Suntech’s Gain Goes Well Beyond Revenue from New Contract

Suntech Power (NYSE:STP) recently bagged an $81 million contract from the United Nations (UN). ^[1] Suntech bid for the contact jointly with Peak International Trade (Tianjin) – a major registered supplier for the UN. The deal, which is to-date the single largest UN contract to be won by Chinese companies, does not include the final purchasing list from the UN. The deal could give Suntech an edge against other solar industry giants like FirstSolar (NASDAQ:FSLR), SunPower (NYSE:SPWRA), and Yingli Green Energy (NYSE:YGE).

We maintain a $10.68 price estimate for Suntech Power, implying roughly 10% upside to the stock’s market price.

The deal would bring in $81 million for Suntech..

Suntech would be delivering portable solar power systems to the UN which would be used by the International Peacekeeping Force and other subordinated entities around the world. The current contract can be extended by two more years, or even longer, if the portable systems are successfully put to use. The UN is expected to provide a detailed list of requirements to Suntech, based on which the actual products would be delivered. The contract also includes after-sales service of the products.

… but the company’s gain goes well beyond the revenue from this contract

Suntech Power designs, develops, manufactures, and markets photovoltaic (PV) products and also provides engineering and construction services for building solar power systems. But it has been focusing almost completely on the manufacturing and sale of PV modules, because of which it is currently the world’s largest manufacturer of crystalline silicon photovoltaic (PV) modules.

This deal shifts focus to the company’s lesser known solar systems division. Our analysis suggests that solar systems are a source of less than 10% of the company’s stock value, but we believe that this could change significantly in the future.

This is because the deal would allow Suntech to promote its smaller products and systems in markets like Africa – while helping its brand all across the world. This would also boost sales of its large-scale systems in the years to come.

We maintain a base case 15% annual growth estimate for Suntech’s revenues from the sale of PV systems, but this number can easily cross 20% in the coming years given recent developments. This would translate into additional revenues (beyond our base case forecast) of $2 billion by the end of our forecast period, indicating 5% upside to our $10.68 price estimate for Suntech Power stock.

See our full analysis and $10.68 price estimate for Suntech Power

1. Suntech and Peak International win UN green-energy contract, China Daily, April 6 2011 [↩]