Chinese Solar Disasters May Be Near

How much longer can Suntech Power (NASDAQOTH: STPFQ  ) survive? The answer might be: until Friday.

On June 28, the company announced an extension of a forbearance agreement with a majority of creditors, who agreed to delay demanding payment for $541 million in debt the company owes them. The deadline to pay, restructure, or go bankrupt is this Friday.  

We already know that Suntech's biggest subsidiary is bankrupt and working with Chinese banks to restructure, but there doesn't seem to be much progress and there may not be any value left for shareholders even if a deal is reached. The big question for investors is: Why are shares still traded? There's no indication that Suntech is still a viable company, it should be bankrupt after debt default, and we haven't heard anything about operations since the end of the fourth quarter.  

A warning sign for Chinese solar
Balance sheets matter in solar, and Suntech is a prime example of why. As sale prices have fallen, there's been less margin per panel and billions of dollars in debt have strangled solar companies.

The next company that investors should question is LDK Solar (NASDAQOTH: LDKSY  ) , who just reported another terrible quarter. While strong Chinese solar manufacturers are reporting rising margins and a march toward profitability, LDK said sales fell 52% from a year ago to $114.7 million and gross margin was -46.9%. Net loss was $165.3 million, or $0.97 per share, which means that LDK lost $1.44 for every $1 in sales.  

If that's not bad enough, debt stands at $2.5 billion and last quarter's interest payment was $58.9 million. There's no conceivable way to think the company will generate enough revenue or earnings to pay down debt in the future.

Keep in mind that LDK's struggles are on a backdrop of strengthening solar companies, especially in China. Trina Solar reported substantially higher shipments and revenue, JinkoSolar reported a profit, and Canadian Solar is moving toward a profit as well. LDK Solar is being left in the dust.

Quality is emerging in China
Suntech will either have to get a bailout or go bankrupt by the end of the week, and LDK Solar doesn't look like it has any prospects for survival. The downfall of these companies is their terrible balance sheets, which I highlighted in October two years ago. The next highly leveraged company to worry about is Yingli Green Energy (NYSE: YGE  ) , who reports earnings later this week. Margins will be up, but I doubt a profit will be on the horizon simply because of billions of dollars in debt. That's too much for even a strong Chinese solar company -- which Suntech once was -- to survive. Stick with quality and companies turning a profit in the solar industry.

An energy stock you can buy today
LDK and Suntech may be terrible stocks to buy but there are energy stocks thriving in this growing industry. Our analysts have found a company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way from it. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "
The Only Energy Stock You'll Ever Need." Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.


Read/Post Comments (1) | Recommend This Article (3)

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 August 27, 2013, at 2:14 PM, never2dull4u wrote:

    Looking at the volume shipped from LDK in Q2, it looks like customers prefer doing business with companies with better balance sheet. Although YGE may not have a great balance sheet, I think YGE will survive. If LDK and STP go BK, the demand will shift over to YGE and TSL. Thus, it will make YGE and TSL a MUCH stronger company going forward.

    Long YGE and TSL

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2611971, ~/Articles/ArticleHandler.aspx, 10/23/2014 2:57:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement