Can Chinese Solar Companies Make a Profit?

Longtime readers of my solar analysis know I haven't been positive about Chinese solar stocks for over two years now. Instead, I think U.S. companies will be the best way to invest in the industry. Considering the profit First Solar is already making, and the consistent improvement at SunPower over the past year, that is what appears to be playing out.

But Chinese solar stocks have had a good run over the past few months and there's speculation that profits will follow, leading to even higher stock prices. So, why am I not buying into the Chinese solar story? Let me put some numbers together that highlight the problem the industry faces making a long-term profit.

Making money with a mountain of debt
The Chinese solar industry is clearly improving and gross margins will likely rise in the second quarter. But can any of these companies make a profit given their debt loads? Below I've calculated the annualized operating and interest expenses based on the most recent quarter and calculated how much gross margin each company would have to make, on every watt it has the capacity to make, just to break even.

 

Manufacturing Capacity

Debt

Annual Operating Expense

Annual Interest Expense

Break-Even Gross Margin Per Watt

Yingli Green Energy (NYSE: YGE  )

2.45 GW 

$2.50 billion 

$280.4 million

$142.8 million 

17.3 cents

LDK Solar (NASDAQOTH: LDKSY  )

2.0 GW 

$2.92 billion 

$135.0 million

$231.3 million

18.3 cents

Trina Solar (NYSE: TSL  )

2.4 GW 

$1.31 billion 

$178.0 million

$58.4 million

9.9 cents

Canadian Solar (NASDAQ: CSIQ  )

2.4 GW 

$1.66 billion 

$154.0 million*

$58.5 million

8.9 cents

Renesola (NYSE: SOL  )

2.0 GW 

$958.6 million 

$111.2 million

$52.5 million

8.2 cents

JinkoSolar

1.2 GW 

$916.95 million

$105.6 million

$35.6 million

11.8 cents

* Canadian Solar had abnormal operating expenses the last two quarters; the estimate is based on a Q1 2012 basis. Renesola plans to outsource some manufacturing, and shipments will be higher than capacity in 2013.

Now, consider that the selling price for solar modules from China is around $0.65 per watt and falling. So, even the best projection above from Renesola would require gross margins to double from what they're expecting in Q2 to about 13%. Leaders Yingli Green Energy would have to make a 27% gross margin and Trina Solar would have to generate a 15% gross margin just to break even. 

This calculation doesn't take into account price reductions that will likely come in the next few years. Greentechmedia recently projected that solar costs could reach $0.36 per watt by 2017, which is great if selling prices stay flat, but price reductions have become a staple and will likely continue.  

The challenge for Chinese solar
Owning Chinese solar stocks is risky because they hold a lot of debt and compete primarily on price. That's not a recipe for the high margins necessary to break even or the ability to pay back debt in the future.

To make matters more challenging, China is no longer funneling unlimited funds to the solar industry, so these companies don't have money to expand and drive the next generation of solar investment.

At the very least, you can see that it's a harder road for companies with massive debt loads than for those without. Yingli, LDK, and Suntech have an incredibly steep climb ahead of them, and I'm not sure equity holders will be left with anything at the end of the day. After all, Suntech and LDK have already defaulted on loans, which is usually the first step to bankruptcy (Suntech's subsidiary is actually bankrupt but the parent company is not).

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Read/Post Comments (7) | Recommend This Article (2)

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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 July 17, 2013, at 2:17 PM, shelu wrote:

    Seems from what I read the Chinese government is going to provide nearly unlimited loans and a massive guaranteed market of up to 10 GW a year to its domestic solar companies.

    That means one or more of the Chinese solar companies will survive and very likely flourish.

    CSIQ, TSL, YGE, and JASO are the ones that appear in the best shape as of now.

  • Report this Comment On July 17, 2013, at 3:39 PM, Foolsspin wrote:

    Travis I'm a little sick of your perversed pumping on American Solars. They've moved up Alright and that SPWR you hold has yet to make a profit???

    Why SPWR is up is the same reason why Chinese Solars will continue to rise. Yes its really to bad that Sun Power and First Solar will not benefit at all from China's 10GW Much more profit will be realized in Chinas Solar industry while SPWR still needs to show profit to justify its hyped evaluation.

    FSLR can not benefit in Japan (cadmium telluride is not allowed) and neither will it benefit in China. EU Commisioner is ready to sign off at around .55 euros with China, a competive rate this to will not encourage SPWR in the EU market. China still to work out a beter deal. Gordo your buddy said "China has the upper hand"

  • Report this Comment On July 17, 2013, at 6:00 PM, Mega wrote:

    Clearly, the answer is "no".

  • Report this Comment On July 17, 2013, at 7:13 PM, Foolsspin wrote:

    NPD Solarbuzz noted that nearly half of the demand in the first half came from large-scale utility and commercial ground-mount applications, with just 20 per cent from residential rooftops (which accounts for nearly 90 per cent of Australian installations). The rest came from non-residential rooftop installations – such as businesses – and off-grid applications.

    Deutsche, meanwhile, says the supply situation is also improving as several second and third tier module suppliers in China are facing a credit crunch and will likely wind down their operations.

    Tier 1 solar companies are now enjoying a rebound in margins, with prices for modules jumping more than 10 per cent from early February from 60c-63c/watt to 71c-73c/W. Even though the “street price”, code for cheaper modules in the mass market, remain around 60c/W.

    Deutsche said this will push margins for some companies from the low single digits in the first quarter to the high single digits or even as high as the mid teens in the second half of the year, and allow Chinese firms to post positive earnings per share results for the first time in 8 to 10 quarters.

    “Furthermore, we expect investor sentiment to improve as policy overhangs decrease and there is greater evidence of sustainability of some of these growth drivers,” it said

    Deutsche revised forecasts of 38 to 40 MW in 2013 and in 2014 estimates are 45 MW In the 2'nd half of the year half of the installs will come from Japan and China

  • Report this Comment On July 17, 2013, at 9:28 PM, king4life wrote:

    Tier 1 is old school, now just tears. Tier 2 is new school. HSOL solar One. Parent bought Germany's Q-Cells. They share the technology. HSOL sells to HSOL and back door's the tariff. Combined capacity is 2.3 GW

  • Report this Comment On July 29, 2013, at 12:43 AM, sonofTesla wrote:

    I would suggest asking Mr. Elon Musk what he would recommend. Solar City using Trina and Yingli almost exclusively now.

    Hanwah Solar One is dominating orders in the fast growing markets of Africa.

  • Report this Comment On July 29, 2013, at 12:49 AM, sonofTesla wrote:

    One more thing...as a proud American it pains me to say, the Chinese saw this one coming at put these wheels in motion long ago. They will continue to dominate the global solar market for quite some time. To bad this country didn't have the foresight to rally behind the solar industry sooner. Sad but true.

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