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Author: TMFBreakerRob Big gold star, 5000 posts Old School Fool Home Fool Supernova Phoenix 1
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Subject: Re: YGE New Contract! Date: 10/31/2007 4:51 PM
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Just for your info, Rob, I posted the following on the Rule Breakers: New Stock Ideas board back in September, following your post, my purchase and the subsequent Fool "quiet period". It was the first of what turned out to be a 51-post thread....obviously YGE stirred up a bunch of interest:

"In my Fool wanderings on many boards, I came across a reference to this company that caught my interest. I subsequently reviewed some additional sources:

1) Edgar (SEC)
http://edgar.sec.gov/Archives/edgar/data/1394029/0...

2) CAPS
http://caps.fool.com/Ticker.aspx?ticker=YGE

3) Yahoo Finance, MSN, Reuters, perhaps more

All the above are useful for getting a flavor of what is happening with YGE, but Edgar is best for reviewing actual financial data and MSN was most useful for understanding the rationale for the crazy price targets on this company: http://moneycentral.msn.com/investor/research/wiza...

Yes, I say crazy price target because here the analysts have been saying to expect a 10-bagger over the next year (from when I first looked at it). I bought at 18.39 (including commission) and am up about 27% in a few weeks. The sky's the limit, huh? LOL

That truly is a laugh because there are a couple things to consider here:

YGE recently IPO'd and has an *extremely* short track record. In my opinion, any investment here represents a risk level that is substantially above my typical preference and anybody thinking of investing here should be prepared for inconsistent financial performance as YGE gets established. High volatility can be expected. Right now, I personally have about 4% of my portfolio here. That may be more than would make others comfortable.

I was asked on the Suntech (STP) board whether I consider YGE to be a better investment. That's difficult to answer because I see the investment proposition as being different for both. In my mind, STP is a no-brainer (appropriately enough). I see little risk to continued high growth in revenues and profits. They are strong financially and use that capability to stay among the leaders technologically. I would do well to have more than 1% of my portfolio there, but I guess it's an element of irrationality. I think STP offers more potential than some of my holdings, but I just haven't dealt with it yet. Keep in mind that I prefer to have a degree of diversification, with respect to companies, but also industries and geographically. I don't want too much money tied up in China, for example, but I'm tipping close to 27-30% of my holdings there if you count Taiwan as part of China.

Now, if STP is such a no brainer, what is the analyst target for it? A: $45...little more than where it is right now, despite analyst expectation of a 50% rise in profits in that time. In my opinion, STP offers a heck of a deal right now, considering the facts that:

1) This is a pretty simple company. Earnings are simply earnings, no big deferred incomes on the books, no unrealized value in book value.

2) I like the PEG ratio as an indicator of "sanity" between the stock price, earnings and growth. Right now, it's underpriced in my book at about 0.9. Given the expected rise in earnings, over the next year, I think a big price rise in the company's stock over the next year is pretty likely.

Now.....let's look at YGE using the same discussion points:

1) As mentioned above, it's a pretty new company that recently did an IPO. Comparisons are difficult and future earnings projections are also difficult.

2) Here's where it gets *really* tough. Earnings for the quarter ending in June were $0.06/share, ramping up steeply. Now analysts are projecting EPS of $2.87 for year ending 12/07 and $5.18 for the year ending 12/08. How can it do so well for the balance of 2007? A: I don't know. It seems like too much to me. But....we'll be getting the next quarterly report shortly, so we should be better able to see if there is *any* sense in it soon.

3) *IF* analyst earnings expectations are met, the stock price expectations are not out of line. Right now, they're at $80+ by the end of this year and over $140 for the end of 2008. Personally, I see it as "questionable", but I still see YGE as a good investment. My thinking is that even if they make $0.60-$0.80/share for 2008, which seems quite reasonable to me given the capacity growth and their current profitable position, the company could still support a stock price substantially above current levels.

So, I see a lot of risk of investor disappointment if/when analyst numbers are not met, but I see a big margin of safety given the current price. Simply put, I believe the YGE risk to be managable for me and YGE appears to offer more short term opportunity than the other companies I hold. Unfortunately, that's a difficult proposition to "prove" using the Edgar financials since the company has such a blasted short track record.

******
KEY POINT: YGE is *not* a no brainer and represents a speculative investment on my part. I think the case for the analyst's targets are far from proven, but I believe the current price holds a margin of safety compared to my 2008 earnings expectations. Accordingly, I believe I'll have a good return over the next year, but it could easily be well below what the analyst targets suggest. In any case, I don't expect to post on this subject for several weeks following today in order to evaluate...and perhaps act on...an additional YGE purchase for my portfolio. So, if you want to talk about this with me more, make it today. :)
******

Other observations:

1) Debt is low (recent IPO remember)

2) Year to year comparisons for megawatts shipped, revenues and profits show very high numbers, but that is of limited value since prior year numbers are so low. It's a problem with evaluating companies that are just getting going. You can't extrapolate those numbers out very well because they aren't sustainable for year after year.

3) Despite the disclaimer of difficult comparisons, I note that they are showing a net income that is growing rapidly. I haven't tried to do a rigorous spreadsheet analysis to support my $0.60-0.80 EPS "guess" for 2008, but it's close enough for me....it may be for you. I would note for you, though that their gross margins rose from about 21% to 23% in the last quarter compared to the previous quarter, which is a pretty healthy start, and they expect 2007 revenues of $460-480 million. Not shabby.

4) Their late 2008 capacity target is 400MW, a bit less than half of STP currently. Their market cap is already about half of STP. Something is definitely out of line. Part of it is STP being too low, IMO. Part of it is based on next year's YGE earnings expectation.

5) They have a significant minority interest (ie somebody else owns part of the company), but bought back a piece of it recently. I don't know if this buy-out will continue.

This is just a rough cut at it, hope it provides some perspective and food for thought. Your mileage may vary, past results are not an indicator of future performance, a stitch in time saves nine (wanting to see if you're still reading). LOL"

********
As it turned out, I didn't buy any more because the price just kept shooting up. As of today, I'm up a little more than 100% since early September and it represents a little less than 5% of my portfolio.

Part of the discussion in that thread was wondering whether the earnings projections are in US$ or in Chinese currency. It seems to me that the earnings projections are way overstated.....

.....but I would be delighted to be proved wrong. I'd like to mention that I'm not the only TMFer to have bought this company either. ;)

On a related note, you may notice that I referenced CAPs, which may be of interest to you on YGE as well as other companies.

Rob
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