Managing Great Expectations at Suntech Power

The Company: Suntech Power, a Chinese solar energy company.
The Filing: Form 6-K filed with the SEC on August 20, 2008.
The Finding: Suntech Power said its gross margin rose to 24.1 percent in the second-quarter ended June 30, from 20.3 percent a year ago. The gross improvement was mainly due to stronger pricing driven by strong product demand and appreciation in the euro versus the U.S. dollar -- less to do with an expected drop in polisilicon pricing.

The Upshot: Contrary to anticipation, Suntech Power said in a conference call with analysts that 45 percent of its polysilicon, which accounts for about 70 percent of Suntech's costs of goods sold, still came from the spot market in the second-quarter, and that ratio should remain the same for the rest of 2008.

The current-shortage of solar-grade silicon supply, however, may finally be comingy to an end as suppliers and new entrants ramp up output in coming years. At Greentech Media's PV Annual 2008, Travis Bradford, president of the Prometheus Institute, said he expects the amount of silicon for the solar industry to quadruple from 30,070 tons in 2007 to 125,302 tons in 2012.

Suntech is on track to reach installed capacity of one giga-watt in output by the end of 2008 and 1.4 giga-watts by year-end 2009. The company has procured 900 mega-watts of competitively priced silicon for 2009. One megawatt, or 1 million watts, is enough energy to power about 800 homes.

In addition, raw material costs as a percentage of total costs of goods sold are expected to decline at least 20 percent the coming year, according to Chairman and Chief Executive Dr. Zhengrong Shi.

"Take nothing on its looks; take everything on evidence," wrote Charles Dickens in is semi-autobiographical classic, Great Expectations. "There's no better rule."

Equity investments in silicon suppliers, such as Shunda Holdings and Glory Silicon, should ensure stability in its supply chain, lower fixed-cost pricing going forward, reduce dependence on the spot market, and ensure enough feedstock and silicon wafers to hit targeted manufacturing output of 2.0 giga-watts in 2010, lowering dependence on the higher-priced priced spot market silicon.

A next-generation PV process, called Pluto, is expected to allow conversion efficiency rates in the range of 18 percent to 19 percent on PV cells manufactured with mono-crystalline silicon wafers, up from a current 16.4 percent.

The Question: Could lower silicon prices and improving technologies lead to the achievement of grid parity with fossil fuel electric power generation sooner than the now expected 2015?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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