Insiders Making Big Bets on Chinese Solar

There are some very bullish bets being made by insiders in Chinese solar firms right now, making me wonder if they know something we don't. Last week JA Solar (Nasdaq: JASO  ) announced a $100 million share repurchase program, an incredibly bold bet from a company with a gross margin of 0.5%, $851.7 million in debt (offset by $676 million in cash), and a market cap of just $225 million.

Today, Hanwha SolarOne (Nasdaq: HSOL  ) announced that three members of senior management bought a total of 301,928 shares of the company's stock for their own accounts. In the most recent quarter, Hanwha had a -9.4% gross margin, $664.7 million in debt, and just $303.1 million in cash.

Neither of these companies are models for operational effectiveness, and the bets have me wondering if management knows something about their future that we don't.

Chinese banks propping up solar
I've argued in the past that Chinese banks are at a crossroads and need to begin letting solar manufacturers fail or risk watching losses continue to grow along with competition. At the end of last quarter, JA Solar had a relatively modest $153.8 million in short-term borrowings but Hanwha was sitting on $334.0 million in short-term bank borrowings, meaning the company could go under in a heartbeat if that funding were pulled.

So why would you risk company capital or personal capital if your company's balance sheet is walking a tightrope that would result in insolvency in any other country? You must know that funding won't dry up and have extreme confidence that the business will improve.

LDK Solar (NYSE: LDK  ) , Suntech Power (NYSE: STP  ) , and Yingli Green Energy (NYSE: YGE  ) are in even more extreme positions, sitting on a lot of short-term debt, giving similar risks to investors. But if JA Solar and Hanwha SolarOne are confident in their funding, should these companies be too? Maybe. It's possible that management knows the short-term funding will last for the foreseeable future and a turnaround in operations is a bet worth making.

Something doesn't smell right
I'm not sure exactly why such bullish bets were made on these two relatively weakly positioned solar companies, but it just doesn't smell right to me. Margins are terrible, losses are mounting, and their stock prices are continuing to crater. The information we've seen doesn't indicate this is a good bet, yet management seems to be going all-in. What do you think? Leave your thoughts in our comments section below.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (4)

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 June 18, 2012, at 4:19 PM, cumulina wrote:

    Must be because of the Japanese decision to go for alternative energy, instead of nuclear.

  • Report this Comment On June 18, 2012, at 8:25 PM, raarbuckle wrote:

    I think that Solar Companies will come back due to the developing awareness of the population that is leaning more and more heavily towards alternative energy, and Solar is becoming more and more affordable every day. Plus, many governments are preaching the "we must get off of oil" thesis! Solar will make it yet!

    Robert Arbuckle

    Trader

  • Report this Comment On June 19, 2012, at 5:55 AM, mrhmotley wrote:

    You are surprised by this insider action because you haven't got the faintest clue what you are talking about. Worse still, rather than acknowledge you might have missed something, you try and talk down three of the largest producers in the world to justify your ignorance.

    You probably won't print this because you lot can't accept anyone who challenges your views and this is why Motley Fool has gone down hill so far. However, anyone with half a brain would have realised that if you sell your products around the world it is easy to re-direct some or all of your sales activity and your product to another part of the world. These are global leaders in an industry that is about to explode in growth. Even US installations grew 85% in Q1 over Q4 last year. Japan, China and the Saudi's are a massive market and those children at Solarworld can bitch and moan all they want but they won't be selling much in the first two of these markets.

  • Report this Comment On June 19, 2012, at 10:38 AM, TMFFlushDraw wrote:

    @mrhmotley

    Obviously we do print comments from people who challenge our views, we just don't allow disrespectful comments or personal attacks (which yours is). But I'll answer anyway.

    What's your point? I didn't say that any some manufacturer won't be able to redirect sales. I've reported on this in earnings takes multiple times. The problem is: Are any of these companies going to return to profitability any time soon because of new demand sources?

    If you're sitting on $2 billion in short-term debt and you have a single digit gross margin (at best) how are you going to survive? Global demand would need to grow in excess of 30% to keep up with supply.

    Sure, other markets will grow, but it won't likely be enough to bring many (if any) of the Chinese manufacturers to profitability any time soon. This is the problem and it makes their short-term debt a ticking time bomb.

    Travis Hoium

  • Report this Comment On June 19, 2012, at 11:46 AM, TriedTrue wrote:

    Why would China, after capturing most of the world market, just pull the funding from some of the largest solar companies in the world? I don't buy it, and based on how incredibly low companies like YGE are trading compared to their revenues I would say that this "risk" is more than priced into the stock.

    These Chinese companies all rely on quantity for their profit instead of % margin. With a huge market developing in Japan (growing to 9.6 Billion), Germany's upper house refusing to end subsidies, the estimated doubling of the Chinese solar market, it looks like growth of global demand could approach or even exceed 30% I don't see how these companies are "ticking time bombs"

    What do you think?

  • Report this Comment On June 20, 2012, at 2:54 AM, panabryan wrote:

    I see were you said gross margin was .5, Here's an excerpt from the minutes.

    "We recorded a positive gross margin of 2.1% in the first quarter, which includes a provision for countervailing and anti-dumping duties of US$2.9 million or roughly 1.1% of our net revenue. Excluding the impact of this provision, gross margin would have been 3.2%. This sequential improvement in gross margin was driven by our efforts to reduce costs while continuing to offer high quality, high efficiency products.

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