Chinese solar companies spanked after Solarfun misses quarter

Investors weren't impressed this morning with latest quarterly earnings from Chinese solar manufacturer Solarfun, sending it down more than 20 percent, and taking other Chinese solar companies along with it.

American Depository Shares of Solarfun Power Holdings (NASDAQ: SOLF) are now trading at $9.80 after closing yesterday at $12.42.

The company declared a first-quarter loss, as rising expenses offset revenue growth.

Solarfun posted a loss of 2.5 million yuan ($327,939), or 0.05 yuan per share, compared with a profit of 33.1 million yuan, or 1.65 per share, for the same quarter in 2006.

Revenue rose 86 percent to 190.7 million yuan ($24.7 million) from 102.5 million yuan in the year-ago period. Operating expenses soared to 28.6 million yuan ($3.7 million) from $3.6 million yuan in the 2006 period.

"As we forewarned in our last earnings release, the first quarter turned out to be a challenging one for our company, but we are fully confident in our ongoing strategy," said Yonghua Lu, Chairman and CEO.

The company blamed increasingly competitive market conditions in Europe, "typical seasonal weakness in the first quarter" and delayed solar subsidy legislation in Spain and Italy. It says it also saw high inventory levels at some of its end customers in those two countries, which meant orders did not materialize.

CIBC World Markets analyst Jeff Osborne, who covers the company, wrote clients that he's optimistic about the company's second quarter numbers, though he projected that liquidity concerns might prompt the company to raise more capital in the second half of 2007.

"The Italian feed-in regulations were revised early in the year, so 2Q should be unaffected, and Spain recently issued its pronouncements only a few weeks ago, suggesting that some weakness will remain in the first half of 2Q. With the regulatory environment straightened out, we expect shipment growth to resume through 2007," he said.

Osborne is maintaining his sector performer rating on Solarfun, writing that "the worst has been baked into the stock."

Solarfun also cut its revenue predictions for 2007, saying it expects to post sales of $250 million to $270 million for the year, down from its previous outlook of $265 million to $285 million.

Solarfun said it's hiring executives with more sales and marketing expertise to build its presence in the European and U.S. markets.

Shares of other Chinese solar companies haven't fared well with the news. JA Solar (NASDAQ: JASO) was down almost 6 percent to $21.79. Trina Solar (NYSE: TSL) was also down almost 6 percent to $45.82. Newly-public China Sunergy (NASDAQ: CSUN) was down almost 7.5 percent, trading at $11.90.

Solarfun's customer base isn't yet very diversified. Solar panel maker Suntaics accounts for about half of Solarfun's revenue. Social Capital and Solar Projekt are also top customers. More than three-quarters of the company's sales are made in Germany.

Chairman and CEO Yonghua Lu owns more than 30% of Solarfun.

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