Just how weak has the solar industry gotten in China? Even the Chinese government can't seem to save the industry from its own problems or the challenges facing the global industry.
Last October, I said LDK Solar was the riskiest stock in solar because of terrible margins and a high level of debt. The narrative hasn't changed in the past year; in fact, it's gotten worse. And so has the stock.
All three companies I listed as high-risk -- LDK Solar, Suntech Power, and Hanwha SolarOne
Now, this isn't to say that others have done better on the market -- far from it. But U.S. companies such as First Solar
Shakeout comes to China
Solar companies have been going bankrupt in the U.S. and Europe for well over a year now, but China has largely been left alone, at least on the module side. That can't last forever, with the amount of debt outstanding on manufacturers' balance sheets, and there are signs that China is starting to capitulate.
The reaction to the declining fundamentals is a slow rationalization of overcapacity. Trina Solar
These aren't out-and-out white flags from solar manufacturers, but I wouldn't expect a quick decline of Chinese manufacturers. Capacity will slowly be taken off the market, financials will get worse, and slowly companies will consolidate with the assistance of the government, which has provided loans for expansion to nearly all of them.
Who is in trouble?
LDK Solar is still on the top of my list of companies that will eventually go under, but it isn't the only one. I look at gross margin as an indicator of health, and any company with a low-single-digit or negative margin at this point is in serious trouble. But what really worries me is debt, especially short-term debt that can pull the rug out from a company.
Rounding out my list is the largest module maker in the world -- Suntech Power. This company has gone through fraud problems and debt woes, and now it's cutting capacity. The company hasn't released second-quarter earnings yet, but we know the gross margin should be about negative-10% and that it had short-term debt of $1.6 billion and total debt of $2.3 billion. That has disaster written all over it.
China's strategy changes
The changes for Trina Solar and Suntech are just the tip of the iceberg for Chinese solar manufacturers. More companies will have to transition away from money-losing operations, especially if Europe imposes tariffs the way the U.S. did. Even strong Chinese companies like Yingli Green Energy, Trina Solar, and Canadian Solar have a lot of question marks ahead.
So who is actually making a profit in solar with all of these headwinds? You might be surprised to hear that it's American company First Solar. We've highlighted how the company has done it and what the future looks like in our premium report on the stock. Click here to find out more.