Solarfun: Just a Chinese Knock-Off?

A year and a half ago, I thought I was seeing double in the solar space. Two solar reports -- those of Canadian Solar (Nasdaq: CSIQ  ) and Solarfun Power (Nasdaq: SOLF  ) -- were just uncannily similar. Here's how the numbers stacked up back then:

Metric	Solarfun Power	Canadian Solar
Revenue	$171 million	$171.2 million
Shipments	40.3 megawatts	41.8 megawatts
Gross Margin	16.5%	16.5%
Operating Margin	12.1%	11.7%
European Revenue	100%	97.9%

All data from company filings.

While their shipment levels remained in a dead heat in the most recent quarter, the two Chinese solar shops have diverged in some ways:

Metric	Solarfun Power	Canadian Solar
Revenue	$144.6 million	$213.1 million
Shipments	102.6 megawatts	102.6 megawatts
Gross Margin	20.7%	16.3%
Operating Margin	13.1%	9.3%
European Revenue	n/a	87.6%

All data from company filings.

It's striking that CSI sported 47% higher revenue than Solarfun this quarter, given an identical shipment level. The former reported average sales prices just more than $2 per watt for the quarter, which mirrors the $2.03 figure cited by Solarfun. So it's not that CSI pulled down a big premium for its solar wares. Every well-established supplier, from Yingli Green Energy (NYSE: YGE  ) to Suntech Power (NYSE: STP  ) , can be expected to land roughly the same pricing for modules in this largely commoditized business.

Solarfun reported that 40% of its shipments were tolling-related in the quarter. I believe this processing business, in which the company converts PV cells to modules on behalf of a third party, explains the wide revenue discrepancy. Solarfun's higher margins make sense in this light, as well.

Next quarter, Solarfun's module processing business is forecast to account for only around 20% of shipments, and gross margins are guided to the upper teens, so it would be a mistake to conclude that this firm has smoked CSI in terms of ongoing profitability.

In terms of capacity, Canadian Solar has clearly pulled ahead of Solarfun. The former firm has reached 820 megawatts (MW) of module capacity, and is on the way to a gigawatt next year. Solarfun is ramping from 500 MW to 700 MW sometime next year.

Is bigger always better? That seems to be the predominant thinking in this "take market share or die tryin'" business, but I'm not sure CSI deserves to command this large of a premium over the somewhat slimmer Solarfun. Let's put it to a vote, shall we?