Will Hanwha Earnings Look Less Dark?

Hanwha SolarOne (HSOL +0.00%) will release its latest quarterly report on Monday, and investors have gotten a lot more excited about the stock's prospects in recent months. Yet even though the Chinese solar market has seen some encouraging signs lately, Hanwha earnings are likely to remain in the red for a long while to come.

For years, intense competition in the Chinese solar industry has led to overproduction and weak pricing, which in turn has made it nearly impossible for most Chinese solar companies to be profitable. Recently, though, signs of financial difficulties among weaker Chinese solar players have made investors optimistic that a shaking-out in the industry could leave survivors with better profit potential. Let's take an early look at what's been happening with Hanwha SolarOne over the past quarter and what we're likely to see in its quarterly report.

Stats on Hanwha SolarOne

Source: S&P Capital IQ.

Can Hanwha earnings keep improving this quarter?
In recent months, analysts have seen more promise in their views on Hanwha earnings. They've narrowed their June-quarter loss estimates by a nickel per share and their full-year projections by $0.37 per share. That optimism has resulted in a massive 140% increase in the stock since early June.

Hanwha's big move higher began in late June, when the company announced that it successfully got a $100 million term loan from Korea's Export-Import Bank. The default earlier this year from Suntech Power (STP +0.00%) refocused investor attention on making sure that money-losing Chinese solar companies could get outside financing to sustain their operations, and the fact that a non-Chinese lender was willing to extend Hanwha credit is a vote of confidence for the company.

Yet the real pop among Chinese solar stocks came from a combination of two much broader industry-moving announcements. In mid-July, the Chinese State Council said it plans to build 35 gigawatts of solar capacity within the next two years. Even though that news strongly suggests continued reliance from China's solar industry on its own government, it nevertheless sent Hanwha and its peers higher. Then, later in the month, Europe and China agreed to settle a potential trade dispute by having Europe impose price floors on sales of Chinese solar panels. By avoiding a much more punitive tariff, Chinese solar companies should be better able to weather the potential impact that minimum sales prices could have on the industry.

In its March quarter, Hanwha managed to eke out a positive gross margin. Continuing to do so will be critical going forward, as rivals Yingli Green Energy (NYSE: YGE) and JA Solar (NASDAQ: JASO) have both reversed their own negative gross margins. Even with those gains, though, both companies continue to struggle operationally, with Yingli having to manage $2.8 billion in debt and with JA Solar failing to boost its sales-volume guidance, disappointing investors.

In the Hanwha earnings report, watch closely to see where the company's sales are coming from and how much it's able to boost its margins. Without considerable progress, the gains the stock has seen in recent months could fade into the shadows quickly if Hanwha can't sustain its forward momentum.

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