Manufacturing Predictable Solar Profits

If you know the JA Solar (Nasdaq: JASO) story already, go take out your recycling while the rest of us get up to speed. We won't talk about the quarterly results until you get back.

OK solar frosh, here's the quick and dirty. JA is a Chinese solar shop that fired up its first 25 megawatt (MW) cell manufacturing line in April 2006. Solar cells are pretty much smack dab in the middle of the solar value chain, so JA buys wafers from whizzes like ReneSola (NYSE: SOL) and sells its cells to module makers like Canadian Solar (Nasdaq: CSIQ). Like SunPower (Nasdaq: SPWR), JA focuses on high-efficiency monocrystalline cells.

Unlike some stunted solar players, JA has done a fine job securing adequate wafer supply in a polysilicon-constrained world, and gross margins have held up nicely. JA has also managed its expansion to 175 MW of annual capacity with great dexterity. New lines came online ahead of schedule last summer, and 13 more cell lines are set to ramp up this year, taking total capacity to 500 MW by year's end.

OK, now that the old pros are back, let's check out the latest numbers. Output in terms of megawatts rose 1% over last quarter, which is a fine result in a steady-state quarter. Gross margin came in just a shade lower than in the fourth quarter, so nothing to worry about on that front, either. Largely on account of light capital expenditures, the bottom-line result was a beefy 57% sequential increase.

Of course, spending is set to ramp from here, but a back-of-the-envelope calculation reveals why JA Solar is being aggressive on that front. Total capital expenditures for the year are expected to be around $138 million, with most of that earmarked for expansion. That puts each 25MW cell line in the ballpark of $10 million. With sales prices of $3 per watt and operating margins in the mid- to high teens, those are some compelling economics.

Today, JA Solar is a pretty straightforward manufacturing play. The company doesn't have whiz-bang technology like First Solar (Nasdaq: FSLR) or Evergreen Solar (Nasdaq: ESLR). It has a proven, profitable process that can be replicated easily. You're going to pay a pretty penny for that kind of visibility, and I'm not at all sure you're getting more than you pay for. But as long as demand keeps up, and wafers aren't too hard to come by, JA is well-positioned to manufacture big profits.

Related Foolishness:

• Here's my fellow Fool's take from last quarter.
• SunPower arguably got mistreated by investors recently.
• Here's a solar stock for silicon skeptics.