The company has seen increasing price-cuts among competitors selling into Germany’s solar power market. Although First Solar makes panels from a thin-film semiconductor technology, it started to see trouble in the German market from manufacturers hit with a glut of polysilicon-based product and slowing of new panel projects, said CEO Mike Ahern.

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The company this morning reported a rough fourth quarter. Revenues were $164.6 million, a bit shy of the Street consensus, up 13.7 percent from a year ago, but down 11.9 percent from Q3. Solarfun lost $61.4 million in the quarter, or $1.14 per ADS, including $47.8 million in inventory write-downs to reflect both falling prices and “unsalable products that could not be sold in the current market environment.”

Gross margin in the quarter was -33.7 percent. SOLF had $60.2 million in cash at quarter end, with total bank borrowings of $190.4 million.

In a statement, CEO Harold Hoskens said that funding for solar projects remained tight in the quarter, with excess inventories in many markets. He said that seasonal factors exacerbated softer demand. “The industry is in a transition from a polysilicon supply-driven environment to a demand-driven environment,” he said, “and currently demand has been affected by the global economic situation. We see that module prices have declined at the same time as the cost of polysilicon, with the cost of polysilicon falling somewhat faster than module prices.”

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In 2009, Citigroup’s (C) Timothy Arcuri observes in a research note today, global demand is likely to sink to 5 GW, from 5.3 GW in 2008. But driven by a growing pipeline of utility-scale projects and aided by government stimulus programs, he thinks the total will jump up to 7.6 GW in 2010 and 9.6 GW in 2011. But Arcuri cautions that at the moment there is about 4 GW of product in the supply chain, or about 10-12 months of current demand. He says production cuts are still not keeping up with inventory build, and contends that long-term polysilicon and wafer supply agreements are preventing a more efficient response from suppliers.

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Yingli Green Energy (YGE): Overweight rating, $12 target. “Yingli has [the] industry leading nonsilicon cost structure and among the highest exposure to declining spot silicon prices.”

Solarfun Power (SOLF): Underweight rating, $3.50 target. “Lack of sufficient cash balance, relatively low brand differentiation and downside risk to estimates could lead to share price underperformance.”

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Pichel offered three reasons for his more cautious approach to the stock:

• He contends the company is “rapidly losing its polysilicon cost advantage” as the price of polysilicon approaches $100/kg and as “competition intensifies in an over-supplied environment.”
• Pichel says he has “little visibility” into the company’s new strategy to outsource production in Asia.
• The company’s balance sheet “leaves little flexibility for pursuing alternative expansion strategies in Asia.”

He says the stock at $2 “represents an option on solar’s growth in the U.S.,” but that “future growth and profitability prospects have become murkier in the last two months in an intensely competitive environment.”

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