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Re: swing man post# 713

Wednesday, 01/03/2007 11:56:00 AM

Wednesday, January 03, 2007 11:56:00 AM

Post# of 778
Happy New Year SM!

Replaced ESLR with STP today. Got some fundamental info which influenced me. Here it is for your reading pleasure...

The first law of thermodynamics tells us energy can neither be created nor destroyed. The second law tells us there is no such thing as a perfect energy transaction -- a little something is always lost as heat. These laws cannot be broken; nor can the world’s growing thirst for energy be slaked. So we maintain our awful addiction to fossil fuels, and resolutely accept the fact that there’s no such thing as a free lunch.

Perhaps the closest thing going to a free lunch, however, is the sun.
While the second law of thermodynamics cannot be repealed, the sun gets around that problem by bathing us in more potential energy than we could ever hope to use. (It has been estimated that humans currently use about a millionth of a billionth of the sun’s total output.)

These two considerations -- the hidden cost of fossil fuels and the sun’s prodigious output -- have spurred rich-world governments to subsidize the solar power industry. The word “subsidize” generally leaves a bad taste in the mouth, but the reasoning actually makes sense here. The world’s pressing energy problems are mostly what economists call “externalities”
-- factors that manifest themselves outside the market price -- and must be dealt with as such. The market excels at solving short-term problems when sufficient profit motives exist. The market isn’t so hot, however, at dealing with “tragedy of the commons”-type issues -- the off-balance sheet stuff that everyone pays for in the long run. Hence the rationale for giving solar a push, in hope of giving it the critical mass it needs.

Surprisingly, it was the sober Germans who really got this party started.
A few years back, the German government dreamed up a mouthwatering incentive program: encourage consumers and businesses to sell solar-generated electricity back to the grid at above-market rates. For a modest investment in green technology, abundant sunshine could be turned into cold, hard cash. Who can beat that? The program was a huge success, making Germany the biggest consumer of solar panels in the world by a hefty margin.

National and local governments on multiple continents soon followed Germany’s example, encouraging the development of solar technology through various rule changes, tax breaks and incentive programs. In the USA, California and New Jersey are leading the renewable energy charge, with dozens of states in their wake.

Unfortunately for the solar power industry, the overflow of enthusiasm proved too much too soon. An ongoing shortage of silicon -- the stuff used to make semiconductors and solar panels -- has led to tapped-out suppliers, idled installers and skyrocketing production costs. Many small solar outfits have found themselves bruised and battered.

Ultimately, the future for solar is very bright (no pun intended). The long march to “grid parity” -- the point at which solar-generated electricity costs are on par with the traditional grid -- is well and truly under way. As for now, though, the industry is still young and fragmented. Most of the pure players are small and vulnerable minnows, while the bigger players are diversified behemoths: weighty names like Sharp, Kyocera, British Petroleum and General Electric.

Yet there is one company, founded in the Yangtze River Delta, that is markedly different from the rest. This company is set to stride atop the solar world like a colossus, dwarfing its competitors in profitability and scope. It could dominate the industry in much the same way that China dominates its neighbors -- and for similar reasons to boot. The company is Suntech Power Holdings (STP: NYSE).

Though a privately held company traded on the New York Stock Exchange, Suntech is, in some ways, a triumphant vindication of enlightened government policies. Deng Xiaoping began quietly opening China to the outside world after the death of Chairman Mao. One of Deng’s earliest -- and smartest -- moves was funding an overseas sponsorship program, in which Chinese students were granted stipends to study abroad.

One of those students was Shi Zhengrong, the founder of Suntech Power.
With a background in optics and financial assistance from the Chinese government, Dr. Shi earned his Ph.D. from the University of New South Wales in Sydney, Australia, in the early 1990s. It was Australia where Shi came into his own as a researcher and developer of solar technology.
Though successful and content as an Australian, Shi was drawn back to China in the year 2000, tempted by the incredible entrepreneurial opportunity unfolding there. As one of the 10 richest men in China now, Shi’s story --and the story of Suntech itself -- is pure inspiration to China’s legions of educated expats.

With the help of a little entrepreneurial elbow grease, Suntech Power was founded as a joint venture in cooperation with the city of Wuxi, near Shanghai, in 2001. Local investors ponied up $6 million; in exchange for providing the technology, the expertise and $400,000 worth of personal funds, Dr. Shi maintained a 25% ownership stake.

Things were a struggle at first. Business was good, but costs were high -- and investing in expansion seemed prohibitively expensive. After wrestling with this problem for some time, Dr. Shi had a distinctly Chinese
revelation: Sometimes low-tech is better than high-tech. Chinese labor was so plentiful, he realized, it made sense to forego machine production where human labor would do. The savings generated from “low-cost expansion” gave Suntech the elbowroom and scalability it needed to achieve rapid growth. Eventually, Dr. Shi arranged a buyout of his local investors on generous terms, paving the way for a listing on the NYSE.

There are a number of reasons why Suntech Power is poised to dominate like no other. For one, Suntech’s cost advantages are huge. To summarize, Suntech has the lowest expansion costs, the lowest production costs and the lowest overall costs per watt by far in comparison with its peers. On top of that, Suntech is both profitable and expanding; the company’s revenues and diluted earnings per share have grown steadily over the past year. This is somewhat remarkable in light of the silicon crunch that has severely hampered, and in some cases crippled, various competitors.

In fact, the silicon shortage has played directly into Suntech’s strengths. Armed with the advantage of low production and expansion costs, Suntech was able to purchase silicon aggressively in the spot market -- maintaining growth and profitability simultaneously. Suntech has aggressively expanded market share at a time when less efficient competitors have either fallen back or sustained losses in a frantic effort to keep pace, or both.

In 2006, silicon represented a whopping 80% of Suntech’s cost of goods sold. When the input cost of silicon falls -- as it inevitably must, as a result of new supply and technological advance -- Suntech’s inherent advantage as the low-cost producer will become even more apparent. We should see the beginnings of this in 2007, as Suntech’s material mix shifts from aggressive spot market purchases to longer-term, fixed-rate supply contracts.

In his book Running Money, ex-hedge fund manager Andy Kessler talks about the waterfall model of technology investing. The idea of the waterfall is to focus on companies that can scale up exponentially as prices and margins decline. When a company goes from selling 100,000 widgets at $5 each to hundreds of millions of widgets at 50 cents each, that is when fortunes are made.

Suntech Power Holdings is an excellent example of the waterfall in action.
Suntech fully expects the market price of solar panels to fall steadily over time -- just as it should, as technology improves and the industry moves closer to “grid parity.” The good news is that costs should fall even faster… and thus profit margins could expand as the company continues to expand. With a $5 billion market cap, Suntech is already a sizable market player; as the company scales up further, it will enjoy better rates on bulk purchasing and wring more efficiencies from the production process. Nor is Suntech a laggard in the innovation department: the company’s CTO, Stuart Wenham, recently won the World Technology Award for Energy.

And then there’s China itself. Suntech is already a major player in Europe, and recently announced a multiyear contract with SunEdison, the largest solar energy service provider in North America. But for all this, progress in the homeland has been modest so far. This too will change.
China is deeply motivated to make progress on its green initiatives before the 2008 Olympics -- and of course, China’s pressing long-term energy needs are known all too well.

Suntech is unique in being the only pure solar play with the capacity to dwarf its competitors in both scale and profitability. It is already a major player in Europe and a growing presence in the United States. As a Chinese company with local roots and government ties, it is well positioned to ride an explosive wave of future growth at home. And when the relative cost of silicon falls, the company’s low-cost production advantage should become even more apparent in its margins.


#board-4258 TSP Trend Timing: EFA (I), TLT (F), SPY (C), and VXF (S)

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