Deli Solar and their niche in the Chinese solar market
Deli Solar (USA) Inc. (Public, OTC:DLSL) could be looked at as just another Solar Company added to the list of emerging and constant Solar IPO's that have been coming out the woodwork for the past two years. Deli Solar is even less important from a Wall Street perspective because it trades on the OTC BB and now you may ask "why should I care?" Valid question, let me begin:
Besides the occasional press release, Deli Solar receives next to zero coverage on the Street and before you blow it off as a 'worthless penny stock' - note that Deli has a market cap of $13 million and its stock has stayed in the $2 range for the past year.
Google lists Deli's P/E at 7.96, however with the current price of $2.15 and factoring their earnings at about $2.5 million minimum for 2007, I calculate DLSL P/E at a generous valuation of 5.
Deli Solar had almost $1 million in earnings for the first six months of 2007, its network expands weekly with new distributors establishing a reliable brand and thanks to a recent acquisition of an other rival solar company, Tianjin (to be accounted for in Q3 07 numbers).
Tianjin had around $500,000 in earnings for 2006 and more importantly it will assist Deli Solar to expand its network to different areas of China. I said the magic word for about 40% of all investors - "China". Little Deli Solar has been busy working on another acquisition of solar company Shenzhen, when the deal is sealed, it will add close to $1 million in net income and $7 million more in revenue for Deli on an annual basis.
Back to the calculator - We now have a target of $2.5 million in earnings for 2007 which at this point is a moderate estimate, but lets stay grounded. Every positive surprise is welcomed from here in the fashion of a new acquisition, partner, analyst recommendation, etc. Deli Solar's P/BV currently is only 1 and
the ratio of stockholders' equity to liabilities is far from it's high of 25. My fellow Masters, Deli is self propelled and self fueled with no loans and no worries in the formidable future. Deli is sun bathing in positive cash flows and it is undervalued because it trades on the OTC and it's revenue is a fraction to it's competitors. However, Deli's competitors that trade on the NASDAQ or NYSE either have negative P/E's or extremely high P/E's that it makes any investor thinking about throwing money into the Solar sector run for the hills. Even the American favorite Evergreen Solar (ESLR) just can't seem to become profitable, like its friend Canadian Solar (CSIQ) or how about the SunPower Corporation (SPWR) with a P/E of 275. You can get a sun tan for free yet these guys can't promise you a return if their life depended on it. About the only decent names of the bunch are Solarfun Power Holdings Co. Ltd. (SOLF) and China's Suntech Power Holdings Co. Ltd. (STP) but even then, how safe are the stocks? I'm not going to pay for future dreams and hopes of positive cash flow at outrageously expensive stock prices, it's just not going to happen.
Another blow to these stocks came when the White House threatened on August 6th to veto a proposed $16-billion energy bill that would provide incentives for alternative energy, including solar panels. The U.S. House of Representatives passed the $16-billion tax bill on August 4th, but if Bush says 'no go', alternative energy stocks are all going to take a hit.
The House passage of its tax bill could rejuvenate hopes for the $32 billion Senate tax bill that Senate Majority Leader Harry Reid, D-Nev., promised to revisit after it failed in the chamber. That version would have extended production tax credits for renewable energy such as wind and solar power to 2013, offered billions of dollars in credits for clean-coal projects and carbon dioxide storage, and significantly expanded incentives for hybrid vehicles, biofuel and alternative fuel production.
The solar sector is one of those plays that analysts have been telling us, 'in just 5 years', '5 years ago it should have...", or whatever comes to mind as they write the article. I'm not convinced the solar sector will ever catch fire and really fuel the growth we investors would like, so until then, I'll bet on the little guy because the big guys aren't doing any better.
Deli Solar isn't your typical solar panel maker, they are in the water heater, boilers, and stoves business. Their business model is unique and comparing Deli to Suntech or SunPower is not a grounded argument, but for the exercise of this article I've done the comparison.
Here's the breakdown for China and the solar water heater business:
A shining exception is solar-powered water heaters, of which China has more than any other country. Chinese firms sold $2.6 billion of them last year alone. According to government estimates, in comparison with gas, or electric hot water heaters, solar hot water heaters are, on average, 75% cheaper to operate on an annual basis and have a 20%-30% longer service life. Solar hot water heaters are nearly 3 times as efficient as electric and more than 80% as efficient as gas hot water heaters. An investment in a solar hot water heater can provided economic benefits, decrease traditional energy consumption and help protect China's environment.
This is why Deli Solar is doing what they do best -- providing solar water heater solutions and cashing in on a lucrative growing opportunity.
Article written by: Steve Reeves
Article posted on: August 21st, 2007
Disclaimer: The Author is holding a long position in DLSL.OB