Solargiga to benefit from global solar energy demand

PUBLISHED : Saturday, 19 January, 2008, 12:00am
UPDATED : Saturday, 19 January, 2008, 12:00am

Stock market listing candidate Solargiga Energy Holdings is set to benefit from rising global demand for solar energy but analysts say stiffer competition and increasing raw material costs may set back its performance.

The Shanghai-based wafer maker for solar cells will raise HK$2 billion selling 422 million shares at a price range of between HK$4.08 and HK$4.88 in an initial public offering that starts on Monday.

The price range was earlier this week cut 10 per cent due to weak market sentiment following mounting bank losses tied to the United States subprime crisis.

The company will announce share allotments on January 31, and trading in the shares is scheduled to start on February 1.

BNP Paribas is the sole sponsor and bookrunner for the deal.

The company has secured Ralec Technology (Hong Kong), a wholly owned subsidiary of Taiwan-listed chip resistor maker Ralec Electronic Corp, to acquire 21.74 million shares, or 5.1 per cent of the offer. The shares will be subject to a six-month lock-up period.

Other key shareholders of the group include Taiwan-based Wafer Works, Space Energy Corp and Sumitomo Hong Kong, which hold 28.4 per cent, 10.6 per cent and 1.51 per cent, respectively.

Market analysts estimate Solargiga is valued at 17.5 times projected earnings for the year, translating into a market value of HK$8.4 billion.

Its Asian competitors are valued at between 9.1 and 42.9 times this year's earnings.

The firm aims to distribute not less than 30 per cent of its net profit to shareholders after listing, according to the company's sales document.

Solargiga posted turnover of 413.3 million yuan for the year to December 2006, representing 138 per cent growth over the previous year.

Net profit was 109.67 million yuan, up from 41.3 million yuan over the previous year.

For the nine months to September last year, the company booked a net profit of 211.33 million yuan, up from 72.49 million yuan for the same period in 2006, while revenue was up 161 per cent at 715.39 million yuan.

BNP Paribas estimated earnings will grow 34.7 per cent to 419 million yuan this year while BOC International forecast the company will record 44 per cent net profit growth to 420 million yuan.

Solargiga Energy is the mainland's second-largest manufacturer of monocrystalline silicon ingots, which are used for making photovoltaic cells.

Taiwan-listed Wafer Works Corp led a consortium last June that sold Solartech, which owned plants in Jinzhou and Shanghai, to Solargiga in exchange for equity stakes in the company.

'The reorganisation aimed to achieve better economies of scale for the group,' BNP Paribas said in a research report.

The price of polysilicon - the raw material for solar cells - has more than doubled in the past few years and to control costs the company has started recycling and upgrading scrap polysilicon. It also plans to buy a stake in a joint venture making solar-grade polysilicon, which is the cheaper alternative to the electronic-grade polysilicon now used.

Solargiga's gross profit margin was hit by rising raw material costs last year, with the margin for the nine months ended September last year only 28.1 per cent compared with 41.8 per cent in the same period for 2006. The profit margin for the whole of 2006 was 40.9 per cent. The contract price for polysilicon rose from to US$28 to US$32 per kilogram in 2004, to US$60 to US$65 last year. Polysilicon raw material costs accounted for 68.8 per cent of the cost of sales for the nine months ended September last year.

Solargiga aims to double production capacity this year with plans to expand the plant in Jinzhou.

The company estimates it will receive as much as HK$2.06 billion from the offering, of which HK$321 million will be used to expand manufacturing and wafer production at its Jinzhou plant and HK$190 million will be earmarked for investment in polysilicon supplies.

The rest of the proceeds will be used to repay bank loans, pre-pay for raw materials and for mergers and acquisitions.

What the analysts say

Wong Chi-man, analyst, Piper Jaffray

Pros: Overseas institutional investors are looking for renewable energy concept stocks

Cons: Market sentiment is not that good, with the company adjusting the indicative price range for its initial public offering

Patrick Yiu Ho-yin, associate director, CASH Asset Management

Pros: The company's business is not bad and the market seems to have stabilised

Cons: The valuation may be higher than traditional blue chips and investors are not encouraged to take a big bet on new IPO shares

Ng Sze-ho, analyst, BNP Paribas Securities

Pros: The company is building a more integrated and resilient model to boost profit margins

Cons: The value-added tax rebate for the export of silicon ingots has been scrapped and the value-added tax rebate for wafers has been reduced to 5 per cent from 13 per cent