Hoku Scientific (Nasdaq:HOKU) Upside Looks Tremendous, In Our Opinion

Sep 05, 2008
Author: SCP Editor

September 5, 2008 - Hoku (Nasdaq:HOKU) announced another blockbuster deal this week, this time with Wealthy Rise, International Ltd., a wholly-owned subsidiary of Solargiga Energy Holdings (HKG:0757). Under the contract terms, Hoku is to deliver polysilicon to Solargiga over a 10-year period beginning in early 2010 for a total of about $455 million. The contract also calls for a deposit of $22 million to Hoku within 15 days and requires additional deposits of $21 million by December 20, 2008, $20 million by March 31, 2009 and $5 million on the first shipment.

We had previously expressed concerns that Hoku shareholders were facing some pretty meaningful dilution in the face of the company’s planned expansion, but after several announcements like the one above, we wrote that the company appears to be working through its cashflow requirements for expansion by locking in upfront and early follow-on deposits for longer term contracts. As a result, we raised our price target on the stock to $5.56, assuming a multiple of 5x P/S given our forecast of $22 million for the current year.

Yesterday, management said it is canceling its equity distribution pact with UBS, saying that it no longer needs the previously required bridge finance – validating our own estimates. Interestingly, it also canceled contracts with Sanyo Electric and Global Expertise Wafer Division saying that its planned polysilicon manufacturing facility was oversubscribed at its 3,500 metric ton annual production level.

Under the Sanyo Supply Agreement, up to $530 million would have been payable by Sanyo to Hoku over a 10-year period. Hoku will need to return the $2 million prepayment for products that Sanyo had previously paid and will release about $109 million of Sanyo’s cash that was being held in escrow. Under the Global Expertise Wafer agreement, up to $117 million would have been payable to Hoku over a 7-year period. Hoku will also need to release the $2 million prepayment for products to Global Expertise.

Here are the latest announcements:

·         September 4 - $455 million polysilicon supply contract to Solargiga Energy Holdings

·         August 5 - $284 million supply contract to Tianwei New Energy Wafer Co.

·         July 30 - $298 million supply contract to Jiangxi Kinko Energy Co

·         May 12 - $678 million supply contact to Suntech.

Backing out the Sanyo and Global Expertise, deals, Hoku still has supply contracts for the delivery of polysilicon for future revenue of up to about $2.1 billion. At yesterday’s closing price of $5.55, Hoku’s current market cap is $113 million.

Granted, the $113 million may look expensive relative to trailing-twelve month revenues of $4.34 million (about 26x P/S) and even against our forecast of $22 million for the current year (about 5.13x P/S). But we think at this point, given the fact that it has $2.1 billion in orders over the next 10 years or so, the stock is in fact very cheap.

To illustrate this point, if we just carve out 8% of the total $2.1 billion in orders, and multiply that by a multiple of 2x P/S, we would arrive at an implied market cap of $343 million, and a stock price of $17.33. We aren’t certain as to when, exactly in FY 2009 Hoku’s revenue will begin ramping, but when it does, we think that it will support this analysis. So at yesterday’s close of $5.55, we think the stock is a table pounder, and are adding it to our Aspire Clean Index portfolio.

Disclosure Note: SCPEditor is LONG HOKU.