The Aftermath Of Chinese Solar Defaults: Who Stands Out?
BMI View : The series of recent defaults by Chinese solar giants - Suntech Power Holdings and LDK Solar - will have significant ramifications on both the Chinese and global solar equipment manufacturing sector. Both were counted amongst the largest solar manufacturers in the world just years before, but negative supply-demand dynamics and sizeable debt burdens led to their demise. We believe that the symptoms present in Suntech and LDK prior to their respective defaults are also present in several other Chinese manufacturers, putting them at risk of experiencing similar fates. As such, US-based First Solar's positive margins and small debt load put the company in a relatively favourable position on the global solar scene as compared to its Chinese peers.
Prior to their defaults, Suntech Power Holdings and LDK Solar were counted amongst the largest solar manufacturers in the world, but negative supply-demand dynamics and sizeable debt burdens led to their demise. At present, we expect further contraction and consolidation in the industry, and have identified several key metrics to help us analyse the short- and medium-term outlooks for some of the larger solar manufacturers still in the industry.
Several Chinese solar equipment manufacturers remain at the top of the table in terms of module shipments, such as Yingli Green Energy, Trina Solar, and Jinko Solar. However, many of these firms are displaying the same symptoms that were present in Suntech and LDK prior to their respective defaults. For instance, revenues for Yingli, Trina, and Jinko have remained relatively flat over the last two years, and all three companies have booked net losses consistently for the last seven quarters. Suntech and LDK were in a similar predicament prior to their defaults.
|Not A Positive Picture|
|Solar Manufacturers - Revenue, US$ (LHS); Net Income, US$ (RHS)|
More worryingly, Chinese solar manufacturers appear to have taken on sizeable amounts of debt despite a lack of revenue growth and consecutive net losses. Debt-to-equity levels in all three major Chinese manufacturers are also relatively high. In fact, Yingli's debt-to-equity ratio was 367x in Q412 (July - September 2012), comparable to Suntech's ratio prior to the default.
|Yingli Treading A Thin Line|
|Solar Manufacturers - Total Debt, US$ (LHS); Debt-To-Equity Ratio, x (RHS)|
We believe that the short-term outlook for Trina is the most promising among Chinese solar manufacturers. This is because the single largest threat to Chinese solar manufacturers at present appears to be a loan or bond default. The Chinese government has shown itself to be unwilling to provide financial assistance to the sector and we believe that Trina Solar is in a better position to cover its current liabilities than its peers (see our online service, April 18 2013, 'LDK: The Demise Of Another Giant?'). At the end of Q412, Trina Solar had a relatively healthy quick ratio of 0.81x, compared to 0.45x for Yingli and Jinko (a quick ratio below 1 indicates that the company will not be able to repay all its current liabilities using cash or near-cash assets).
Canadian Solar appears to be in a similar predicament to Yingli and Jinko. We believe this is due to the company's decision to base most of its operations and production in China. The company's fiscal position appears much more aligned with Chinese manufacturers than other Northern American manufacturers, despite having its roots in Canada. In fact, Canadian Solar appears to be extremely susceptible to short-term credit risks with a quick ratio of just 0.25x at the end of Q412.
|First Solar Leading The Pack|
|Solar Manufacturers - Quick Ratio, x|
At present, we believe that US-based First Solar has the most stable short-term outlook among the major solar manufacturers globally. The company had a healthy quick ratio of 1.4x at the end of Q412, as well as one of the highest gross margins in the sector (27.3% in Q412). The company also reported positive net income over the last five quarters, indicating the healthiness of its margins compared to the Chinese manufacturers.
|Margins Under Pressure|
|Solar Manufacturers - Gross Margin, %|
We believe that the market conditions for Chinese manufacturers could improve over the course of 2013. This is because of the Chinese government's ambitious plan to install 10,000MW of solar capacity within the year, equivalent to three times the capacity installed in 2012. This is particularly beneficial to Chinese solar manufacturers, and we have already witnessed the sharp increase in the amount of solar modules being sold domestically, a move that we had previously called for (see 'New Solar Plant In Tibet: The First Of Many', April 20 2012). To be sure, domestic sales for the three major Chinese solar manufacturers in 2012 accounted for around 13-20% of total sales, up from under 5% just four years ago.
That said, we highlight that the effects of any increase in domestic sales for Chinese manufacturers could be offset by a loss of sales and profits from Europe (which accounts for more than half of total sales for Trina, Yingli, Jingko) later this year. This is because the EU could impose anti-dumping and anti-subsidy duties on Chinese solar panels for up to five years starting this year. A preliminary decision regarding anti-dumping duties and countervailing levies will be reached by June and August respectively, and a final decision will be passed in December. The EU already ordered its custom officials to register imports of Chinese solar panels starting from March, and would allow the trade bloc to track and impose duties retroactively.
We also highlight that the Japanese solar industry is set to grow tremendously this year, and that the increase in installations should benefit all the major solar players, particularly Sharp.
Medium- To Long-Term Outlook
We believe that the medium- to long-term outlook for the leaders in the global solar manufacturing industry will be greatly affected by sales growth, margins, and debt repayment. Based on these factors, we believe that Yingli and Trina could experience major hurdles due to sizeable debt repayments in 2014 and 2015.
|Trina: Major Repayment In 2015|
|Solar Manufacturers - Debt Repayment Schedule (Bonds And Term Loans), US$mn|
Trina, in particular, inked a deal with China Development Bank in 2010 for a loan facility of up to CNY30bn (US$4.4bn). This expires in 2015. In our opinion, the company's rapid capacity expansion and history of losses suggests that a sizeable portion of the facility might have been drawn down. The repayment of this credit facility could be a potential stumbling block for the company. Yingli also has a bond issue of US$357mn and a term loan of US$250mn expiring in 2015, and could experience some difficulties in repaying this loan should its income remain negative.
Additionally, we believe that manufacturers with a greater sales and distribution presence in China such as would be in a strong growth position than others - namely Jinko and Yingli. This is because of the government has set out to install 21GW of solar capacity by 2015, and we believe this target could be revised up further based on its plan to install 10GW in 2013 alone.
|Domestic Sales Increasingly Important|
|Chinese Solar Manufacturers: Domestic Sales, US$ (LHS); Domestic Sales As A % Of Total Sales, % (RHS)|
First Solar Favoured
Overall, we believe that First Solar is in the strongest strategic position. The company's margins are positive and its debt load is relatively small, both of which are extremely promising signs. We believe that Jinko could perform as well, should it be able to increase its sales in China and globally.