Chinese Solar-Energy Companies May Be Next Stocks to Burn Investors [WSJ]
By HERB GREENBERG
April 21, 2007; Page B3
Years ago, when the disk-drive industry was booming and Seagate Technology couldn't add capacity fast enough, the company's chief executive -- the late Alan Shugart -- was asked what would happen when capacity exceeded demand. His answer was akin to, "We'll worry about it then."
Indeed they did, with layoffs, plant closings and price cuts -- something investors, who watched the share price slide, likely won't forget. Such is life maneuvering amid the boom-bust-boom world of technology, where the experience of Seagate is more the norm than the exception.
Next on tap to learn that supply-demand lesson the hard way just might be investors in the handful of Chinese solar companies that have gone public in the U.S. in the past year. These companies have come out of nowhere -- some reformulated from industries unrelated to solar -- to become stock-market darlings amid the recent infatuation with alternative energy.
The solar crowd includes such companies as Trina Solar Ltd., which has been in the solar business since late 2004 (it originally made aluminum siding) and now has a market value of more than $1 billion after going public late last year; JA Solar Holdings Co., in business since May 2005, making products since April 2006, publicly traded in the U.S. since February and now with $1 billion-plus market value; Solarfun Power Holdings Co., which went public late last year and is now valued at nearly $1 billion; and Canadian Solar Inc., another recent initial public offering with China roots that started in 2001 as a maker of solar car chargers.
[Solar companies chart]
JA Chief Executive Samuel Yang says a few more Chinese solar upstarts are believed to be waiting in the wings to do an IPO. Plenty more, he says, are looking for ways to cash in on the boom, including companies that used to make clothing and shoes. "Everybody thinks it is such a lucrative industry," he says. To a large extent, it has been. Most of the young publicly traded companies have posted impressive sales and profit growth. That's right: they are posting profits -- lots of it.
But before investors get too excited, consider that much of that growth has been tied to sales in Germany, the largest market for solar energy, where purchases for large fields of solar panels have been subsidized by the government. Piper Jaffray & Co. analyst Jesse Pichel, regarded as one of the most seasoned in a rapidly growing field of solar analysts, says that is why he regards much of the sales and profit at these companies as "funny money" and "welfare." "There's a lot of risk that the subsidies don't continue in Germany and I think they will get reduced," he says. That, in turn, will cause demand to slow.
That gets us back to this whole supply-demand thing. When supply outstrips demand, prices tend to fall. That is something to keep in mind because even as demand is slowing, many of these companies are pulling out all stops to expand capacity -- and they are doing it as more competitors are springing up. Consider Canadian Solar, which makes solar panels, which contain solar cells that absorb sunlight. It attributed a fourth-quarter loss in part to a decline in prices even as plants are running around the clock. "We're expanding capacity, but we're expanding to meet firm orders," Chief Executive Shawn Qu says.
While demand in such countries as Spain, South Korea and the U.S. may strengthen, and the business as a whole may get much stronger in future years, Mr. Pichel says it isn't rising as fast as the growth in capacity. As a result, he believes profit margins will continue to come under pressure for the time being as companies start selling below market prices to gain share. Mr. Yang and Mr. Qu believe there will be a shakeout in the industry and that their companies, as low-cost providers, will be among the survivors. Executives of Solarfun and Trina couldn't be reached. Still, between here and there -- wherever there is -- a lot will happen before it gets sorted out. Meantime, there is likely to be a comeuppance that investors in these companies will wish they had anticipated -- as was the case with Internet stocks, memory-chip stocks and, oh yes, disk-drive stocks. History, on Wall Street, has a way of repeating itself. |
