Suntech Power focuses on traditional mono- and polycrystalline cells, modules, and systems and, as dull as that may sound, it makes money.

Open for business in 2002, Suntech is part of a $12-billion solar industry that brokerage CSLA Asia-Pacific Markets says will treble by 2010. Based in Wuxi in coastal Jiangsu near Shanghai, Suntech started trading on the New York Stock Exchange on December 14 as the biggest tech IPO of 2005, jumping 41 percent in its first day. It was trading recently at $26.68, up from an offering price of $15 (See Suntech IPO Jumps 41%).

Before the offering, the company targeted a market cap of $1.59 billion to $1.92 billion. But Suntech is now worth about $3.86 billion. Moreover, it is poised to grab market share in China, the world’s fastest-growing large economy and soon to be the world’s biggest energy consumer.

The company makes low-cost, quality solar cells for offshore customers like SolarWorld, IBC Solar, and Conergy. Germany was Suntech’s biggest customer in 2004 with sales of $61.5 million, though China should soon displace it.

“Everyone says the Chinese market is going to beat Japan and Germany in five years, and won’t have any trouble at all beating the U.S. market,” says Paul Maycock, president of Williamsburg, Virginia-based consultancy PV Energy Systems.

What’s remarkable about Suntech is how it has managed to change the arithmetic of the business. As silicon prices moved up from $24 to about $40 per kilogram between 2003 and today, it managed to increase margins from 19.4 to 33.1 percent. Suntech attributes this to implementing better process technologies. Its prospectus cites one that enables it to use thinner-than-usual silicon wafers; it also mentions how Suntech secured 10-year wafer supply agreements from suppliers in Germany and China, quite a feat in a silicon shortage.

Suntech reported profits of $23 million on sales of $137 million in the first nine months of this year, up from $8.8 million in the same period in 2004. Given that its 2004 full-year profit was $19.8 million, 2005 should be a stellar year. Frost & Sullivan analyst Pramodh Panchanadam expects Suntech’s 2005 sales to top $175 million. “Based on the data I have and the market trend, I think they will do well,” he says.

Quality and Efficiency

Mr. Maycock describes Suntech’s technology as “me-too,” but he likes the company in most other respects. “The quality of their modules is extraordinarily good,” he says.

Suntech claims its cells are 15.5 to 16.5 percent efficient—the percentage of solar energy converted into electricity. The industry average is 15 percent, according to Rhone Resch, president of the Washington, D.C.-based Solar Energy Industry Association. Suntech is piloting a new line yielding 18 percent, and is targeting 20 percent by 2008.

And so the IPO underwriters came forth, among them Credit Suisse First Boston, Morgan Stanley, CSLA, and SG Cowen. Suntech agreed to sell 26.38 million shares—18.2 percent of the company. Suntech says it plans to use the cash on raw materials ($100 million), new capacity ($40 million), and R&D ($20 million). 

Suntech, the first China solar play in the United States, will be the eighth Chinese company to launch in New York City this year. Clean energy makes a good story these days, especially in carbon-choked China. Beijing just announced its intention to raise China’s renewable energy consumption from 7 percent of its energy use to 15 percent by 2020.

The signs are pointing sunward. China’s photovoltaic (PV) market reached 12 gigawatts of capacity last year, according to the Chinese government, and San Francisco-based consultancy Solarbuzz predicts solar electricity in China will grow from 60 megawatts in 2004 to 400 megawatts in 2010 and 10,000 megawatts by 2020.

Taking Analysts by Surprise

Still, Suntech’s advance has caught some by surprise. “Here’s a solar IPO that’s flown under the radar,” says Robert Wilder, president of WilderShares, which indexes clean energy stocks. “I don’t know much about them, and I follow this sector quite closely.”

Less surprised, PV trade magazine Photon International ranked Suntech tied for fifth place in capacity, and tied for sixth place in production in 2005 in its annual solar league table.

CEO Shi Zhengrong, who holds 55 percent of the company, earned a Ph.D. in electrical engineering at Sydney’s University of South Wales, staying on in Australia to work in thin-film research before heading home to launch Suntech.

The company, which has scaled up to nearly 1,300 employees, raised a total of $90 million in funding by August 2005, most of that cash coming in an $80-million round that closed in May and was led by Goldman Sachs and DragonTech Energy Investment. In its filing with the U.S. Securities and Exchange Commission, Suntech revealed it had also issued unregistered securities to Actis China Investment Holdings, Financial Natexis Singapore, and Bestmanage Consultants, and that it borrowed $4.2 million in short-term loans for unexplained reasons in October and November. Suntech did not respond to requests for comment.

Suntech is blessed with good access to silicon, which has been in ever-shorter supply since Germany, Japan, and other countries began subsidizing solar projects. “The reason is it’s all going to Germany because you can get 60 or 70 cents per kilowatt hour, whereas the market price is 4 or 5 cents,” explains Michael Liebreich, CEO of New Energy Finance, an energy research and consultancy company based in London.

“It has absorbed all the silicon manufacturing in the world, and all the PV companies are having a boom year,” he adds. “Because of this boom, the price of solar PV companies has skyrocketed. Anyone who’s not quoted wants to be quoted to build up capacity, because you can sell anything you can make right now.”

Polycrystalline silicon is the key component in most solar PV cells. Electronics-grade silicon is slightly purer than solar-grade and can also be used for solar cells. An oversupply of silicon after the dot-com bust sent prices as low as $9 per kilo in 2000. But the price for solar-grade silicon rose to about $32 per kilo last year and has traded at an average of $40 so far this year. A number of companies, including U.S. players SunPower and Evergreen Solar, say they are already sold out for next year, unless they get more silicon.

So despite signing a raft of deals with polysilicon suppliers, Suntech will have to keep building up silicon supplies if it hopes to keep pace with expected growth, asserts Frost & Sullivan’s Mr. Panchanadam.

Lower Costs, Higher Quality

Bigger competitors like SunPower and Sanyo offer more efficient cells, but at a price. Suntech offers quality products at mainstream prices, as well as quality and efficiency that put it “in the top of the pack” compared with others in that price range, says Mr. Maycock. It’s also the first Chinese solar company with such a quality product, he says. “Other companies there are small, don’t have any volume, and are not capitalized.”

Perhaps even more impressive, the company has such low costs that its margins have grown while its prices have remained competitive. In July, CSLA estimated the industry average for pre-tax margins would be 21 percent this year. Suntech, which claims more than 33 percent, says its advantage is its thinner PV wafers, which enable more efficient cells at lower production costs because less silicon is used. Mr. Panchanadam says the thickness of Suntech’s cells ranges between 150 and 200 millimeters, down from 300 to 350 millimeters, reducing Suntech’s cost by a factor of two.

Suntech says it is developing more advanced equipment and a purification technology so it can work with lower-grade silicon, and it is exploring ways to make materials stronger so it can use even thinner wafers. The company also is looking at techniques to make thin-film PV cells on glass to cut both silicon consumption and production costs. Beyond refining cost-cutting processes, Suntech enjoys tax breaks for being located in a high-tech zone.

Hype and Competition

Mr. Panchanadam says Suntech has to be on the lookout for competition from heavyweights like Sharp Solar, Kyocera, and BP Solar, companies that control more of the manufacturing process—starting with silicon ingots, not cells. “Suntech will have to be innovative and create a niche for itself to move among the high echelons,” he says. It will have to keep working on new applications, pushing R&D, building alliances, and securing more silicon, he says. He also warns that the company could end up losing its market share if more efficient thin-film cells, which Suntech is only just starting to work on, gain traction.

Mr. Liebreich, an advocate of renewable energy, says the sector is “extremely exposed” to policy shifts and listed players could face some rainy days. “The level of subsidy currently being given in Germany and other countries is not sustainable,” he says. “If everyone invests [in capacity] because prices are high, then when the sector unwinds, there will be hangover.”

Others still see long-term growth, pointing to stock prices that remain 15 to 25 times company earnings, and PV Energy’s Mr. Maycock has his reasons for liking Suntech as it prepares its IPO. “They are the first in China to get volume in a new market that’s going to explode, and their value-added is very high,” he says. “They’re emulating the biggies, and they’re rapidly joining the club.”

Editor's Note: This story has been updated since its original publication in Red Herring to reflect Suntech's IPO and recent value.