3 Reasons Why Investors Should Avoid Suntech Power

On September 29, the Chinese government announced a 50% rebate on value added tax from October 1, 2013 to the end of 2015. 

News of the rebate subsequently set off a monster solar rally with some stocks up over 25% in a few trading days. Suntech Power shares also followed suit. Despite the jump, the fundamentals do not bode well for Chinese solar panel manufacturer. 

Three big problems
First, the fundamentals for Suntech Power are ugly. Suntech Power has negative operating margins and negative growth. Suntech Power's main subsidiary, Wuxi Suntech, has approximately $1.75 billion in debt and possibly only $500 million in assets. The subsidiary defaulted on $541 million of debt on March 2013 and is currently in bankruptcy reorganization. 

Secondly, Wuxi Suntech is based in China and owes the majority of its debt to Chinese state-run banks. It is a very open question whether American investors will get anything before the Chinese banks. Even if the Chinese banks get their share, American bondholders are next in line with $600 million in claims before equity holders can claim whatever is left. 

Lastly, while there have been two bidders for Wuxi Suntech, based on market prices, it does not seem that the bids are anywhere close to Suntech Power's debts. Once the winning bid is approved, Suntech Power will likely be a shell company with very little in assets. The current equity holders will get little to nothing or will see their equity stake severely diluted. 

Better buys out there
SunPower (NASDAQ: SPWR  )  and Trina Solar (NYSE: TSL  )  appear to be better buys than Suntech Power.  

Trina Solar is one of the leaders in the Chinese solar sector while SunPower is the leader in the rooftop sector. Both sectors are due for enormous growth as solar energy becomes more affordable over time.  

Both companies have outperformed the market year to date. SunPower has rallied over 450% this year while Trina Solar has rallied almost 280%. Both stocks are near 52-week highs. 

The fundamentals for both companies are very strong. The margins for Trina Solar have likely bottomed out with second quarter gross margins increasing from 8.4% to 11.6% year over year . SunPower's margins are holding steady around 40%. Both companies are fully utilized and are rumored to be expanding megawatt capacity for next year. 

The bottom line
Owning Suntech Power is dangerous. The company has more far more debt than assets and has already defaulted on its loans. In my opinion, the current market price is likely due to Suntech Power being a trading vehicle for solar sector sentiment. As the restructuring ruling on December 20 nears, it is very possible that Suntech Power will trade significantly lower. 

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  • Report this Comment On October 18, 2013, at 10:41 AM, johnk6g wrote:

    Writers of articles should get their facts straight.

    It was the parent - STP - which defaulted on $451 million in convertible notes in March.

    STP, Suntech Power Holdings Co. Ltd. is a holding company formed in the Cayman Islands. It has guaranteed all of the debt of its Chinese subsidiaries including Wuxi Suntech. Default by one subsidiary triggers a cross default as to all Chinese bank debt of all subsidiaries.

    The defaulted bonds of STP are selling for around 25 cents on the dollar. The common stock is worthless, and bondholders have filed a petition in the Southern District of New York to place STP into a chapter 7 bankruptcy.

    However, the STP bondholders are unlikely to recover anything in this bankruptcy, as the Chinese Banks with defaulted loans will have claims of equal priority with the defaulted $451 million in convertible notes that have been in default for over 6 months.

    Nobody is answering the phone at the STP offices in San Francisco. It appears that STP has stopped paying its employees, and has, according to recently resigned directors and officers, insufficient cash to pay its lawyers.

    If the Chinese bankruptcy proceeding against the Wuxi Suntech in China, reorganizes it will create a new holding company. It cannot possibly upstream new cash or other assets to the parent STP, without first paying off the existing defaulted STP debt. There is zero chance that the creditors of Wuxi China would allow such a thing.

    The defaulted 451 million in notes will be lucky to recover anything. The possibility of the common stock surviving with any value is zero.

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