Knobias Clip Report (11-26-2007)

Submitted By Knobias ClipReport

Solar Names See Increased Attention

Monday’s session saw the Dow turn from green to red, dismissing the holiday cheer and initial reports from retailers following Black Friday. Initial reports had the number of shoppers increasing some 5% but also had average tickets decreasing by the same amount. The reports had many selling retailers into the initial rally following the open.

In the small cap space, alternate energy names highlighted many traders’ screens as being one of the only ways besides shorting to earn quick gains.

A new line of thought regarding the long term prospects of the solar area, a couple of news reports from some of the names, and a change in the overall environment had many looking at the percentage of their portfolio solar names occupy.

The line of thought regarding solar has many believing a supply increase in the number of solar panels will increase at a faster pace than demand. The theory could be conceivably true since the number of companies in the alternate energy space have increased exponentially over the past year. The ensuing fall out will be a land grab and market share fight based on price. Names with larger budgets for R&D that can offer new products and names with larger cash positions that can weather the storm for the years of over-supply will be the winners in the space. It was noted that some 88% of solars expected a price decrease in the coming years on products while margins were to remain somewhat unaffected as bulk buying and producing began to take place, thereby decreasing costs. The remaining 12% were expected to increase prices.

The fact is, the simple law of competition displays that many competitors enter the market following the initial entry by a few with positive returns on capital. What follows is barrage of new entrants and a market share fight based on either price or service where margins are depressed and the weak are eliminated. This will inevitably happen and one would be wise to find the names that can weather the storm through sustainment through times of depressed net incomes or new and improved products.

Also worthy of note in the solar area was the replacing of John Howard as Australia’s Prime Minister. His replacement, Kevin Rudd, has been considered extremely friendly towards the environment and much more so compared to his predecessor. The fallout could be increased tax initiatives which would definitely increase the demand in the country. The name that could possibly benefit would be Suntech Power Holdings Corp Limited (STP). The CEO of the Company, Dr. Zhengrong Shi, has had extensive research and business experience on the continent country. The Company already has a presence there but noted in a third quarter conference call that if the environment changed favorably, they would certainly consider expanding their operations there.

Also in the smaller cap solar space, Hoku Scientific Inc. (HOKU) announced entry into a supply agreement with Solarfun Power Hong Kong Limited, a subsidiary of Solarfun Power Holdings Co., Ltd. (SOLF), for the sale and delivery of polysilicon over an eight-year period beginning in July 2009 for up to total cash consideration of $309 million.

In the agreement, SOLF agreed to pay HOKU $1 million upfront and also and is required to pay an additional cash deposit of $9 million on or before December 28, 2007, as a prepayment for future product deliveries, and requires that SOLF pay HOKU an additional $45 million in increments of $20 million, $20 million, and $5 million on or before September 30, 2008, March 31, 2009, and March 31, 2010.

The contract is one of a few that HOKU has announced with prepayment options over the past year. These prepayments serve to help the Company finance their new facility in which the polysilicon would be produced in Idaho. The Company has yet to produce any polysilicon though since their facility has yet to be built and with a harsh winter in Idaho, it wasn’t immediately known if their construction milestones were expected to be met that ensure other prepayments from earlier contracts. Shares still rose by 38% on over 8.5 million.

In any event, with the solar industry still waiting for a domestic alternate energy bill, as well as many of the names announcing new contracts, new facilities, and increased top and bottom lines, the sector is certainly one to follow. Investors would be wise to watch.



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