Renewable Energy Stock on Watch: JA Solar Holdings Co. Ltd. (JASO)
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    JA Solar rallies on anticipated Demand Spike after Japan crisis

    JA Solar Holdings Co. Ltd. (NASDAQ: JASO) shares dropped more than 4% this morning after shares soared 9.8% earlier this week on the back of anticipations that the earthquake and tsunami in Japan and subsequent nuclear power crisis, as well as the high oil prices environment due to political turmoil in Libya and Middle East, could boost the demand for solar panels. Concerns over the future of nuclear power have turned eyes toward the alternative energy, raising the chances of solar and wind options for increased utility power generation. In addition, the nuclear crisis in Japan has weathered out the concerns that the governments’ subsidy programs for renewable energy could be suspended.

    Despite the surge, JASO’s shares are still 18.7% down compared to their February 18 high of $8.52, trading at $6.93 on March 17. The plunge in the stock price followed the issuance of the results for Q4 2010, which confirmed the solar panels pricing pressure and worsening margins. Moreover, the speculations that the subsidies to boost the solar panel installations in the European Union might be halted, as well as the fears that the solar industry could face a supply glut in 2011, have further taken a toll on the company’s valuation.

    JASO is a leading manufacturer of high-performance solar power products. The company sells its products to solar manufacturers worldwide, who assemble and integrate solar cells into modules and systems that convert sunlight into electricity for residential, commercial, and utility-scale power generation. Annual shipments of solar panels hit 1.46 gigawatts (GW) in 2010, up 187% over the prior year. Moreover, JASO reached 2 GW of solar panels manufacturing capacity in 2010, positioning itself in second place in the global top of solar cells manufacturers, just behind Suntech Power (NYSE: STP).

    The last year was exceptionally strong for the solar industry. According to Solarbuzz, global photovoltaic installations reached 18.2 GW in 2010, up 139% over 2009. JASO outperformed the industry and analyst expectations in terms of growth being responsible for 8% of global installations. Total revenue for 2010 was $1.8 billion, an increase of 211% compared with $572.5 million in 2009. The company has also turned to profitability in 2010, reporting net income of $266 million, or $1.61 per share.

    For the last reporting quarter, Q4 2010, JASO’s net income jumped nearly six times to $118.7 million, or $0.59 per share, from $22.3 million, or $o.14 per share, a year earlier. Analysts on average were expecting earnings of $o.48 a share, according to Thomson Reuters. Revenue more than doubled to $584.3 million, but gross margin fell to 19.2% from 22.5% in Q3 2010.

    Based on strong demand for solar panels in 2011, JASO reported that it expects total cell and module shipments to exceed 2.2GW in 2011, representing an increase of approximately 50% compared to 2010. Sales contracts signed for 2011 delivery amount to more than 2GW, representing approximately 90% of the company’s expected shipments for 2011. The company is also planning to expand capacity by 50% to 3GW in 2011.

    While the competition among solar cells manufacturers is just starting to heat up, the eventual decline in PV pricing could likely push out of the market the high cost cells producers. JASO is currently among the largest PV manufacturers. Larger and escalating scale would allow it to produce cells at among the lowest cost and maintain the profitability. It also has a longer operating history than many other cell producers, proven profitability, customer base that advocates that the company could gain advantages and market share in the event of further pricing pressures.

    However, following margins erosion the market revised downward JASO’s profitability in 2011. According to Thompson Reuters, JASO is now expected to earn $1.37 a share on revenue of $2.31 billion in 2011, compared to $1.61 on revenue of 1.8 billion in 2010. For Q1 2011, the company is expected to earn $0.33 on revenue of $555 million, which seems rather conservative.

    JASO currently trades at 5.05 times 2011 consensus EPS estimates, despite the triple digit growth and outlook. At these levels, the company’s valuation looks heavily discounted compared to its U.S.-based peers. The leading position within the industry, low cost profile, stellar growth of PV demand supported also be the recent events in Japan suggest that JASO’s valuation could further improve.

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