Wednesday, July 18, 2007

For China's JA Solar, Supplier Alliances Create Solid Outlook

Posted 7/17/2007

In solar energy, the latter half of the supply and demand equation is the easy part. That's what makes JA Solar's (JASO) new supply pact, plus its close ties to another supplier, big.

JA Solar enjoys a strong relationship with a big supplier of polysilicon, the material used to make solar cells. JA says that company, Jinglong Group, is China's biggest maker of polysilicon. Jinglong's parent, Jinglong BVI, owns the biggest piece of JA Solar. The size of that stake appears to be 32%. And JA Solar's chairman is the president of Jinglong. JA Solar says it gets the polysilicon from Jinglong at 5% below spot market prices.

But then last month, JA Solar inked a pact with M.Setek, a privately held Japanese company, to supply it with polysilicon starting this month. That agreement about doubles the amount of silicon wafers that will be available to JA Solar through 2010.

New supply agreements are huge because the industry is struggling through silicon shortages that may not clear up until '09, analysts say.

"That (deal) brought to light a lot of the differences between them and some other" solar companies, said John Hardy, an analyst with American Technology Research.

The deal also helped propel JA's American Depositary Receipts to an all-time high of 43.87 on July 9. The company went public in the U.S. in early February at $15 a share. It trades near 38. It fell about 6% on Tuesday after Needham & Co. downgraded the stock to hold, based on its recent quick run-up.

Still, the stock's gains exceed such big solar highfliers as solar installer SunPower, (SPWR) which is up 50% since JA's IPO and panel maker Suntech, (STP) up about 15%.

Solar is one of the best stock sectors today. IBD's Energy-Other group, which includes solar companies, ranks No. 7 among 197 industry groups tracked by IBD in terms of stock performance over the past six months. Governments around the world are subsidizing solar companies, looking to promote clean energy that helps the environment and reduces their dependence on oil, gas and other energy resources that have seen fast price hikes.

Hardy, who has a buy rating on JA Solar, says investors hope the company will be able to ramp up its manufacturing faster thanks to the M.Setek pact.

This month, JA Solar confirmed that it planned to boost its output by more than 50%, adding four new production lines. The company hasn't yet said anything about its production plans in 2008.

Last month, CIBC Markets analyst Jeff Osborne upgraded the stock to outperformer from sector performer. "We see this announcement (with M.Setek) as putting JA up with Suntech as a leader in China in regards to supply," he wrote in a research note.

He notes they appear to be the only two Chinese solar companies with silicon needs already "in the bag" for 2008.

The supply outlook justifies JA Solar's stock price, says Pavel Molchanov, an analyst with Raymond James. He rates the stock a strong buy. He says the solar industry's outlook calls for 30% annual revenue growth for the time being.

The company is expected to earn $1.06 a share this year, based on the consensus of eight analysts polled by Thomson Financial. That's vs. 37 cents last year and the loss of a penny a share in 2005.