Is Suntech (NYSE:STP) Now a Penny Stock?
Another Solar Company Gets Blasted
Suntech was the biggest solar panel supplier in 2011 shipping almost 2000 MW of solar modules to various countries around the globe. Suntech, which is also one of the oldest Chinese solar companies has been the biggest solar panel manufacturer in China in the recent past despite losing marketshare to other Chinese companies like Trina Solar, Canadian Solar and others. Though most of solar share prices have crashed in the last year by 80-90%, from their peaks, Suntech’s share price fell sharply from its all time low and settled below a dollar, after it was revealed that the company failed to do due diligence on hundreds of millions of dollars in German Government bonds. This is not the first time that the company’s management led by Dr Shi has made a mistake. In fact, the company has a long history of strategic and tactical mistakes.
a) Signing a number of long term polysilicon and wafer supply agreements paying huge amounts as prepayment when polysilicon prices were at a historical high. Many of these prepayments and investments had to be written down as the smaller suppliers went bankrupt and the polysilicon prices crashed resulting in renegotiation which resulted in additional payments
b) In R&D, despite promise of a game changing technology Pluto, the company could never really come up with the goods. Suntech’s solar cell efficiency is no better than its competitors like Trina, Yingli and others.
c) Making costly investments into thin film technology which had to be written off as well
d) Bad capital structure with too much debt has resulted in the company being potentially insolvent now with the more than $500 million being expected to be the amount of fraud
e) The company started to vertically integrate into wafers and ingots exactly at the wrong time when wafer prices started to crash. This wasted additional hundreds of millions of dollars
Suntech’s management is the worst amongst the Chinese solar companies given the number of mistakes it has made till date despite the initial mover advantage, plus the strong support from the Chinese Government it enjoys. The company has so much debt and its business model, is in such a dire shape that only a Government bailout can keep the company alive. Like LDK Solar, Suntech is now dependent on the benevolence of the Chinese Government and its banks. The company’s convertible bond prices have crashed to 40cents a dollar indicating the company’s precarious shape.
Note, LDK Solar which is even in a worse shape than Suntech recently got a $80 million grant from its home city Xinyu to make a loan repayment. LDK which has been making massive losses for the last 3 quarters and has a humongous debt was acquiring distressed European solar companies as recently as January of 2012. LDK convertibles at that point of time were trading at 50 cents to the dollar indicating the lack of investor confidence in the company. LDK since then has fallen by around 50% more and current market cap is $200 million compared to the total debt of more than $3 billion.
German Solar Energy Company Sunways has sold a 33% stake to LDK solar for around 2 million euros. Note most small German solar companies are almost insolvent and have no hopes of turnaround. Around 5000 German solar companies have closed according to BSW. Some big German companies like Solon and Solar Millennium have already announced bankruptcy. Note Chinese companies too would have shut down but the state owned Chinese banks are keeping them alive with loans at ridiculous interest rates. LDK which is buying Sunways is almost insolvent as well with its convertibles trading at less than 50c on the dollar in Singapore. It has more than $3 billion in debt compared to its market cap of around $600 million. It faces massive losses in the coming quarters and can’t serve the interest payments much less expand. The strong support of the Chinese Government for its green companies is keeping them alive. Chinese solar panels have become super cheap due to companies selling at below cost and massive scale. Note all the cheap solar panel brands in the world are Chinese with the exception of First Solar and some Asians.
Suntech’s $541 million of convertible notes due March 2013 dropped to 45 cents on the dollar yesterday, down from 70.8 cents on July 24, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest since Jan 3.
Suntech, which has said it needs additional funding to continue operating, may have been defrauded by an affiliate, the firm said July 30. After the Wuxi, China-based company guaranteed a 554.2 million-euro loan in 2010 to a Global Solar Fund S.C.A. backer, it discovered financial irregularities at GSF, which is managed by a former sales representative, Javier Romero.
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