Another Chinese Solar Company on the Brink of Failure

We're supposed to be seeing progress from the solar industry at this point. First Solar (Nasdaq: FSLR  ) and SunPower (Nasdaq: SPWR  ) are improving margins and talking about strong long-term markets in the U.S., Japan, and India. But Chinese solar players are posting deteriorating results that should have investors running for the hills.

The latest to report terrible numbers is LDK Solar (NYSE: LDK  ) ; my most hated solar stock for 2012.

Earnings crash and burn
Before I get to the quarterly numbers, keep in mind that LDK Solar has $3.9 billion in debt and accounts payable, and now has just $111.9 million in cash. It needs financials to improve quickly, but...

Net sales in the third quarter fell 38.2% from a year ago to $291.5 million, although this was a 23.8% improvement from the second quarter. Gross loss was $32.5 million for a negative gross margin of 11.2%, and net loss was $136.9 million, about the same as the company's market cap.

This follows negative gross margins of 22.7% at Yingli Green Energy (NYSE: YGE  ) , 5.9% at JA Solar (Nasdaq: JASO  ) , and 18% for ReneSola (NYSE: SOL  ) . Chinese solar is simply going bankrupt before our eyes.

What will China do?
The big question hanging over the industry revolves around what China will do with its solar industry. LDK, Yingli, Suntech Power (NYSE: STP  ) , and others are sitting on tens of billions of dollars of short-term debt from state-owned banks. As sales decline and margins get worse the prospects get worse for everyone in China's solar industry.

To make matters worse, it's a reinforcing cycle once it gets started. Financials get worse, customers begin to question your long-term viability and warranty, which leads to fewer sales and worse financials, and so on.

Foolish bottom line
I wouldn't touch any solar stock from China right now or any time in the near future. U.S. companies are risky as well but at least they have a chance at survival.

Of the U.S. solar companies, First Solar stands out from the crowd. If you're looking for our recommendation on how to play First Solar along with continuing updates and guidance on the company whenever news breaks, we've created a brand new report that details every must know side of this stock. To get started, just click here now.


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