Chinese Solar Stock Rally Looks Unsustainable

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Doug Young

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Clouds linger despite solar rally

After more than a year of coming under constant assault, shares of solar panel makers have suddenly received an unexpected boost from investors who are suddenly showing renewed interest in the battered sector. Many are attributing the sudden surge in solar stocks to growing signs that China will soon embark on a massive building spree of new solar power plants, which should theoretically provide a major new business opportunity for solar panel makers who have been posting massive losses for more than a year now.

What’s most interesting to me is the fact that investors also seem to believe that most solar companies will emerge from an upcoming restructuring without having to declare bankruptcy a process that usually results in all of a company’s publicly listed shares becoming worthless. This assumption seems a bit optimistic in my view, especially for some of the weaker companies that are almost certain to be taken over by state-run entities before the current industry restructuring is finished. If and when that happens, holders of the companies’ publicly listed shares are likely to take a major hit, losing most or quite possibly all of their investment.

All that said, let’s take a look at the latest headlines, which have 2 of the weakest players LDK (NYSE: LDK) and Suntech (NYSE: STP) both recently announcing that they have regained compliance with New York Stock Exchange listing rules that stipulate all company shares must trade at $1 or more. (Suntech announcement; LDK announcement)

I’ll admit that I hadn’t followed the stocks too closely since shares of both companies went below the $1 level last fall, so I went to look and see when both Suntech and LDK declared reverse share splits that most companies in their situation usually perform to bring their share prices back up above the $1 mark. But after extensive searching, there was no sign that either company had done such a reverse share split.

Instead, it was investors who helped each company back into compliance with NYSE listing rules by more than doubling the value of both Suntech and LDK shares over the last 2 months. Suntech shares now trade at about $1.75, after moving below the $1 mark last September and trading as low as 77 cents each in November. Similarly, LDK shares now trade at about $2, again after falling as low as 71 cents last fall.

Another company that fell below $1, JA Solar (Nasdaq: JASO), actually did have to perform a 5-for-1 reverse share split to bring its stock back above the $1 mark. But even JA Solar has seen a rally in the last few weeks, and and its current price of $5.39 per share means the recent rally would have lifted its share price above the $1 mark even without the reverse share split.

In a sign that the industry is indeed still going through a major shake-up, JA Solar has announced that its chairman is taking over the role as CEO, again showing that this is hardly an industry that is worthy of serious investment again just yet. (company announcement) But for some reason, investors seem to be ignoring the fact that this industry is still highly troubled and are suddenly buying solar shares again.

To all of those people who have recently purchased solar shares on hopes of a major turnaround, I would warn that the bloodbath isn’t over just yet and I still do believe that many of the companies will ultimately get taken over by Beijing and other Chinese government entities. Those new masters will then demand the cancellation or severe dilution of all publicly listed shares as part of any rescue plan. When that rescue comes, Suntech and LDK are likely to be among the first to receive bailouts, prompting major sell-offs in their shares that will once again see them tumble below the $1 mark.

Bottom line: A recent rally in solar shares looks unsustainable, with investors in many companies likely to lose most or all of their money after a Beijing-led rescue plan gets announced.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.


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