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Debt Bombs Among Solar Stock: Who Has Liquidity to Last?

With solar power component prices forecasted to decrease again this year due to continued overcapacity, investors need to assess which of the world’s largest photovoltaic (PV) suppliers have the liquidity to sustain additional revenue and earnings shortfalls. With the demand cycle unlikely to rebalance until 2015, even size won’t save some manufacturers from being forced out of the solar market.

In terms of megawatt shipment volumes, Suntech Power Holdings (STP) is the number three supplier of PV modules, according to analytics firm NPD Solarbuzz. Unlike Arizona-based, thin-film PV module maker First Solar (FSLR) and Chinese competitors, such as vertically-integrated crystalline silicon (c-Si) manufacturers Jinko Solar (JKS) and JA Solar (JASO) –NPD Solarbuzz ranking of 2, 7 and 8, respectively – Suntech assumed too much debt to build capacity, as demonstrated in the following debt to equity YChart:

STP Debt to Equity Ratio Chart

STP Debt to Equity Ratio data by YCharts

Digging into Suntech’s financial filings, one unearths a capital structure that is truly broken: In addition to negative working capital of more than $1.2 billion, the company has less than $168 million in unrestricted cash, and more than $2.0 billion in debt, of which $541 in convertible notes comes due in March.

Earnings for most Tier 1 manufacturers have been damaged by the effects of declining ASPs. And, though shareholders at Yingli Green Energy (YGE), Trina Solar (TSL), and Canadian Solar (CSIQ) – NPD Solarbuzz ranking of 1, 4, and 5 – experienced dilution due to operating losses, the rush to expand market share hurt shareholders equity worse for holders of Suntech common stock.

YGE Shareholders Equity Quarterly YoY Growth Chart

YGE Shareholders Equity Quarterly YoY Growth data by YCharts

The solar panel maker is also being sued by investors because of ties to alleged fraudulent activities of a solar investment fund, GSF, which financed Italian solar energy projects with non-existent German government bonds. If due diligence uncovers that Suntech knew of the scam, bankruptcy could prove a real possibility.

Though the financial pain is being felt upstream, too, management competence boldly paints a study of contrasts: Polysilicon manufacturer Daqo New Energy Corp (DQ) has successfully restructured (reverse stock split and sale of its module division) to focus on core operations; whereas, LDK Solar (LDK), the world’s largest producer of solar wafers (in terms of capacity), continues to founder under an onerous debt-load – more than $2.0 billion in debt matures over the next 12 months.

LDK Management believes it can generate sustainable cash flow by expanding downstream into module manufacturing and cutting operating expenses. Too little – too late: Given existing working capital problems, where is the company going to get the cash to expand into panel production? As for manufacturing gains, industry-wide wafer plant utilization averaged 50% in 2012. Management should take their blinders off and acknowledge the negative impact that idle factories and falling prices have on LDK’s profit margins:

LDK Profit Margin TTM Chart

LDK Profit Margin TTM data by YCharts

At the first hint of a recovery, competitors will resume production. Ergo, LDK is unlikely to witness a sustainable recovery in margins.

Whether or not LDK survives as an ongoing enterprise will be dictated by the willingness of Chinese banks to keep lending. However, should the company be successful in re-negotiating short-term borrowings, it will be at the expense of common stockholders – most likely higher interest rates on new borrowings or through debt conversion to stock (dilution).

Another scenario could be the sale of LDK to a Tier 1 module supplier looking to bring silicon and wafer production in-house. Unfortunately, as most of the top Chinese-based c-Si module makers mentioned in this report have already built-out their vertically-integrated supply chains, the “for-sale” value of LDK is questionable.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com.

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