Maybe this is the end of the beginning for the world’s beleaguered solar industry. The industry can’t start a recovery until some of the in-all-but-name bankrupt solar companies in China sell off capacity or go out of business. But until very recently even companies generating nothing but red ink have been able to find capital to keep going despite losses.
Maybe. Just maybe that started to change on March 15. On that date Suntech Power Holdings (STP) received a notice of default on $541 million in convertible bonds. Suntech had been scrambling to avoid a default on the bonds, which matured on March 15. At one point the company claimed that 63% of bondholders had agreed not to force a default until May. But other bondholders have decided not to wait and are bringing suit. The company is likely to be forced into bankruptcy as a result.
Chinese companies hardly even go into bankruptcy and Suntech is a classic example of why not. Besides the $564 million in convertible debt due on March 15, the company has enough debt on its books so that its debt to equity ratio is near 500%. Much of that–$1.8 billion—is in short-term bank loans that Chinese banks have been willing to roll over and over even though the company has no chance of ever paying back those loans. The company hasn’t filed a financial report since March 2011 but it’s clear that the company is burning cash. From 2009 to 2011 Suntech doubled solar cell production to become the biggest Chinese solar company—and also one the industry’s high cost manufacturers. The one saleable asset that Suntech has that the company might have been able to use to pay off part of its debt—145 Megawatts of solar projects in Italy—is tied up in a lawsuit over allegations of fraud.
None of that mattered as long as local governments, more concerned about jobs than profits, kept providing the cash to keep the doors open.
Now, however, it looks like even that source of cash is in the process of drying up. And analysts are predicting that 2013 will see the first consolidation in China’s solar sector.
I’ll believe it when I see it—and I’m not buying shares of even my favorite Chinese solar companies, Yingli Green Energy (YGE) and Trina Solar Power (TSL) as anything other than swing trades on volatility in this sector until I see some factory doors shut. (Yingli Green Energy is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
The economics are still too brutal. At Trina, for example, Credit Suisse estimates that the company needs to show a cash profit of about 10 cents a watt to break even. On estimated current costs of 60 cents a watt, generating a profit of 10 cents a watt would require a gross margin of 15% or so. For the fourth quarter, Trina projected a gross margin of 1%. (And that was a big improvement from the -3% to -4% gross margin recorded in the third quarter of 2012.)
As long as there’s so much excess capacity in the Chinese solar sector, and as long as cash-strapped companies are willing to sell their products at just about any price to generate cash, nobody is going to see 15% gross margins.
Right now the projections on Wall Street call for 2013 to see the beginnings of consolidation in the sector with major reductions in capacity in 2014.
Until 2014, then, I’d swing trade these stocks, buying them when they rally on hope and then selling them when reality reasserts itself.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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