Friday, August 15, 2008

Fun in the Sun

SolarFun Power Holdings (SOLF: Nasdaq) completed a $72 million equity offering this week. The Company produces silicon ingots and manufactures photovoltaic cells and modules. The stock is trading at 16.1 times forward earnings, which is well below the 47.7 times average of the specialized semiconductor group. The relative value in the stock and the enabling effects of the equity offering are enticing.

Investors should peak underneath the “surface logic” suggesting a bull-case scenario for SOLF. Some portion of the proceeds is earmarked to buy out the remaining portion of a 52%-owned subsidiary called Yangguang Solar. The balance is still owned by SolarFun founder and chairman, Nantong Linyang. Of course, the pricing could be fair and the result of eliminating minority ownership interest could beef up SolarFun’s bottom line.

The rest of the offering proceeds are to be used for working capital purposes. SolarFun needs the cash resources. Cash used by operations was $139.7 million in 2007, the last time the Company disclosed CFO figures in a 20F filing with the SEC.

SolarFun is solidly profitable, turning out $20.3 million in net profits on $328.3 million in sales in 2007. Profit margin (8.1%) is a bit below that of the industry (11%). Customers in German account for half of revenue, followed by Spain with 24%. Just over 8% of sales came from customers in China.

There is also a convertible debt issue outstanding, so investors could be facing a bit of dilution on the exercise of those bonds. The flip side of this risk is the receipt of more growth-enabling capital - always a good thing in a capex hungry industry like semiconductor production.

SolarFun is gearing up production capacity at a time when solar energy production is just reaching mainstream. The timing could be quite fortuitous, reaping returns in the coming years for investors who are prepared to ignore the rough edges on this small cap stock.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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