Suntech Power Holdings Co., Ltd. (STP)

I won’t be buying any more as I had a large serve at around $10.
I was wrong about a few things in my last post on Suntech. I predicted earnings reasonably well yet poorly anticipated market reaction. Score fundie 1, behavioral -1.
Long term theme is still reasonably intact, but there are some questions over the short term. Look at the cash flow carefully.

US electricity consumption is set to rise 41% by 2020. I see the majority of increase being supplied by alternative energy and that is part of the reason I have purchased STP and GE.

• Solar power will be installed residentially and on utility scale. STP is well placed to survive and prosper.
• Wind power will primarily be utility, but recent innovations will lead to residential use. GE is well placed to benefit.

Q3 Earnings

Q3 2008 Earnings Call Transcript

In response to this near terms challenges, we have implemented a range of measures to improve our cost structures as quickly as possible and preserve our profitability. Specifically, we have proactively renegotiated the higher price, spot silicon contracts for 2008 delivery.

Our adjusted procurement and production inline with sales orders to minimize inventory build out, deferred CapEx and non-essential cash outlays accelerates the optimization of manufacturing processes and supply chain management and considerably the roll out of high efficiency Pluto technology.

We believe that this steps will enables us to view the short-term market disturbances and will position us for growth as the environment improves in 2009. Despite this near term challenges, we are confident that 2009 solar demand will be relatively strong. We also believe that the industry calibration will benefit Suntech as we expect to fly to quality solar companies that are positioned to be long-term leaders in the solar industry.

We have already received orders from the European customers for over 600 megawatt of PV products for 2009 and are pursuing a growing pipeline of additional orders. This indicates that core demand is strong though we are well aware of the challenges created by the turmoil in the financial market that may make it difficult for some orders to materialize.

…the spot market price for silicon has fallen by over 50% to well below $200 per kilogram.

While this will help to reduce the cost of the new silicon purchases in the first quarter of 2009 onward, the mix of higher price silicon from our carrying over inventory and a higher cost purchase of raw materials in October, 2008, we mean that our average of silicon cost will remain relatively high in the fourth quarter. [HOW COULD THIS HAVE BEEN SPOTTED? By checking the raw materials on the balance sheet and knowing that with falling prices these still had to be consumed. Still that is difficult to judge without knowing inventory turnover for STP.]

Nevertheless, we expect to benefit from the lower spot pricing in early 2009 and I believe our profitability will improve steadily through 2009 as we transition from the silicon, polysilicon to longer-term contract; also our strategy to secure diversified silicon pipeline to ensure stable and a relatively low cost silicon supply in 2009. [That is one trend you want to follow and judge management by.]

During the third quarter, our key markets continued to be Germany and Spain, which generated 33% and 22% of our revenues respectively. As we move into 2009, we expect that Germany, Italy and the U.S. will be the key growth drivers. In particular we are excited about our new initiatives in the United States that we believe will enable us to rapidly expand our presence there.

Stuart Wenham

that we are nearing the completion of our evaluation phase of the Pluto technology and we are on track to expand our production capacity from 10 megawatts to 30 megawatts by the end of 2008.

We are consistently producing Pluto monocrystalline cells with the conversion efficiency of 18.5% to 19% and multicrystalline cells with the conversion efficiency of close to 17%.

We are targeting to increase our Pluto manufacturing capacity to 100 megawatts during the first quarter of 2009. We intend to start selling Pluto modules as soon as we have received the relevant industry certification which we expect will be in the second quarter of 2009.

Our new Thin-Film production facility is on track to finalize installation of a 50 megawatt Thin-Film production line by the end of this year. We will then initiate trial production and plan to send Thin-Film panels for certification in early 2009. We expect to start shipping Thin-Film products to customers in the second half of 2009 and target 15 megawatts to 20 megawatts of output for the full-year.

Amy

Non-GAAP gross margin was 21.8% in the third quarter compared to 24.7% in the second quarter of 2008. The quarter-over-quarter decrease in gross margin, primarily reflects a decrease in ASPs, due to the depreciation of the euro versus the U.S. dollar and to a lesser expand the increased raw material purchase cost. [just like I said it would]

Net interest expenses were $7.9 million in the third quarter of 2008 compared with net interest expenses of $5.2 million in the second quarter of 2008. The sequential increase in the net interest expenses was primarily due to the increased short-term borrowing balance to facilitate daily operation. [Warning Will Robinson. Cash flow negative, borrowing to fund daily operation. Coupled with higher cost raw materials and lower ASP in Q4.]

Foreign currency exchange loss was $16.6 million in the third quarter of 2008 compared to a foreign exchange gain of $2.5 million in the second quarter of 2008.

During the fourth, we have secured a further $600 million of credit facilities. We have maintained excellent relationship with domestic banks, which have relatively strong liquidity and high cash reserves.

So it appears those wild rumours were predominately right. They were cutting back capacity, seeking more financing and I’m not sure about employees, but that could be on the money.

Valuation

http://finance.yahoo.com/q/ks?s=STP
Multiply any of those figures by five and you’d be closer to fair value.
STP is cheap.

Cash flow is still a concern. They need to become increasingly cash flow positive as soon as Q1 2009.

Related posts:

1. Suntech Shine Again
2. Suntech Achieves 1GW and 1MW
3. Suntech Reports Preliminary Q4 and 2008 Financial Results
4. Need cash? See Suntech
5. Suntech Reports First Quarter 2009 Financial Results
6. Suntech Power’s Day in the Sun