of the solar market while avoiding the issue of module price declines due to the current oversupply facing the industry. I’m forecasting photovoltaic installations to increase by 36% in 2010. It’s my opinion that SMA is well positioned to maintain its market share—currently 39.6%—and grow margins.

This article originally appeared in the October 2009 issue of Black Enteprise magazine.

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