Mixed performance for Chinese solar power companies

LDK draws strong demand for its IPO but erases most of its debut gains. Trina's share price continues to fall after it prices a follow-on at a 2.5% discount.
It has been a volatile week in the solar power sector with disappointing earnings from one solar cell manufacturer and concerns about narrowing margins at another. But while this led to significant losses for most of the Chinese solar power stocks listed in the US, wafer manufacturer LDK Solar was able to retain interest for its initial public offering and set the price at the top of the range.

When the shares debuted on the New York Stock Exchange on Friday, LDK traded up another 11.6%, but then started to slide and finished the session a marginal 0.74% above its IPO price.

Trina Solar fared a lot worse, however, falling 7.8% on Friday after pricing a follow-on offering at a 2.5% discount to ThursdayÆs close, suggesting investors arenÆt yet convinced that the correction has reached the bottom. Trina, which started as a solar module manufacturer but has been diversifying its business with the aim of becoming a fully-integrated player, had already lost close to 21% since May 14 when it announced details of its first return to the equity capital markets since its December 2006 IPO.

That drop in the share price meant Trina and its existing shareholders were able to raise only $243.3 million compared with the $315 million that the deal was valued at at the time of the initial filing. LDK raised the full $470 million it targeted, meaning it exceeded the $400 million raised by sector leader Suntech Power in its listing in December 2005, which until now has ranked as the largest private sector IPO in the US by a Chinese company. LDKÆs offering also has a 15% greenshoe which may increase the total proceeds further to $539.8 million.

SolarFunÆs first quarter earnings report last Wednesday showed a net loss of Rmb2.5 million ($0.3 million), which the company said was primarily due to a decrease in shipments and a decline in average selling prices. This spooked investors, who worried that a drop in selling prices in particular would spread to other producers of solar cells and modules. The loss compared with a net profit of $3.8 million in the fourth quarter 2006 and a $4.3 million profit a year earlier and came despite a year-on-year revenue increase of 86%, indicating a sharp drop in margins. SolarfunÆs share price plummeted 22.7% on the day in response to the report.

A day earlier Suntech PowerÆs first quarter numbers had showed a narrowing of gross profit margins to 19.9% from 30.1% in the first quarter 2006, which the company said was due to slower than expected delivery of lower priced wafers from its long-term contract suppliers û a problem which it said had been sorted out. Otherwise, SuntechÆs earnings were strong and observers say the earnings disappointments at both SolarFun and Suntech were largely company specific and shouldnÆt have much real impact on other players in the sector.

Short-term though, it was likely to continue to affect sentiment, they say, with many investors seeing this as a cue to secure some of the profits they have made from the fast-growing sector so far. The fact that there has been no less than $1.2 billion worth of solar power stock offered by Chinese companies alone over the past month may also have played a role in the pull-back.

LDK offered 17.4 million American Depositary shares at a price between $25 and $27 through joint bookrunners Morgan Stanley and UBS and priced the deal at $27 per unit. Each ADS accounts for one common share.

According to sources the deal was fully subscribed within the first two to three days after the launch of the two-week roadshow and ended up about 12 times covered when the books closed on Thursday last week. A small number of investors were said to have withdrawn their orders as a result of last weekÆs sell-off in the sector, but with 350 names in the book and very little price sensitivity this made no real difference, the sources say.

The majority of the demand came from the US, although there was no firm breakdown of the order book as of last Friday. One source estimated that US investors, including sector specialist funds, accounted for at least 60% of the total order amount.

Not surprisingly, many investors compared this offering to TrinaÆs follow-on and Yingli Green Energy HoldingÆs IPO of up to $377 million, which is also currently in the market. Being a focused producer of multicrystalline solar wafers and ingots, LDK is positioned in the part of the value chain where the main bottleneck is expected to be over the next year and consequently where the best margins should be.

ôInvestors are getting more options of what to buy in this sector and they are also starting to differentiate between the different players,ö one sector specialist says. ôThe integrated model is definitely the way to go longer term, but right now the guys who supply the raw material are in the sweet spot.ö

Even after last weekÆs correction in the sector, LDK was also offered at quite a reasonable valuation of 12-13 times its projected 2008 earnings, making it quite an attractive buy in comparison with the other offers in the market. Trina priced its follow-on at a 2008 price-earnings ratio of about 13.8 times after falling from a valuation of about 16.6 times at the beginning of the roadshow.

Yingli, which is a fully integrated solar power play, is offering its shares at a 2008 PE of 13.4 to 15.5 with the help of Goldman Sachs and UBS. That deal is set to price this week.

A closer comparable for LDK, however, is London-listed Renesola, which also produces wafers but with a focus on monocrystalline wafers which are less effective than the multicrystalline ingots and wafers that LDK makes. Rensola currently trades at about 9.4 times next yearÆs earnings.

Of LDKÆs base deal, 77% was made up of primary shares and the greenshoe is also all new shares, which means the company will make at least $362 million from the IPO before expenses. The money will be used primarily to expand production capacity ($160 million) and to buy polysilicon ($120 million), which is the key raw material used to produce solar wafers.

According to the listing document, 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.

A smaller amount of the net proceeds, or about $20, million will go towards research and development and the balance will be used for general corporate purposes, including potential acquisitions.

Securing polysilicon is a key issue not only for wafer manufactures, but for solar cell and module manufacturers as well, as they often source this raw material for the wafer producers in other to make sure they get enough supply back to cover demand from their customers.

Investors are likely to have been comforted by the fact that 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.

Meanwhile, Trina fixed the price of its follow-on offering of 5.41 million ADS at $45, compared with a closing price of $46.15 on Thursday. The stock fell to $42.55 on Friday in the wake of the transaction.

Sources say the deal was a bit more than 1.5 times covered and attracted over 50 investors. About three quarters of the demand came from the US while the rest was split between Europe and Asia with a slight bias for the former.

The company sold 3.6 million new shares, while existing shareholders, including both members of the management and private equity investors, sold the remaining 1.81 million. Merrill Lynch, which was the sole bookrunner for the follow-on, owns shares in the company but didnÆt sell any of them this time around. The investment bank will hold a 5.4% stake after this transaction.

Each ADS accounts for 100 common shares and the total deal size corresponded to 21.3% of the company. Trina will use approximately $150 million of the net proceeds to expand its manufacturing lines for the production of silicon ingots, wafers, solar cells and solar modules and the rest for general working capital.

The company expects to increase its annual production capacity from ingots to solar modules to 350MW by the end of 2008 from a module capacity of just under 60MW today. Its solar cell plant, which was opened as recently as April as part of an aim to cover the entire value chain, has a production capacity of 50MW.
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