Not All Roses For Chinese Solar Stocks

The march of earnings continued from the solar industry last week, but unlike when Canadian Solar and Trina Solar reported it wasn't all roses. JA Solar (NASDAQ: JASO  ) , Yingli Green Energy (NYSE: YGE  ) , and LDK Solar (NASDAQOTH: LDKSY  ) showed some of the challenges facing solar companies and didn't improve nearly as quickly as competitors, even taking steps back in some cases. The industry's winners and losers are starting to emerge, although the Chinese government can always change that.

More solar earnings
JA Solar reported one of the most disappointing earnings reports so far this quarter. Revenue dropped 5.5% from the first quarter to $258.1 million, gross margin was just 8.1%, and net loss was $22.6 million, or $0.12 per share. Management also didn't increase guidance from 1.7 GW to 1.9 GW, something Trina Solar did, raising speculation that others would follow. JA Solar doesn't have a balance sheet as dept laden as LDK or Yingli but it also isn't separating itself from an operational standpoint either.  

LDK Solar's report was even more discouraging. The company had just $114.7 million in sales and reported a $95.1 million loss in the quarter. That means $2.5 billion in debt will continue to grow long-term and some sort of bankruptcy or restructuring is necessary. There's no way investors should touch this stock given the weakness in results.  

Yingli Green Energy (NYSE: YGE  ) also reported earnings on Friday. Module shipments increased 23.6% sequentially and revenue was up 27% sequentially to $550.4 million during the quarter. Gross margin increased to 11.8% overall and 12.5% in the module business. Still, Yingli lost $52.3 million, or $0.33 per share, during the quarter as operating and interest costs ate up the company's potential profit.  

Yingli faces the same challenge as LDK Solar, who are both drowning in debt. Yingli's $2.8 billion in debt and last quarter's operating expenses would require a gross margin in excess of 20%, something that doesn't seem to be on the horizon.

Foolish bottom line for Chinese solar
Not every solar manufacturer in China will survive long-term, there are just too many companies competing for the solar pie right now. Balance sheets are becoming more important than ever and so is quality in the solar industry. Companies like Trina Solar and Canadian Solar, who have better balance sheets, are outperforming companies like LDK and Yingli simply because of the cost of debt. Slowly, the difference is starting to show up on income statements and that will transfer its way to stock prices as well.

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  • Report this Comment On September 03, 2013, at 7:44 PM, sonofTesla wrote:

    The key to making money off of Chinese solar stocks is to do the exact opposite of what the author of this article says...He has no business being their solar "analyst". Yingli is dominating and will continue to do so. The Chinese govt. will see to it. Trina and Hanwha Solar One will also yield you very nice returns.

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