How to Profit as Surge of Solar IPOs Mark Dawn of New Industry in China

By Jason Simpkins
Staff Writer

Of the five best-performing initial public stock offerings so far this year, three are China-based solar-energy companies.

With energy prices soaring, China is making a big move into the market for solar-energy technologies.

Initial public offerings (IPOs) of solar-energy firms have reached record levels this year, with at least half a dozen China-based alternative-energy technology companies helping to fuel that trend.

According to a recent report by New Energy Finance, solar-energy IPOs had reached $4.7 billion as of July 31, more than double the $2.2 billion recorded during the same period in 2006 and triple the $1.5 billion for 2005.

Of those six China-based solar-energy companies that went public this year, three are among the best-performing IPOs through the first nine months of this year. [For more information on these IPOs through the first three quarters of the year, please click here and check out our related story on IPO deals through the first nine months of this year].

The includes the No. 1 performer, JA Solar Holdings Co Ltd (JASO), the solar-cell maker whose shares have more than quadrupled in value since it went public on Feb. 6 at $15 a share. LDK Solar Co. Ltd. (LDK) and Yingli Green Energy Holding (YGE) - which went public a week apart in early June - ranked third and fourth, respectively.

LDK, which closed Friday at $68.90, is up 155% from its offering price. It manufactures "multi-crystalline" solar wafers, the main raw material needed to produce solar cells. LDK sells multi-crystalline wafers globally to manufacturers of photovoltaic products, including solar cells and solar modules.

Yingli, which ended the week at $26.07, is up 137% from its IPO price. Yingli is a vertically integrated photovoltaic (PV) product manufacturer in China. Through Baoding Tianwei Yingli New Energy Resources Co. Ltd. (Tianwei Yingli), the company's principal operating subsidiary based in China, it designs, manufactures and sells PV modules, and designs, assembles, sells and installs PV systems that are connected to an electricity transmission grid. As of June 7, Yingli's annual production capacity was 95 megawatts of poly-silicon ingots and wafers, 90 megawatts of PV cells and 100 megawatts of PV modules.

Three China-based solar-power-technology companies went public in the final two months of last year, raising $508.8 million, not including "green shoe" overallotments. Four more solar-energy-related firms went public this year, raising $1.11 billion.

What's the attraction? Unlike many high-tech startups, solar-energy companies can become profitable very quickly, analysts say. For that reason, this surge in IPOs is an investment boom - but not a bubble.

"Solar companies, once they're ramped up, they're solidly profitable," Jeffries & Co. analyst Jeffrey Bencik told The Associated Press in a July interview. "This is not the Internet bubble. These companies have real products and real profits."

Soaring economic growth - primarily in China, but also in India, parts of Latin America and Eastern Europe - have sent crude oil prices soaring to record levels north of $80 a barrel, and have caused other commodities roar north, as well. And those spiraling energy and commodity prices have drawn the interest of retail investors, as well as institutional, private-equity and venture-capital investors, too.

The ultimate objective: Find the technological breakthrough that will one day enable oil, coal, and natural gas to be replaced with either alternative sources of energy, or even better with a clean, cheap, renewable fuel or energy source. As long as the prices of conventional fuels remain as high as they are now, those investments in energy alternatives will continue to increase.

In the United States alone, engineering, manufacturing and construction jobs related to the solar industry will total 30,000 by 2015, according to the report, "Solar Power Commercial Market Applications," from Energy Business Reports.

So-called "green" mutual funds - officially referred to as environmentally friendly funds - have experienced significant gains in recent months, as investors moved to profit from these same trends. The Portfolio 21 Fund (PORTX) has posted a year-to-date total return of 12.59%, is up 23.3% over the past year and has an average annual total return of 19.93% over the past five years. The Winslow Green Growth Fund (WGGFX) has done even better: It's up 15.4% year to date, has a one-year total return of 24.23% and has generated a very lofty average annual total return of 26.76% over each of the past five years.

Morningstar rates Portfolio 21 as "above average" in terms of both risk and return, while Winslow Green is rated as a "high" risk and return fund.

Then there are the companies themselves.

LDK Solar (LDK) and Yingli Green Energy Holding (YGE) both went public in early June - LDK at $27 a share and Yingli at $11. As noted, LDK, which closed Friday at $68.90, is up 155% from its offering price. Yingli, which ended the week at $26.07, is up 137%.

The SunPower Corp. (SPWR), whose shares closed Friday at $82.82, has been a major solar energy player since late 2005. Its shares are up 192% in the past 12 months, including an advance of nearly 28% in the last three months alone.

In a research note on Thursday, Schaeffer's Research analyst Joseph Hargett said several factors favor continued gains in the stock: The so-called "short interest" is very high - equal to 65% of the shares outstanding and available for trading - and analysts who follow the stock are somewhat bearish, with seven "buys" and six "holds." That leaves a lot of room for analyst upgrades, Hargett said.

And while he didn't actually use the term, the scenario Hargett outlined - high short interest and lots of room for analyst upgrades in a stock that's already performed strongly makes a rally-igniting "short-squeeze" very possible, if not likely.

There's a reason SunPower's shares have sizzled: Its financial performance has been extremely strong, as well. Over the past 12 months, sales have advanced at an annual rate of 227%. Revenue for the second quarter was $174.1 million, a 22% increase from the prior quarter's revenue of $143.2 million.

The San Jose-based maker of high-efficiency solar cells, and systems, opened a new plant in the Philippines on July 30.

LDK is a leading manufacturer of multi-crystalline solar wafers, which are the principal raw material used in the production of solar cells. Net profit for the second quarter of 2007 was $99.1 million, up 35% from $73.4 million in the first quarter. This was a 716% improvement over $12.1 million in the second quarter of 2006. Gross profit was up 1,265% from a year ago, as well. Yingli Green Energy is set to release its second quarter earnings on August 15.

Both Yingli and LDK are based in China, which may have the worst pollution problem in the world. It's estimated that the country's pollution is responsible for the death of more than 750,000 Chinese citizens a year. The country is going through a tremendous amount of trouble to clean up its act before the 2008 Olympic games.

Because of the Olympics, China will spend $3 billion on pollution-control initiatives during this year alone.

Last year Beijing removed 15,000 old taxis and 3,000 buses from the city to try to ease pollution and traffic. Beijing officials also say they have planted nearly 200 million trees since 2002, which was the year after Beijing was named the host of the 2008 Games. And, of course, the silicon solar panels will be used to help provide power to the Olympic game venues.

Four other Chinese solar companies have gone public in the past eight months. In addition to JA Solar Holdings Co Ltd (JASO), whose shares have more than quadrupled in value since its Feb. 6 IPO at $15 a share, other U.S.-listed China-based companies involved in the solar-power sector include:

  • Solarfun Power Holdings Co. Ltd (SOLF), manufacturer of both photovoltaic (PV) cells and PV modules in China.
  • Trina Solar (TSL), which makes standard solar modules ranging in power output from 160 watts to 185 watts.
  • Canadian Solar Inc. (CSIQ) produces and sells solar cells and module products that are have residential, commercial and even industrial uses.
  • Suntech Power Holdings Co. Ltd. (STP), maker of photovoltaic cells and marketer of integration services. Its products are used to provide standalone power for street lamps, garden lamps, telecommunications relay stations, and mobile phone networks.
  • And China Sunergy Co. Ltd. (CSUN), which manufactures solar cells from silicon wafers.

This is no coincidence. A mad rush to clean up the country before the Olympic games isn't going to be enough to permanently squelch China's pollution epidemic. If the country is going to get the problem under control it's going to have to count on alternative energy technologies like solar power for contributions.

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