Chinese solar power companies flock to the US market

LDK and Yingli start their IPO processes as China Sunergy is set to price its initial offering at the top and Trina Solar files for a follow-on.
Investors who havenÆt yet caught on to the hype surrounding the solar power sector have the chance right now as there will be no fewer than three Chinese solar power companies selling shares within a short space of time. A fourth was set to price its small-sized initial public offering at the top of the range after the US market closed yesterday after receiving strong demand from investors.

Among these, LDK Solar, Yingli Green Energy and China Sunergy are all seeking new listings in the US, while Trina Solar has just filed for a follow-on offering. Together, these companies may raise as much as $1.2 billion.

China-based companies have been a force to reckon with among US-listed solar sector companies ever since Suntech PowerÆs IPO in December 2005. The solar cell and module manufacturer caught the attention of investors by pulling off the largest US IPO by a Mainland company and then kept them spellbound as its share price almost tripled in the next couple of months. The stock has had a dip since then but is now back up at levels representing a 140% gain since the IPO.

It took a while for the next one to follow, but since November last year another four Mainland companies in the same sector have listed on either the New York Stock Exchange or Nasdaq. Most of them have seen sharp gains in their market value since the debut, which is obviously helping to attract interested newcomers.

ôThere is a lot of institutional interest in this space. The margins and the substantial growth, especially for the Chinese players, have attracted a lot of the alternative energy funds out of the US and Europe and there is a lot of new money coming in to the sector as well,ö says one observer.

As the number of publicly traded Chinese solar companies continues to increase, investors are also getting a chance to buy into different parts of the value chain. The first few to list were typically focusing on the downstream part of the sector, producing photovoltaic (PV) solar cells, which convert sunlight into electricity, or modules and systems, but with this new batch of companies, investors will be able to get exposure to the upstream part of the sector as well.

That should be of interest, analysts say, since this is where the bottlenecks are û in the form of a shortage of polysilicon and wafers - and companies producing wafers and ingots (an interim step in the production of wafers) in particular have the better margin outlook. The reason is that they are able to raise selling prices as the cell manufacturers scramble to get their hands on enough of this raw material to maintain their production capacity and satisfy their customer demands.

Of the two larger listing candidates û LDK and Yingli û the former is a pure play wafer and ingot manufacturer, while the latter is a vertically integrated solar sector player that is active throughout the value chain from the production of wafers to the installation of entire solar PV systems.

Neither of the two has any direct comparables among the other publicly-listed Chinese companies. London-listed Renesola does produce wafers, but focuses on monocrystalline wafers which are less effective than the multicrystalline ingots and wafers that LDK produces.

Similarly, Trina Solar, which started as a solar module manufacturer, has been diversifying its business with the aim of becoming a fully-integrated player but only just started to make its own solar cells last month. And while it has plans for significant expansion in the coming few years, it is still much smaller than Yingli, which is coming to market as a fully-integrated player.

ôYingli is a more established version of Trina,ö one observer notes. ôIt is also comparable to Suntech in terms of scale and will be one of the big dominant players when the sector becomes commoditised and starts to consolidate.ö

Trina earlier this week filed for a follow-on offering of 5.4 million American Depositary Shares, of which two thirds are primary and the rest backed by secondary shares sold by existing shareholders. There is also a 15% greenshoe of all secondary shares. Based on TrinaÆs closing price on May 14, the offering, which will be arranged by Merrill Lynch, could raise about $315 million pre-shoe.

LDK, which kicked off the roadshow of its IPO on Wednesday this week, is seeking to raise up to $470 million from the sale of 17.4 million ADS, or 16.7% of the company. About 77% of the offering is backed by primary shares and the 15% greenshoe is also all new shares.

The ADSs, which each account for one common share, are being offered at a price between $25 and $27 apiece, which according to sources translates into a 2007 price to earnings multiple of 21 to 22.5 times, or a 2008 multiple of 12-13 times. This puts it at a significant discount to Oslo-listed REC Group, which is considered its closest direct comparable and which trades at a 2007 PE of 43 times and a 2008 PE of 30 times.

LDKÆs offering is being arranged by Morgan Stanley and UBS.

Yingli has also filed for an IPO, which according to an initial notice published on Bloomberg will be about $350 million. The company hasnÆt determined how many ADS to sell and hasnÆt set a price range yet as it isnÆt planning to launch the formal roadshow until next week. Goldman Sachs and UBS will be joint bookrunners for this deal.

According to sources, Yingli is likely to come to market at a higher valuation than LDK because of its integrated nature. They refer to SolarWorld, a European company that is also active in all parts of the solar chain, which trades at a 2007 PE multiple of about 30 and a 2008 multiple around 25 times.

ôI donÆt think you should expect such valuations to translate straight away to a Chinese company, but in terms of scale Yingli is quite comparable to Suntech, which trades at about 24 times on a 2008 basis. Meanwhile, Trina trades at about 16 times, so I think youÆd probably be looking at a valuation within that range,ö one market source says, with regard to YingliÆs potential valuation.

LDK, Yingli and Trina are all outlining quite aggressive expansion plans in their offering documents, which fits in with the optimistic forecasts about the solar power industry made by various research and data firms.

Solarbuzz forecasts that PV systems installations will reach 4,177MW in 2011 from 1,744 MW in 2006, while Photon Consulting projects that solar power production will grow at a compound annual growth rate of 43.7% from 2005 to 2010. The latter also believes that solar power industry revenues will reach $72 billion by 2010 from $12 billion in 2005.

The key drivers are expected to include continued government subsidies and economic initiatives; technological advances that make solar power more cost-efficient; new distribution channels; rising oil prices; and increasing environmental concerns.

LDK plans to increase its production capacity of multicrystalline wafers from 215MW at present to 600MW by mid-2008. The intention is to boost it even further to 800MW by the end of 2008, but the company doesnÆt yet have any contractual commitments for the equipment to cover this last leg.

Meanwhile, Yingli launched an expansion project in April last year that will increase its annual production capacity of ingots and wafers, PV cells and PV modules to 600MW each by 2010 from 90-100MW at present. Trina expects to increase its annual production capacity from ingots to solar modules to 350 MW by the end of 2008 from a module capacity of just under 60 MW today. Its recently opened solar cell plant has a production capacity of 50 MW.

The shortage of polysilicon, which is a raw material for the production of ingots and wafers, is expected to plague the industry for some time yet, however, and this will remain an issue no matter what part of the chain the company is active within. Aside from the actual difficulty on getting enough of the material, the shortage is also leading to higher production costs which could have a negative impact on margins.

LDK, Yingli and Trina all address this issue in their prospectuses and outline how they are dealing with it û typically by securing as much supply as possible through long-term contracts. LDK says it has inventory commitments covering 90% of its estimated polysilicon requirements for 2007 and approximately 50% for 2008, however many of these supply agreements are subject to fluctuating market prices or price negotiations with the suppliers.

According to sources, Yingli has secured about 90% of the silicon it needs for 2007 and has an ongoing relationship with Wacker-Chemie - one of the biggest silicon suppliers in the world û which is putting it in a good position to obtain the necessary supply in the future as well. The company noted, however, that the shortage resulted in an increase of 185.5% in its average purchase price of polysilicon per kilo in 2006, which came on the back of a 106.5% increase in 2005.

After the US market closed yesterday (May 15) smaller Chinese solar power player Sunergy, which is being brought to market by Merrill Lynch, was expected to price its IPO at the top of the $8 to $10 price range for a total deal size of $85 million. This would value the solar cell manufacturer at 12.4 times its 2007 earnings, or at quite a significant discount to most of the comparables in this part of the market.
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