Summary
JA Solar operational improvements gone unnoticed by the market.
Hanwha Solar's high margin rate is not reflected in the company's stock price.
Both companies offer undervalued situation for solar investors.
............Hanwha did not make a profit in Q4, but due to the nature of the quarter and cleanups of the balance sheet, came close. The company unquestionably has two obstacles to making its net profit and improved value.
One is a scale. In order to promote the revenue generation, more modules need to be sold. The company guided expansion to 2GW from the current 1.5GW, but did not provide a timeline for completion. It also confirmed 30% tolling plan, getting closer to QCELLS in business, but not necessarily improving that much-needed revenue generation.
Second, Hanwha needs to improve its financial section of the balance sheet. The company is paying hefty, highest interest on one of the lowest amounts of debt among the peer group. Fixing the interest rate is a matter of rewriting loans, and getting the status of a tier-1- company. Korean analysts discovered that Hanwha must have gotten GM over 10% long before the market, when Beijing Bank granted $500M credit facility in December, learning this level of GM was one of the prerequisites. Meeting this requirement could subsequently lead Hanwha to get the privileged borrowing rate and follow with loan rewrites to emulate other companies' rates. This task, in my view, is easier than the improvement on gross margins.
In the area of guidance, Hanwha offered what normally is not offered by Chinese companies: gross margin of 15 to 20% for a full year. While the market got excited, volume guidance, a 25% increase in the module shipments, spoiled the mood quickly, knowing that the big dogs were heralding 50% increases. Then the company talked about 200MW planned as solar plant strategy. JA Solar made an effort to include the solar plant numbers in the yearly guidance, but I am not sure if Hanwha did. Adding 200MW on the top would suggest around a 58% increase, a substantial utilization of capacity and the second largest increase percentile in modules next to JA.
During January 2014,Hanwha like JA, has shown an increase in module shipment in international markets, a new company record. It was so strong that it became third largest delivery, beating Canadian Solar Inc.(CSIQ). In 2013, the company dedicated most of its sales to global markets, having the highest ASPs among the group. Strong deliveries in January support high Q1 shipments, described as "similar" to Q4 figures, the largest shipment quarter for Hanwha. The volume growth produces speculation that Hanwha is already in capacity expansion mode. This, associated with high ASP driven, among other things, by module retailing in South Korea, puts improvement in revenue scale as a strong possibility.
In the case of Hanwha, the company released plenty of news describing engineering, procurement and construction engagement in China. While the company hinted at a shift in strategy, it failed to provide details during the conference call, perhaps because it was never asked such a question. We know that over 1GW of projects are in their portfolio. A recent one, a distribution generation project planned for rooftops of Wuxi City, includes the intention to keep 100MW for FiT revenue. We can assume plant ownership, and FiT revenue generation is an adding- value mechanism, only when one looks at benefits to JinkoSolar. Both JA and Hanwha have this as future premium, without recognition today.
In my view, both JA and Hanwha are typical undervalued situations that the market failed to upgrade on recent progress. They are candidates for the solar-ready portfolios during 2014, with price per share representing 2011 levels and having plenty of growth coming to them this year. http://seekingalpha.com/article/...looking-for-undervalued-situations |
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