Yuanta initially gave Sunshine Energy (0757.HK) a sales rating, with a target price of HK$1.40.

Yuanta pointed out that the loss in mid-2009 was RMB 85.6 million, while the mid-term profit in 2008 was RMB 276.7 million due to inventory depreciation of RMB 172.6 million. Yuanda said that although it is a leading producer of single ingots and wafers in mainland China, Sunshine Energy is facing challenges in turning losses into profits because its cost advantage in waste wafers is weakening.

According to Yuanda, Sunshine Energy's gross profit margin for the second quarter of 2008 was 40%, and the average level for the industry was 25%, mainly because the majority shareholder Hejing (6182.OT) supplied waste wafers at a big discount, but due to a sharp drop in spot prices, the profit margin of the scrap wafer processing business was drastically reduced, thus hampering profitability.

Yuanda pointed out that Sunshine Energy has achieved vertical integration through joint ventures and acquisitions of downstream businesses, but the bank does not expect these initiatives to provide significant profit contributions in the next 12 months, especially when China's solar demand and price prospects are uncertain.

Yesterday, Sunshine Energy closed flat at HK$2.00.