Solar's Impending Failures

Solar industry coverage in recent months has focused on the debacle at Solyndra and U.S. financing of the failed company. But we aren't the only country that has supported solar, as China has poured billions and billions of dollars into solar companies to build up the industry.

That support has helped push technology forward, lower costs, and, in an ironic twist, make many of the most heavily supported companies virtually insolvent. With a vast oversupply of polysilicon and solar modules for the foreseeable future, it's become apparent that China may have to let some of its solar companies fail. There's just no way the industry can support the current level of supply and losses these companies are posting and will probably continue to post.

Picking the losers
If China does let manufacturers fail, it will be those that have the most short-term debt and the worst financial performance. Normally, short-term debt is used to fund small items like payroll, but in the case of Chinese solar manufacturers it's been leveraged to build an entire industry. So which ones are going to be left standing when the music stops?

Let's look at seven Chinese solar manufacturers that have varying degrees of short- and long-term debt as well as cash levels. I've used second-quarter sales and gross margin as our proxy for ability to pay debts because growth rates vary dramatically across the industry, making trailing-12-month sales numbers less meaningful.

Company

Cash

Quarterly 
Revenue

Gross 
Margin

Short-Term 
Debt

Long-Term 
Debt

LDK Solar (NYSE: LDK  ) $636.4 million $499.4 million 2.2% $2.2 billion $1.1 billion
JA Solar (Nasdaq: JASO  ) $616.9 million $413.0 million (2.7%) $7.1 million $826.7 million
Hanwha SolarOne (Nasdaq: HSOL  ) $229.8 million $277.1 million 7.8% $137.5 million $185.8 million
Renesola (NYSE: SOL  ) $480.8 million $249.3 million 18.4% $428.0 million $332.7 million
Trina Solar (NYSE: TSL  ) $684.2 million $579.5 million 17% $343.0 million $382.6 million
Yingli Green Energy (NYSE: YGE  ) $1.1 billion $680.6 million 22.1% $1.2 billion $0
Suntech Power (NYSE: STP  ) $767.9 million $830.7 million 4.1% $1.7 billion $766 million

Source: Company earnings releases.

The analysis of this balance-sheet information is somewhat subjective, but I'll place companies into high-risk and lower-risk categories.

High risk
LDK Solar definitely tops the list of risky manufacturers, followed by Suntech Power and Hanwha SolarOne. These three each have heavy debt loads, not enough cash to cover debt, and very low margins.

The use of short-term debt to build manufacturing facilities has helped each of these companies expand rapidly over the past few years but could be their downfall going forward. Short-term debt can evaporate at almost any time, and if margins continue to be anemic, even the friendliest Chinese bank will turn its back on them. It's running out of cash like this that makes companies fail.

Risky, but not toxic
Trina Solar and Yingli Green Energy both have nearly enough cash to cover debt and double-digit margins, making them the safest of the companies in the table. After First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWRA  ) , which are industry cost and efficiency leaders, respectively, I would consider Trina and Yingli the two least likely to fail in solar manufacturing (I know, not exactly a ringing endorsement).

JA Solar is a different story, because, instead of being a vertically integrated module manufacturer, it's mostly a cell manufacturer. When module demand falls in relation to supply, as it has this year, module manufacturers will use their own cells before looking outside for solar cells. That puts JA Solar in a tough position.

With all of that said, JA Solar has almost no short-term debt, potentially giving the company more time to wait out a market shakeout than its competitors. I'm not jumping into the shares today, but I would definitely say JA Solar has a better chance of surviving than LDK Solar and Hanwha SolarOne do.

Foolish bottom line
Evaluating risk is extremely important in solar right now as the industry deals with oversupply. I think many more bankruptcies are inevitable, and they may come from better-known names than Solyndra.

Now it's time for you to weigh in on which companies you think may be teetering on oblivion. Which Chinese company is most likely to fail?

  • LDK Solar
  • JA Solar
  • Hanwha SolarOne
  • Renesola
  • Trina Solar
  • Yingli Green Energy
  • Suntech Power

Let us know in the comments section below.

Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2011, at 9:19 AM, cubfantexas wrote:

    To me, the better question is, will some large solar mfgs get married?

    Personally, I believe ReneSola and Yingli would be a very good marriage. ReneSola's valuation and technology + Yingli's cash position, sales network and remaining wafer need = a new vertical player which immediately puts immense pressure on Trina and Suntech in terms of verticality (and thus margin control), sales network and high efficiency (higher value prop).

    They get married and choose a new single global name like 'Parity Solar' or something like that. Also see Jinko as a good spouse to ReneSola.

    Given the history, marriages are not likely to happen in China, as suggested here, but would make good sense if adopted as an acceptable practice. China should adjust their mindset to accept that it is better to merge companies than to lose one, and the jobs along with it.

  • Report this Comment On October 26, 2011, at 12:35 PM, busterjones wrote:

    Hanwha SolarOne (HSOL) is not in danger of failure. I do not agree with your assessment at all. Hanwha SolarOne is backed by the Hanwha Group a multi-billion dollar conglomerate. Furthermore, a recent interview with Andreas Liebheit, the Vice President and Managing Director of Hanwha SolarOne, Europe, Middle East and Africa (EMEA) states that HSOL:"The market is picking up, and the level of activity is improving very much compared to Q2 and in Q1. So now we see a good flow of revenues in the short term.In the long term we are expanding because we feel that we are well positioned to develop a strong brand. We maintain an excellent position with our original equipment manufacturers (OEM) partners, which is also a valuable testimony of our high level of quality. Our own brand definitely benefits from the trust shown by our OEM customers; it proves that we are a highly committed partner, focusing on customer value also in the long term. Furthermore, we are backed by the Hanwha Group, a large and financially very strong Korean conglomerate with high ambitions in the solar business. So this gives us a good position."

    http://www.solarserver.com/solar-magazine/solar-interviews/s...

  • Report this Comment On November 02, 2011, at 4:41 PM, marc5477 wrote:

    @busterjones

    The author didnt say they would fail, he said they are the more likely to fail than some others. Next, what did you expect a VP to say? "Our company is struggling and our prospects are low?" He is just a VP and will probably be fired instantly if he says anything that might irk the upper execs. Furthermore, what he said sounded like propaganda more than an actual answer. Anyway, none of my business.

    My pick would be to stay away from Chinese solar at this time. The reason is regulation. Now that the cat is out of the bag about Chinese subsidies you can be sure that the US will put pressure on them to stop. If China resists then the US might do something about it themselves. I'm hoping for a big fat tariff on all Chinese goods and the repeal of the free trade agreement which China has defecated on for decades. Pressure is building and Id rather not be a casualty. Ill stick with FSLR for now.

  • Report this Comment On November 02, 2011, at 4:49 PM, TheDumbMoney wrote:

    I am really not sure that First Solar is an industry cost leader on a per watt basis at all. On a per watt basis I believe it is well behind some of the Korean private manafacturers, as well as some of the Chinese companies. I did some very casual research on this about two months ago, when I was considering buying FSLR at $80 (but didn't), so I may be wrong or misremembering, but I seem to recall that was the conclusion I drew.

  • Report this Comment On December 01, 2011, at 10:54 AM, BetrayedbyGovt wrote:

    I agree with many of your assessments. However, if you look at all the failed Corporations large and med. that have failed in the last few years, almost 80% of them received direct bail out money from the Taxpayers of the United States. That being stated, First Solar may have legs for a bit of time but after receiving over 1/2 a Billion in aid is not a good indicator. In addition First Solars actual product is substandard by many rules of comparison. Their product now costs 2 to 3 times more to produce than many of there peers products. First Solar and their supporters deem them as a high tech and advanced product, however if you look closely at the facts you will see that First Solars panels are at best 48 to 65% less efficient as conventional panels not using thin nano tech. Now that polysilcon has drastically dropped in price this gives all of First Solars competition a huge head start, that is when the solar inititive gets rolling again. What consumer would want to pay more and receive less of a product because it is a different technology. Look to Yingli Green Energy 2013 Call opt.

  • Report this Comment On December 01, 2011, at 11:07 AM, Stenfors75 wrote:

    @BetrayedbyGovt

    Which 5 companies in the sector do you as the most advanced in terms of technology? Please also state why, and how they differ.

    Thanks,

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1576879, ~/Articles/ArticleHandler.aspx, 12/20/2014 10:12:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement