JA Solar Loses Earnings Power

China-based JA Solar Holdings Co., Ltd. (JASO - Analyst Report) announced disappointing financial results for its 1st quarter of 2009 ended March 31, 2009.

Revenue in the reported quarter was $33.9 million, a decrease of 79.4% from $164.2 million in the comparable prior year 1st quarter of 2008, and a decrease of 76.3% from $143.3 million reported for the sequential 4th quarter of 2008.

Likewise, total gross loss in the reported quarter was $20.9 million, significantly down compared to a gross profit of $34.5 million in the year ago 1st quarter of 2008, and gross profit of $1.4 million in the sequential 4th quarter of 2008.

Total operating expenses in the 1st quarter of 2009 were $7.4 million, compared with $10.6 million in the 1st quarter of 2008 and $19.1 million in the 4th quarter of 2008. Stock-based compensation charged to the income statement amounted to $7.9 million and $4.7 million for the 1st quarter of 2008 and the 4th quarter of 2008, respectively.

Operating loss in the 1st quarter of 2009 was $28.3 million, compared with operating income of $23.9 million in the 1st quarter of 2008 and operating loss of $17.7 million in the 4th quarter of 2008.

The net loss per diluted ADS in the 1st quarter of 2009 was $0.18, compared with net income per diluted ADS of $0.15 in the year-ago period and a net loss per diluted ADS of $0.10 in the sequential 4th quarter of 2008.

The company’s inventory at the end of the 1st quarter of 2009 was $20.3 million, an increase of $8.8 million, or 77%, compared with the balance at the end of the 4th quarter of 2008. The dramatic year-over-year increase in inventory was primarily due to the loss of customers in the increasingly competitive solar power market.

Although JA Solar is one of the most cost-efficient solar producers, with an increasingly geographically diversified customer base as well as silicon wafer supply agreements in place to cater to its production, it is recently experiencing increased competition.

Furthermore, on the downside, tepid module demand in Europe, rising inventory levels, falling ASPs, a shrinking customer base and the company’s high R&D expenses may adversely affect performance over the near-term.

However, on the upside, fast ramp-up of new solar cell manufacturing lines, a decline in polysilicon prices, continued production process improvements and a burgeoning committed supply of raw materials may help drive long-term top-line growth.

JASO currently trades at a premium P/E multiple of 61.7x our current-year 2009 EPS estimate; yet only 12.8x our forward-year 2010 earnings per share estimate. With the strong focus of the Obama Administration on alternative energy, there is ample opportunity for the share price to appreciate significantly with forward P/E multiple expansions. Meanwhile, JASO trades in-line with the median industry sales and book value multiples.

Looking ahead, successful execution in the high-growth potential solar panel market may warrant premium multiples to industry peers, and JASO is well positioned to take advantage of this opportunity. Moreover, we note that despite the company’s position in a strong growth industry, many other alternative energy stocks, including JASO, significantly underperformed the broader market over extended periods in 2006-08. Especially in the second half of fiscal 2008, JASO, like its solar peers, witnessed a steep decline due to ongoing worldwide financial crisis and declining crude oil prices.

With such a mixed outlook in the alternative energy industry, we downgrade our recommendation on JASO common stock to HOLD with a six-month target price of $4.00. Price appreciation to our near-term valuation target represents 8.1% upside potential.

JA Solar Holdings, based in Ningjin of the Hebei province in the People’s Republic of China, manufactures high-performance, monocrystalline solar cells using processing technologies. The company has an annual installed capacity of approximately 600MW. JA Solar is a recent start up entity, established in May 2005, and commenced manufacturing operations in April 2006. JA Solar was incorporated in July 2006 with its initial public offering on February 7, 2007.