In all likelihood, bankruptcies are coming to the solar industry. The market itself is incredibly oversupplied (again) and demand likely won't grow to meet that supply for years, leaving overleveraged manufacturers nowhere to hide.
Companies are already selling solar panels at cash costs, meaning they can't generate a return on capital expenditures, and potentially won't be able to pay debt. This scenario frequently leads to bankruptcy, which happened in 2012 when the industry went through a similar downturn. Unfortunately, as with most highly competitive industries, it will almost certainly happen again. It's simply a question of who will survive this time around. So, in the spirit of succeeding by avoiding failure, let's take a look at which companies investors may want to avoid.
Image source: Getty Images.
Those in jeopardy
The first two well-known companies in serious trouble are Yingli Green Energy and ReneSola. Yingli has $1.73 billion in debt and says it will ship just 300 MW to 400 MW in the third quarter, down sequentially from 662 MW in the second quarter. ReneSola's revenue in the second quarter was just $250 million, well below its $280 million to $290 million guidance, and third-quarter guidance was for $200 million in revenue at just a 10% gross margin. With operations in decline even before module prices plunged 25%, and ahead of a likely decline in 2017 demand, these companies are in serious trouble.
The next group of manufacturers to look at are Canadian Solar Inc. (CSIQ +1.70%), Hanwha Q Cells (CSIQ +1.70%), JA Solar Holdings Co. (NASDAQ: JASO), JinkoSolar Holdings Co. (JKS +0.09%), and Trina Solar Limited (NYSE: TSL). All three are among the largest solar manufacturers in the world and they're all sitting on a lot of debt that could become problematic.
Source: Company earnings releases. Note: Debt figure includes notes payable.
You can see that JA Solar has the weakest operating performance, but the least debt out of this group. What should concern JA Solar's shareholders is a decline in full-year guidance to 4.9 GW-5.0 GW of shipments, down from 5.2 GW-5.5 GW that it previously expected, indicating that weakening demand is already on the horizon. Losses are coming at JA Solar and that's cause for concern.
The company with the largest debt balance happens to be Canadian Solar, which has been among the most aggressive in expanding the last couple of years. That could be terrible timing and holding projects on the balance sheet, as it's done recently, may be bad timing as the value of projects declines. A net margin of 2.4% isn't much when solar panel prices are plunging. The windfall of profits that came from Canadian projects the last few years is almost gone too with management expecting to sell 100 MW of power plants in the next couple of quarters. Once it does, operations get far more difficult and $3.2 billion is a lot of debt to service if core operations are going to be losing money soon.
JinkoSolar and Trina Solar both have large debt loads, but also boast stronger margins than JA Solar and Canadian Solar.I would expect losses to creep into the business as panel sale prices decline, but it'll be possible to be near break-even next year, particularly as weaker competitors see volumes decline faster as customers seek quality manufacturers.
And the strongest on this list is Hanwha Q Cells, who bought much of its capacity out Q Cells' bankruptcy. That's helped drive lower costs and higher margins for the manufacturer.
Which should investors avoid today?
The solar industry in late 2016 is about risk management than upside potential. And the companies I have the most concern about are Yingli Green Energy and Renesola, who appear to be in serious trouble. So much so, in fact, that market forces may eventually lead to their demise. Investors should also probably avoid JA Solar and Canadian Solar, who both have low margins and, in Canadian Solar's case, a balance sheet loaded with debt.
Being the biggest has never been a way to generate value in the solar industry and history has often shown that the largest manufacturers often wind up in bankruptcy court. The decline in 2012 led to the demise of Suntech Power and LDK Solar and 2017 looks like it'll be a similar dynamic for manufacturers. For investors, the downturn in large solar manufacturers may just be getting started.
