Suntech Power Holdings Co. Ltd. (STP) announces Q3 2008 results on 20 November.

Other solar companies have  been reporting mixed results, with currency exchange rates affecting a number of results and being sited for lowered guidance.

The shorts have got out ahead of the Q3 announcement, firing up the rumour mills with some wild claims on the Barrons’ Blog.
Let’s take a quick look at the three main claims.

1. “Quietly laying off about 10% of its 10,000 employees, and has idled half its production lines.”
   The key word in that phrase is quietly. So quite no one has heard about it. Has the industry really changed that much since Dr Shi raised guidance 3 months ago? Should we place more credence on rumours from known shorts than SEC filings? In Q2, Dr Shi said “We are fully booked for the second half of 2008 and expect these excellent demand conditions to continue through 2009.”
2. “lobbying regional banks for short-term financial support in order to ballast the company during this downturn.” Fellow solar company Yingli Green, YGE, did turn to the Chinese government and banks for support. The difference is STP is self funding. They produce so much cash they’ve been given it away left, right and centre. If they were short of cash all they’d have to do is rein in their investments.
3. The company has “put on ice” its plans to expand from 700 MW to 1.2 GW by the end of the year. European orders are down, and depreciation of the dollar means ASPs “are untenably low.” Prices proposed for new contracts would put solar manufacturers “into a loss position.”
   How does that square with Suntech Announces Groundbreaking of PV Cell Production Facility in Yangzhou, China? Then there is the issue that as of late August STP was aiming for 1GW not 1.2GW. Did I miss another announcement?

Some details to look for in Q3 earnings.

• How have and will the sudden change in Fx rates affect STP? (see notes below on currency)
• Cell production capacity. It was 660MW at Q2 end.
• Pluto advancement. IS 30MW production line still on schedule for end 2008.
• Gross margins. In Q2 GM rose to 24.1% up from 20.3% a year earlier.
• In Q2 conference call Shi said were expecting to finalise 500MW of additional sales by Q3 end.
• Check still on track as per business outlook from Q2

Analysts are expecting

• Earnings per share of $0.42 with a range $0.36-.46.
• Revenue $572M, with range $509-592M
• EPS for 2009 $1.98 with range $0.90-3.11

Suntech Outlook from Q2

• $570-580M in revenue
• GAAP gross margins of 22-23%
• FY $2.05-2.15B in revenue.
• FY product shipment 550MW
• 1GW of capacity by year end

What I expect

• Strength of RMB against the Euro will result in lowering of revenue and earnings forecast.
• As RMB strength began in early August it will have a material impact on this quarters figures. This could be as high as 10% of eps, with low end of eps estimates a possibility. However, this is very dependent on their hedging strategy.

Currency

From the Q2 Conference Call.

Their sales contracts are in EUR and USD.

“Foreign currency exchange gain was $2.5 million in the second quarter of 2008, compared to a foreign exchange gain of $2.9 million in the first quarter of 2008. The foreign currency exchange gains in the second quarter of 2008 was primarily due to the appreciation of the RMB and euro versus the U.S. dollar coupled with an increase in euro denominated sales.”

“Net other expenses increased from $0.8 million in the first quarter of 2008 to $6.3 million in the second quarter of 2008. The increase was mainly due the mark-to-market validation losses associated with foreign currency derivatives instruments. In order to hedge our foreign exchange exposures we entered into euro and U.S. dollar and U.S. dollar and RMB forward contracts, covering various periods from July 2008 to March 2010. At the end of Q2 our forward contracts was subject to temporary mark-to-market losses because of the US dollar depreciation significantly against all major currencies.”

“So, the reason we give 22% to 23% in GPV margin is because about 60% of contract was singed in euro currency in Q2 and in Q3, so we justify the possible appreciation of U.S. dollars, so that’s the reason.”

So they are hedged, which may lessen the impact. They had already anticipated a strengthening of the USD, but still the size of the have must have been greater than expected.

The RMB has remained flat against the USD over Q3. The big move has been against the Euro.

The current RMB-USD Fx rate is 0.1465. Almost flat since Q3 began.

The big mover was against the Euro. The current RMB-EUR Fx rate is 0.1163. That is a huge move since the beginning of Q3.

Here is a chart of USD to Euro. Using those figures, I guesstimate the following.
Expected revenues of $572M. 60% is Euro is $343M USD. If the rate used at the start of the quarter was around 0.64 and worst case 0.70 when revenue received and converted then the impact would be around $30M USD. As I have no idea of their actual currency hedges, what rates they were anticipating and used for their calculations, this is all just guess work. The reason to indulge is such guesswork is preparation.

NOTE: The currency fluctuations are meaningless in the long term success of STP. They only impact is likley to be on the short term share price. Which as a buyer si of interest to me.

Other Articles

STP Articles on Fusion Investing

From Seeking Alpha

• Four good bullish reasons for solar. Excellent current and prospective earnings. Credfit crunch has had little impact on solar companies. Polysilicon prices will continue to slide and Obama will continue US investment in solar.
• Three points to consider for Q3 earnings. Increased conversion efficiency. Expansion in the US market. Production capacity ramp up at Shanghai thin film plant.

Related posts:

1. Suntech Achieves 1GW and 1MW
2. Suntech Q3 Update and Thoughts
3. Suntech Smashes Estimates and Ramps Production
4. Suntech Shine Again
5. Fusion Portfolio Buys Suntech STP
6. Suntech Reports Preliminary Q4 and 2008 Financial Results