Another Sign That Chinese Solar Is Dead

Trina Solar (NYSE: TSL  ) is one of the leaders in the Chinese solar industry, but now it looks like it's following the downward path of Suntech Power and LDK Solar, who have both defaulted on loans. Trina updated first-quarter guidance yesterday and said it shipped between 390 MW and 400 MW versus a previous guidance of 420 MW and 430 MW, another sign that Chinese solar is slowly going out of favor.  

If Chinese manufacturers experience lower shipments it will translate to lower margins, which is their core financial problem right now. Trina Solar expects gross margin to be between 1% and 3%, which is about in line with expectations for low-single digits. But this level of gross margin isn't enough to make a profit or pay for billions of dollars in debt. The debt-fueled expansion of Chinese solar is being squeezed financially and more companies will have to fall if this continues.

Shipment and margin trends aren't usually isolated to one Chinese solar manufacturer so it's easy to assume that other companies will see disappointing numbers in the first quarter. The first two to watch are Yingli Green Energy (NYSE: YGE  ) and Canadian Solar  (NASDAQ: CSIQ  ) , who round out the top three Chinese solar module suppliers with Trina. All three have high debt, low margins, and massive losses.  

Squeezing China
U.S. regulators put import tariffs on Chinese modules last year in an effort to fight subsidies and product dumping. European officials are considering similar measures and may implement tariffs so onerous that China is priced out of the market. The Wall Street Journal is reporting that tariffs of between 48% and 68% will be announced in June, which would make even cheap Chinese panels uncompetitive in the market. Trina, Yingli, Canadian Solar, and most Chinese competitors count on Europe for a large percentage of their demand, so if they're squeezed it would only exacerbate low shipments and unsustainable margins.

Contrast to U.S. suppliers
Take Trina's numbers and contrast them with recent reports from First Solar (NASDAQ: FSLR  ) and SunPower (NASDAQ: SPWR  ) . Both stocks have jumped in 2013 because they're reporting higher profits than expected as their end markets stabilize. This is a stark contrast to what we're seeing in China.

I've been down on Chinese solar stocks for a long time now and this is only the latest reason why. The U.S. and Europe are trying to squeeze them out, margins remain unsustainably low, and debt levels continue to pile up. Eventually the Chinese government will have to let some of these companies fail and liquidate their assets. That's why I would stay away from all Chinese solar stocks right now.

A solar stock worth another look
Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past two years. The stakes have never been higher for the company: Is it done for good, or ready for a rebound? If you're looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must know side of this stock. To get started, simply click here now.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On May 15, 2013, at 11:03 AM, madmilker wrote:

    Do you really think a few solar panels on top of Wal*Mart stores is gonna make all those cargo ships Wal*Mart had commissioned years ago pollute less....

    duh!

    Do you know where JCL FSLR HOLDINGS, LLC is located?

    duh!..

    Wal*Mart has their Global Procurement Office in China.....they don't need any solar panels made there....

    because all the US dollars goes there.

  • Report this Comment On May 15, 2013, at 11:18 AM, platypus2323 wrote:

    Wow, Mr. Hoium, you never seem to let a day go by without trashing Chinese solar. And every article includes the mandatory shill for FSLR and SPWR. You're super-long there. Pump it!

    Nomura just released a re-iteration of their Buy rating on Trina, projecting a return to much higher gross margins in Q2 of this year, and will likely be profitable in FY2014.

    You use words like "assume". You say things like "some chinese companies are in trouble, so I would stay away from *all* of them". There's absolutely NO NEW INFORMATION here. Just another double-down on the bashing.

    The fact is that most of the Chinese solars are dead already or dying. But not all of them will die, and Trina has the best balance sheet of all the Chinese solars. China Development Bank isn't going to turn their back on them, and all that "scary" debt that keeps getting tossed about is actually long-term notes. Trina has almost a billion dollars in cash. The note due in June is $86 million. Pretty sure they've got it covered.

  • Report this Comment On May 15, 2013, at 2:17 PM, TMFFlushDraw wrote:

    @platypus2323

    I hear the same argument about YGE, LDK, CSIQ, and used to hear it about STP. The bottom line is that China has to prop up these companies. Without CDB Trina would be dead. (btw, JKS has a far better balance sheet than Trina)

    Nomura can say what they want and that's the "news" of the day but I'm betting that U.S. companies SPWR and FSLR outperform TSL. If I'm wrong and TSL is a profitable powerhouse in 2014 I'll be the first to admit it. So far, I've been right.

    Travis Hoium

  • Report this Comment On May 15, 2013, at 3:40 PM, godbless21 wrote:

    csiq will be dead, lost too much money....

  • Report this Comment On May 17, 2013, at 8:17 PM, hansrichtig wrote:

    Next chapter: Trade war. China will slap import taxes on transportation equipment (eg GM), chemicals etc. And I hope wages for workers assembling the junk destined for US & EU will go up too

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