The latest news from Canadian Solar (Nasdaq: CSIQ) and Suntech (NYSE: STP) is casting a shadow over a nascent recovery for the embattled solar sector, as each company struggles to fix its broken finances pummeled by a two-year downturn. Canadian Solar has announced a plan to raise up to $50 million through a stock sale, while domestic media are reporting that bidding for bankrupt Suntech is moving ahead quickly, indicating the end may be near as an independent company for this former solar high-flyer. All this shows that investors shouldn’t get too bullish on solar companies just yet, even as Canadian Solar says it is still on target to post a profit for all of 2013.
Let’s start off with Suntech, which is in the process of a painful reorganization in bankruptcy court. The steady stream of signals coming from the courtroom in the city of Wuxi seem to indicate that Suntech won’t emerge as an independent company after the reorganization, though its brand and operations are likely to survive. That means Suntech shareholders could ultimately find themselves holding worthless stock, which is often the case for companies that undergo this kind of bankruptcy reorganization.
The latest report indicates that rival solar panel maker Yingli (NYSE: YGE) has looked at Suntech’s books and decided to bid for the company’s main manufacturing assets. (Chinese article) According to the report, Yingli is seen as the most likely winner in the current round of bidding, where it is competing with 3 other firms including Trina Solar (NYSE: TSL). Previous reports had indicated that the companies would each bid to become a strategic investor in Suntech’s main assets, which would probably see them take a controlling stake in those assets.
Investors seem to sense that their shares could soon become worth very little or nothing, and are quickly dumping the stock to recoup some money while they can. Suntech’s shares are down 33 percent this month alone, including a 14.3 percent plunge in the latest trading session. They now trade at $1.08 a share, and could soon fall below the $1 level that would put them in violation of continued listing requirements. Still, I doubt the company is too worried about being de-listed, since it’s shares are likely to become worthless before that happens. Look for a winning bidder to be named by October, and for the shares to lose most of their value by that time.
From Suntech, let’s move quickly to Canadian Solar, which has announced a plan to sell shares to raise up to $50 million. With a current market value of about $500 million, that would translate to issuing about 10 percent of company stock in this fund raising exercise. Investors weren’t too excited about the plan, with Canadian Solar shares tumbling 11 percent after the news came out. But even after a recent pull-back, the shares are still 5 times higher than their lows from late last year.
Frankly speaking, I was a bit surprised to read about this new capital raising effort, as previous signals from Canadian Solar had indicated the company was boosting its finances by selling some of the solar plants it constructed with its own money. This $50 million also doesn’t seem like a very big number, which hints that the company may simply need the cash to keep funding its daily operations in the present. Regardless of the reason, this latest news doesn’t seem too encouraging, and we could well see Canadian Solar shares continue their recent pull-back over the next month or two.
Bottom line: Suntech’s main assets could be auctioned off in the next month, leaving its shares worthless, while Canadian Solar’s stock may also come under pressure.
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.