August 9th was “Solar Friday”, as we were bombarded with a flurry of news that showing the sector is rebounding and could also see its first major merger. In the former category, earnings updates from Yingli (NYSE: YGE) and Trina (NYSE: TSL) are showing steady improvement for the embattled panel-making sector, while a quarterly report from Canadian Solar (Nasdaq: CSIQ) is showing the sudden improvements may already be starting to plateau. In the latter category, Chinese media are reporting that both Yingli and Trina are also showing interest in investing in Suntech (NYSE: STP), the former solar panel pioneer that is now in bankruptcy reorganization.
All the reports point to an industry that is still very much in a state of flux, as it rebounds from its worst-ever downturn and seeks to return to profitability following a painful downsizing. Let’s start with the latest M&A news, which comes just a day after I wrote about another media report that said 5 potential investors are interested in buying strategic stakes in the main operating unit of Suntech as part of its bankruptcy reorganization. (previous post)
That earlier report said at least one of the 5 potential suitors was a major solar panel maker, and now a new report says that both Yingli and Trina are among the interested parties. (Chinese article) Other potential bidders include Beijing Putian New Energy, and an unspecified company from Xi’an. The report points out that the suitors are being very cautious due to Suntech’s huge debt, which stands at about $1.75 billion.
It says that Trina executives in particular are divided about the a bid for Suntech due to the company’s shaky finances and heavy debt. I would expect that Yingli, Trina or any other suitor will also move very cautiously in the matter, but that we could see one of these big names ultimately purchase most of Suntech’s assets and a limited amount of its debt.
From Suntech, let’s take a look at the bigger solar picture coming from the new earnings reports and updates from Trina, Yingli and Canadian Solar. The Trina and Yingli updates look remarkably similar, with both companies providing upward revisions to their previous shipment and margin forecasts. Trina said its second-quarter shipments will now come in about 20 percent higher than its previous forecast, while Yingli doubled its expected growth rate for the quarter. (Trina announcement; Yingli announcement)
Both companies also said they expect their second-quarter gross margins to come in around 11-12 percent, again higher than previous forecasts. Trina shares rose 9.4 percent after its announcement, while Yingli shares rose 6.3 percent. Both stocks are now trading at about double the levels from their April lows.
By comparison, Canadian Solar shares tumbled 8 percent after it announced its latest quarterly results, though its shares are still more than triple the levels of their lows from March. Canadian Solar also reported relatively solid numbers, including shipments and margins that beat its previous guidance. Its bottom line wasn’t as attractive, widening to a net loss of $12.6 million from a $4.4 million loss in the first quarter. (company announcement)
The company also wasn’t very upbeat about the rest of the year, indicating its sudden jump in performance could already be starting to plateau. It predicted its shipments and gross margins would both actually fall slightly in the current quarter, and left its shipment forecast for the full year unchanged from previous guidance. In a more upbeat sign, it reiterated its view that it could meet its previously stated target of returning to profitability for all 2013.
After the huge run-up in solar stocks so far this year, these latest results could indicate the shares may be due for a rest or even a pull-back as investors take some profits. Still, on an operational basis the results do seem to indicate the sector is returning to health, albeit slowly.
Bottom line: Either Yingli or Trina is likely to make a serious bid for Suntech, as the sector’s recent rebound slows and consolidation continues.
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.