It has been a busy week for Chinese solar companies. On Wednesday, Trina Solar (NYSE:TSL) and Solarfun Power (NASDAQ:SOLF) both went public. Since that time, though, the companies have taken slightly different courses.
Trina priced its IPO at $18.50 and shares skyrocketed to $26 before retreating to $20, where the stock is trading today. Solarfun, however, priced itself at $12.50 and saw its shares drop immediately to the $10 range. It has since recovered slightly and is trading at $11 today.
Does the market know something that the rest of us don't? I never argue with the market because, well, it's the market. But I think it is far too early to assess the long-term prospects of either company.
It is not that both companies don't offer intriguing growth prospects. They do. For the nine months ending September 30, Trina reported net income of $7.8 million on revenue of just over $75 million. These figures are up from $1.1 million in net income and $11 million in the prior-year period.
Solarfun has also experienced similar growth, jumping to net income of $8.8 million on revenue of $49 million this year from a full-year 2005 net income of $1.8 million on $21 million in revenue.
My concern is that I have no way of accurately assessing the prospect of whether either company can continue this torrid pace of growth. There are simply too many unanswered questions. For instance, unlike SunTech Power (NYSE:STP), which has done an excellent job of locking up supplies of silicon at fixed prices that are below the spot market price of silicon, I don't know how much silicon either company has access to or at what prices.
Without knowing that information, it is difficult to assess how fast either can grow. Furthermore, even if they can grow, the prospects that their margins could get hammered by high silicon prices is very real.
Secondly, the quality of Trina and Solarfun's cells and modules also remain an unknown -- at least to me. Given China's growing need for solar power in the rural parts of the country as well as its need for cleaner energy sources in major cities such as Beijing and Shanghai, there is undoubtedly room for multiple solar companies to peacefully co-exist in China. But this doesn't mean that all of these companies are going to do equally well.
Chinese consumers, like consumers everywhere else, will gravitate toward the best combination of price and quality. Unfortunately, it is too soon to gauge with any accuracy which company (or companies) will win in the marketplace. Investors will need to wait until both companies report quarterly figures to begin parsing for clues of growing market share.
Until better information is forthcoming, I would encourage investors to sit tight or, if you really want to invest in the China solar market, consider an investment in SunTech Power for the reasons I explained in this piece.
There is no need to rush into this market without having a better grasp of the facts. This week won't be China's only week in the sun. The country's second-largest solar module company, Yingli Solar, is still planning an IPO in 2007, and I am sure that there will be even more to follow after that.
The market for solar power in China is sure to grow stronger over time. This leaves investors plenty of time to do more due diligence. Better to go slow and get it right, than to jump in and get burned.
Interested in other solar Foolishness? Check out these articles:
- SunTech Shines On
- SunTech's Forecast: Sunny
- Sharp Magnifies Its Focus on Solar
- Investing in Cleantech
SunTech Power is a Motley Fool Rule Breakers recommendation.
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Jack Uldrich will soon be spending a week in the sun in Mexico. He owns stock in SunTech Power. The Fool has a strict disclosure policy.
