Is Suntech the financier de rigueur for the solar industry?

It sure seems that way.

I have been trawling the internet trying to find details on Suntech’s minority ownership of and loans to a number of their suppliers. I have momentarily given up hope after reading a reference to a Credit Suisse research note on STP. The only comment by the CS analyst not taken directly from the earnings release or conference call was “We raise our DCF-based target price from US$48.0 to US$50.0.”

Discounted Cash Flow, DCF, is a useful tool for analysing companies with reliable, reasonably predictable long term cash flow. This is pretty much the antitheist of Suntech. Using DCF to value a company like Suntech is ludicrous. There is no way anyone can reliable predict their earnings from one quarter to the next let alone the appropriate growth rates and cash flow over the next five to ten years.

Yet apparently the CS analyst can predict these things so accurately that they found it meaningful to change their estimate by $2. They are havin’ a laugh as my English friends would say.

Why is DCF inappropriate? For a start STP doesn’t actually have any cash flows. STP is flat out converting their earnings into minority ownerships of silicon providers at a time which surely represents peak margins for that segment of the industry. As I am overweight STP I sure hope they are getting good deals. Therein lays my conundrum. I have no idea whether STP are investing our earnings wisely.

• Is that 18% investment in Glory silicon a good investment?
• How about that $100 million in to Nitol Solar or the $102 million in Shunda Holdings?
• How about the EUR58 million into the Global Solar Fund?
• Will the $49M in advances to suppliers or the $270M dues from related parties be shown to be wise investments?
• The $187M in long term prepayments may ensure silicon supplies, but will it end up being a good deal?

So many questions, so few answers and strangely no-one seems to be even asking. On the Q2 conference call not one analyst asked about these investments or the long term loans and prepayments STP has been handing out to their supply chain. So am I jumping at shadows?

I wish I knew.





This quarter’s earnings were clearly superb, but in the long term what matters is that their investments in capital equipment and their supply chain continue to pay off. As we are only in the first innings of the world’s conversion to solar, among other alternative energies, STP remains a speculative bet. While Chairman and CEO Shi as well as the rest of senior management are clearly confident in the future, next year, I am left wondering why they need to invest so much in their supply chain partners.

As I have shown disdain for applying DCF to STP I guess I should say how I do value it. While I generally prefer multi-year time frames with my investments I consider it folly to look further than one or two years ahead with a company like STP. I look at earnings and what investors are likely to pay for those earnings. I then examine the bear stories and determine when they can realistically become threats and what confirmations I should be watching for. Lastly and most importantly is investor sentiment. Investor sentiment, not fundamentals, is what drives growth stocks. With growth stocks I prefer to focus on the voting machine not the weighing machine.

The STP Q2 conference call was a bullish game changing call. The picture they painted was so rosy that I can see myself selling those extra STP shares I bought last week within a couple of months.

I do like STP. I like their management depth, I like their earnings, their improving margins, Pluto and the rest of the R&D. I even I like their Australian connection. Just show me the money or some more details on the investments and loans and I’ll be a happy camper.

Does anyone have anything of use to say on STP’s investments and loans?

Related posts:

1. Suntech Achieves 1GW and 1MW
2. Suntech (STP) I wish you were lower
3. Suntech Bring the Sunshine
4. Suntech Smashes Estimates and Ramps Production
5. Fusion Portfolio Buys Suntech STP
6. Suntech Reports Preliminary Q4 and 2008 Financial Results