Markets & Finance

Sizing Up Solar-Power IPOs


Two profitable Chinese outfits are going public, but sunstruck investors should remember last year's disappointing ethanol offerings

Around this time last year, corn-based ethanol sprouted into investor's minds. Stock in agriculture giant Archer Daniels Midland (ADM) was soaring on ethanol prices, and smaller pure-play outfits like VeraSun Energy (VSE) and Aventine Renewable Energy (AVR) timed their initial public offerings to coincide with America's newfound interest in alternative fuel.

It hasn't worked out as planned. In Washington, representatives of corn-growing states have put massive support behind the fuel, ensuring that its use will increase for years to come, but the ethanol industry hasn't been able to avoid criticism that the fuel is more of a sop to farmers than the solution to U.S. energy problems. Even ethanol producers have suffered, as demand for the fuel has sent corn prices skyrocketing. Since their market debuts, VeraSun and Aventine shares have both fallen more than 40%, and ADM is well off its 52-week high.

That hasn't kept other alt-energy players from throwing their hats in the ring. This year, investors willing to brave this still risky segment may have a more attractive option in solar power. Two upcoming U.S. initial public offerings by Chinese companies highlight a clean energy source that could be a smarter long-term bet. While corn-derived ethanol's strongest advocates are corn farmers and their lobbyists, energy analysts tend to see a bright future for solar power once it can overcome several obstacles.

Seeking Secure Supplies

The first hurdle, not surprisingly, is cost. Solar installations are expensive and polysilicon, a necessary ingredient for solar panels and computer chips, is in short supply. Demand exceeds the capacity and new plants can take years to come on line. Polysilicon is so highly valued that U.S. outfit Evergreen Solar (ESLR) and the Chinese company Suntech Power (STP) recently exchanged stakes in themselves for secure supplies of the material.

This week should see the IPO of LDK Solar, a Chinese manufacturer of solar wafers used in the solar panels that actually convert sunlight into electricity. The company, analysts say, is in a relatively good position, having secured much of the polysilicon it will need for its expected production capacity. Sam Snyder, an analyst at IPO research shop Renaissance Capital, says the deal for the pure-play wafer manufacturer has "scarcity value" in an industry where companies split up the multistep process of manufacturing solar panels.

Another Chinese player expected to price in coming weeks is Yingli Green Energy, which offers investors a vertically integrated model that manufactures wafers and makes them into photovoltaic cells. It also works on folding them into workable solar power-generating systems.

Relatively Young Industry

Both companies have put up credible numbers. LDK posted 2006 net income of $25.8 million on sales of $105.5 million, while Yingli had $24.1 million in net income on revenue of $114.4 million in the first eight months of 2006.

So far the relatively young industry has seen excitement as stocks in profitable companies like SunPower (SPWR) and First Solar (FSLR) enjoyed enormous gains in their stock prices while other less nimble companies struggled in the fledgling space. The Chinese companies may have advantages over their U.S. counterparts as demand for solar electricity builds.

Todd Glass, chair of the energy practice group at law firm Heller Ehrman, says "anytime where manufacturing cost is a key component, China has a competitive edge" over American outfits. This is especially the case when the companies have a relatively solid supply of polysilicon, as both LDK and Yingli do.

New Technology on the Way

However industry dynamics could be changing. Glass sees the polysilicon supply growing as more plants get up and running. Already industry consensus has it that more polysilicon is used in solar panels than for microchips, their previous dominant use.

Polysilicon has proven a boost for manufacturers such as St. Peters (Mo.)-based MEMC Electronic Materials (WFR) which has seen its stock price more than double since July. However a newer technology called thin film could emerge as the next-generation solar competitor. Miasolé, a private Silicon Valley startup, manufactures solar cells that use a metallic compound instead of polysilicon, exempting it from the heated competition for polysilicon. Profitable First Solar also uses a non-silicon technology.

But before warming to solar power, investors should remember how last year's ethanol boomlet went sour. Even when a product gains widespread use, profits—and stock-price gains—are not a sure thing. And while solar technology has a bright future, not all the players will share the spoils.

Halperin is a reporter for BusinessWeek.com in New York.

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