Hoku deal with Sanyo energizes solar venture

The $370M pact paves the way for a new plant and catapults the Hawaii company's stock

Chief Executive Dustin Shindo always believed there was an opportunity for fledgling Hoku Scientific Inc. in the booming solar industry.

But until yesterday, the Kapolei-based company hadn't achieved a landmark deal that would signal Hoku's arrival.

Now it has.

Hoku's $370 million contract to supply the polysilicon for solar panels to Osaka, Japan-based Sanyo Electric Co. Ltd. gives Hoku its largest customer as well as financing needed to start building its new solar-cell and polysilicon plant planned in Pocatello, Idaho.

Investors embraced the deal and more than doubled Hoku's stock price yesterday to $6.90, a gain of $3.80 or 122.6 percent. The trading volume of 28 million shares -- 78 times its average daily volume for the past 12 months -- was an all-time high for the company, which went public in August 2005.

"It validates our strategy and approach," said Shindo, who began diversifying toward solar last year after founding the company about five years ago to commercialize fuel-cell technology. "It's something that validates we're moving in the right direction. As a company, we have put a long-term approach to energy technology, and I think we are proud of the success we had today. But we try not to pat ourselves on the back too much and say it's the most amazing thing ever. It's really just one step."

The contract with recently formed subsidiary Hoku Materials calls for the delivery of predetermined volumes of polysilicon each year at set prices from January 2009 through December 2015. It also provides for an initial direct deposit of $2 million to Hoku upon signing, and requires that Sanyo put approximately 30 percent, or $111 million, of the total purchase amount in an escrow amount with Bank of Hawaii.

Cowen & Co. analyst Robert Stone, who upgraded the stock to "outperform" from "neutral," said in an investment report that he believes the stock has 40 percent upside over the next 12 months from the $5.37 price the stock was trading at when he upgraded the shares yesterday. A 40 percent move from $5.37 would put the stock's value at $7.52.

"This is the classic chicken-and-egg situation," Stone said. "They needed to get a certain level of customer commitments for the plant, including some money upfront in order to get banks to provide them the rest of the financing. We believe the Sanyo deal is the critical milestone in that respect because it will support approximately half of the output of the plant by our estimates. And Sanyo is going to provide about 30 percent of the contract value in escrow up front, which will be available to Hoku in the later stages of construction and ramp-up."

Sanyo, the world's fourth-largest solar-cell manufacturer in 2005, had solar cell revenue of about $238 million in its 2006 fiscal first half -- the period ended Sept. 30, 2005. For 2005, Sanyo ranked behind Sharp Corp., Q-Cells AG and Kyocera Corp. Sharp and Kyocera are based in Japan and Q-Cells is headquartered in Germany.

Last month, Hoku announced its first deal to supply polysilicon when it signed a memorandum of understanding to sell $120 million to $140 million worth of polysilicon to Germany-based Solar-Fabrik AG.

Analyst Jesse Pichel of Piper Jaffray & Co. said yesterday he expects the Solar-Fabrik deal to be finalized by the beginning of February and that -- like the Sanyo deal -- it also will include some prepayments.

"So to have these two customers early in the stage is a big endorsement and gives us some confidence this (plant) will get through," Pichel said.

Pichel maintained his "outperform" rating yesterday on Hoku, but raised his target price to $7 from $4.50. He said he anticipates the Sanyo deal will help catapult Hoku's stock to at least $12 a share in 2009 when deliveries start.

Hoku said earlier this month it had chosen Pocatello as the site of $220 million plant that would produce 1,500 metric tons of polysilicon a year. Hoku said yesterday that it is scaling up those plans to a $260 million plant capable of producing 2,000 metric tons of polysilicon a year. Hoku expects the plant to be operational late next year.

The company said it intends to seek debt capital of $130 million and that, under the agreement, Hoku and Sanyo each has the right the terminate the contract if Hoku is unable within the next six months to raise the additional capital required to complete construction of the polysilicon plant.

Shindo said it was necessary for Hoku to increase the planned size of the polysilicon facility to meet all of its needs.

"There is a global polysilicon shortage, which is creating an opportunity for existing polysilicon companies and new ones like ourselves to add supply to the market without taking market share away from others," he said.

Shindo also said it was important that Hoku be recognized as a Hawaii company even though its solar-cell and polysilicon plant will be in Idaho.

"We are building a polysilicon facility outside of Hawaii because the resources to build one in Hawaii do not exist," he said.

Despite Hoku's expansion, Pichel said he expects Hoku to be a "small player" in the solar market.

"Even if they expand beyond what they told us, they're still going to be years behind the big guys," Pichel said. "But it almost doesn't matter because they'll be able to sell out whatever they produce and make a decent margin given the strength of the solar-power market."

Separately yesterday, Hoku announced it had named Dean Hirata to its board of directors to replace the position created by the late Lloyd Fujie, who died in December. Hirata is the vice chairman and chief financial officer of Central Pacific Financial Corp.