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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.
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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