JA Solar silicon deal swells stock

Chinese solar cell maker JA Solar Holdings (NASDAQ: JASO) climbed Monday on an analyst upgrade after the company said it doubled the amount of silicon wafers it ordered from a supplier.

JA Solar is to receive 10.2 million wafers between July 2007 and December 2011 from Japanese polysilicon supplier M. Setek Co, allowing JA to increase its production.

The companies had previously agreed on 5.1 million wafers.

Analyst Jeff Osborne of CIBC World Markets raised his rating of JA Solar to "Sector Outperformer" from "Sector Performer," and set a price target of $32, reasoning that the increased order will allow it to compete with other leading Chinese solar companies.

Osborne had downgraded the company on April 17th, concerned that JA's value was, at the time, indefensible for a commodity PV cell/module supplier (see Solar honeys JA Solar and SolarFun downgraded.)

The analyst said the company now has the raw materials to credibly compete with China's "solar titan," as he put it.

"We see this announcement as putting JA up with Suntech (NYSE: STP) as a leader in China in regards to supply," he said. "We estimate M. Setek, coupled with existing supply arrangements with ReneSola and Jinglong, will lead to JA raising capacity in 2008, providing further upside to our 2008 estimate."

The analyst also predicted the sourcing deal, coupled with agreements with other suppliers, would lead JA Solar to boost its capacity in 2008. Accordingly, Osborne raised his profit and revenue estimates for 2007 and 2008, now calling for $1.01 per share in 2007, with revenue of $299.9 million, and $2.01 per share in 2008 on sales of $617.7 million.

"Our new $32 price target is based on 16x our new 2008 EPS estimate of $2.01. We believe JASO deserves a premium valuation to the Chinese solar peer group," Osborne said.

"While it is extremely challenging for investors to distinguish the multitude of Chinese solar players from one another, we believe the first metric should be stability of wafer supply."

Wall Street analysts project 2007 earnings of $1.03 per share on $290.7 million in sales, and a per-share profit of $1.47 in 2008 on revenue of $544.4 million, according to Thomson Financial.

JA Solar risk factors identified by CIBC World Markets include slower than expected capacity expansion of cell manufacturing capability, which would significantly lower profitability.

Other risks include a macro slowdown in solar cells, which would likely stem from an easing of government subsidies in Germany, Spain, Italy and in other regions that have driven strong growth for the sector to date, as well as the company's overall comparative lack of experience.

JA Solar's American Depositary Shares rose $1.39, or 6 percent, to close yesterday at $24.68. The stock has swung between $16.17 and $28.88 since its IPO in February.

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