Both Sides of the Coin: Hoku Scientific, Inc. (HOKU)

Hoku Scientific, Inc. (HOKU-NASDAQ) has been a stock on a mission as shares have more than doubled in the last month, and it is easy to understand why based on the headlines.  The company has in effect become a leveraged bet that it will be one of the premiere or significant suppliers of polysilicon to solar power panel-makers in the year 2009 and beyond.  But there are those who can point to the "glass half-empty" logic as well, and any new shareholders need to consider both sides before making educated investments.  The company has yet to deliver on any solid supplies and is essentially pre-revenue.  You cannot do any financial analysis on the company, because in Vegas they’d say "it’s betting the come."  That being said, this has become a de-facto call option on future solar power supplies.

Forget current revenues, forget the balance sheet, for get logical financial analysis of the current situation.  What has been happening is that the company is trying to get the ball further rolling and finish the building of a major factory in Pocatello, Idaho.  Hoku has been in the process of signing up tentative supply contracts as well as securing the financing needed to build the factory.  In the event you haven’t been looking at solar panels or the news and analysis around them, solar panel makers have recently started experiencing limited to large supply issues that have capped their ability to ship solar panels.  The demand is there for what may become a secular basis, and there is a supply shortage as of now.

Hoku has seen its shares rocket since it started announcing tentative supply pacts recently.  The contracts are all tentative and on an ‘up-to X-million’ basis, so the current trading around the company has become a game trying to guess how much they will really be able to secure.  It has announced tentative supply pacts with the following companies for ‘up-to’ the said amounts if known: Solar-Fabrik AG (up-to $185 million), Suntech Power Holdings Co. Ltd. (up-to $678 million), Sanyo (up-to $370 million), and Hawaiian Electric Co. (up-to $185 million).  Once again, these deals are all subject to the factory being completed and to certain supply quotas and of course there are exit provisions.  At the end of May, reaffirmed that the engineering, design and construction of the plant are on track for product deliveries to begin in January 2009. Specifically, Hoku Materials announced that it has drawn on its $13 million credit facility with Bank of Hawaii to pay the 15% initial deposit under Hoku Scientific’s hydrogen reduction reactor purchase contract with GEC Graeber Engineering Consultants GmbH, and MSA Apparatus Construction for Chemical Equipment Ltd. for reactors capable of producing 2,000 metric tons of polysilicon per year.

After searching through local news listings it does look like the project approvals have passed and as though.  It appears as though there is still quite a bit of financing and tentative issues remaining before everything is set and the company is a solar power supply winner.  After an 11% drop today the company’s market cap is almost $177 million, so it is still very much in small-cap coverage.  If the company is successful in getting all the ducks in a row and is successful in producing the contracted quantities in 2009 and beyond, then this has a good shot at becoming the next big thing for investors looking to make a killing off of alternative energy.  If it runs into steady problems and never gets off the ground or if it can’t meet production deadlines or quotas, then it will just be another "Has been that could have been."

Shares have been trading all over the place with the 52-week high being yesterday’s intraday high of $12.80 and the 52-week low of $2.12.  Trading volume reached as high as 33 million shares one day last week, and the total shares outstanding are listed as 16.491 million shares by NASDAQ.  The June short interest was down to 847,400 shares, down from 1.2 million in May.  With the strong performance seen, it would not be a huge surprise if the company tries to raise capital via security sales (although that is merely conjecture).

For an alternative energy believer such as myself this is easy to believe in and easy to get excited about.  For speculative investors betting real money on real possibilities, there is always the other side of the equation that has to be considered.  That’s both sides of the coin for the bulls and for the skeptics.

Jon C. Ogg
June 27, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.