This week, Suntech Power (NYSE: STP) reported financial results that surprised no one. The company pre-announced two significant accounting charges earlier this month, so investors already knew the bad news.
In a nutshell, Suntech has discontinued the trial production of thin film panels, manufactured at an uncompetitive cost using Applied Materials' (Nasdaq: AMAT) ill-fated SunFab system. The company took an impairment charge of $54.6 million on its thin film equipment in the quarter. Its investment in and prepayments to Shunda are also impaired because the wafer maker is saddled with debt. The impairment charge taken against Suntech's equity investment in Shunda topped $100 million.
The bottom line is that Suntech reported a quarterly loss of $174.9 million on its bottom line.
The real surprise came on Wednesday's conference call, during which management announced that it's "considering partial upstream integration into the wafer segment" of the solar value chain. This marks a break from Suntech's "virtual integration" model, which had distinguished it from competitors like Yingli Green Energy (NYSE: YGE) and Trina Solar (NYSE: TSL).
Like First Solar (Nasdaq: FSLR), SunPower (Nasdaq: SPWRA), and other solar panel makers, Suntech is increasingly moving downstream as well, into project development. This ensures a ready consumer of solar modules, providing stability and certainty of future demand. Suntech is one of the companies rumored to be eyeing Recurrent Energy, a privately held company with a pipeline of more than 1.3 gigawatts of solar projects.
If Suntech were to simultaneously pursue an aggressive wafer manufacturing push and the acquisition of Recurrent Energy, I would expect shareholders to get significant dilution of their stake. Suntech could conceivably take on additional debt, but is already quite leveraged, and surely doesn't want to end up like Shunda. I'm steering clear of this solar player for now.
