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Solarfun's Year Is Looking Joyless

Just when a rebound in solar shares is offering investors some relief, Solarfun (s solf) comes out with dismal fourth-quarter results that make clear there’s still plenty of bad news to go around.

In addition to a large quarterly loss, a pile of solar modules it can’t sell and the need for substantial borrowing in a tight credit market, the Chinese company is also losing Chief Financial Officer Amy Liu, who is leaving at the end of the month “to pursue other interests.” Terry McCarthy, a former chair of Solarfun’s audit committee, has been named interim CFO.

“When a CFO leaves, it’s not perceived particularly positively,” said CEO Harold Hoskens in a conference call. “We fully understand that. I think in this case, you shouldn’t read more into it than is necessary.”

In the last three months of 2008, Solarfun swung to a net loss of 418.8 million Renminbi ($61.4 million), including $47.8 million from writedowns related to a drop in inventory values as well as products that the company says it can’t sell in the current market. Solarfun reported a net profit of 66.4 million Renminbi in the comparable quarter in 2007.

And while Solarfun’s revenue rose 14 percent year-over-year, to $146.4 million, those inventory problems caused the cost of revenue to exceed revenue itself, creating a gross loss of $55 million vs. a $6.7 million gross profit the year before. Though there was some good news in operating expenses: They fell 15 percent.

It’s likely to get worse for Solarfun before it gets better. The company expects shipments in the current quarter — estimated at 35 megawatts — to be even weaker than in the last quarter of 2008, when they totaled 46.7 megawatts. It also forecast average selling prices to range between $2.78 and $2.04, down from $3.37 in the most recent quarter. For the full year, Solarfun said the price of its goods could fall as much as 15 percent.

Solarfun, which sees 80 percent of its revenue in euros, has been hurt by a strong dollar and a trend of governments in Spain and Germany scaling back spending on solar power. Falling prices of its modules are also a concern, although prices of polysilicon used in making them are also declining .

The company says it’s budgeting for demand to pick after this month. But it will still need to worry about funding for the rest of the year. It said cash on hand will help, as will lines of credit. Solarfun held $60 million in cash at the end of December, down $10 million from the end of September. Bank borrowings, meanwhile, rose by $13 million to $190 million.

Banks in China are still being “accommodative” with their lines of credit, Solarfun said in its earnings release. But analysts are starting to wonder how long their generosity will last. They say Solarfun will need to borrow heavily to fund its operations. And as the Journal’s David Gaffen pointed out:

China-based solar stocks typically “have lots of short-term debt, and there is an inherent belief that the debt will be renewed continuously by Chinese banks,” says Dan Ries, analyst at Collins Stewart. “Will Chinese banks continue to lend?” Mr. Ries asks, noting that Solarfun “could be a test case at some point.”