Solar Christmas: Coal for LDK, JV for Trina

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Doug Young 

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Photo by Tom Konrad

I thought I’d get into the Christmas spirit in this first work day after Thanksgiving in the US, so let’s take a look at what solar panel makers LDK (NYSE: LDK) and Trina (NYSE: TSL) are getting in their holiday stockings with the latest company news reports. It seems the struggling LDK won’t be getting much, with word that a Chinese court has added further delays to a case where it is owed $40 million in a business dispute with rival Canadian Solar (Nasdaq: CSIQ). The news looks a bit better for Trina, whose Christmas stocking is filled with another smaller solar company that it is acquiring as the industry consolidates.

Let’s start with LDK, which I previously said is in real danger of being forced into bankruptcy next week when a deadline will come for it to reach agreement with bondholders who are waiting for an interest payment that was due in August. (previous post) Now Canadian Solar has announced that a court has agreed to a new hearing in a dispute between itself and LDK that was ruled in LDK’s favor last year. (company announcement)

The dispute centers on Canadian Solar’s termination of an agreement to buy materials from LDK after the industry entered its current downturn. An arbitrator ruled a year ago that Canadian Solar owed LDK about 250 million yuan ($40 million) as a result of the contract termination. A court in Canadian Solar’s home province of Jiangsu refused LDK’s request to force Canadian Solar to pay the award in May, but now a higher court is ordering that case be re-heard.

It’s hard to comment too definitively in this matter without knowing more detail; but at least some level of local politics seems to be involved in this case. Chinese courts often favor companies in their home areas, reflecting the high degree of politic influence in China’s judiciary. Thus I wouldn’t be surprised if the court’s May decision to refuse to enforce the $40 million award for LDK came after Canadian Solar applied pressure on the judicial system through its local political connections. So perhaps this latest decision by a higher court represents a slightly positive development for LDK.

But whatever the case, the most obvious outcome in all this is that LDK won’t be getting its $40 million anytime soon, if it ever gets it at all. That’s quite a negative piece of news, as LDK was probably hoping to collect the funds sooner rather than later to help it through its financial difficulties. LDK shares didn’t react much to the news in light trade after Thanksgiving, but I suspect the stock could come under pressure as people return to work this week.

Meantime, let’s take a quick look at the news from Trina, which has announced it is forming a joint venture with smaller player Yabang Group. (company announcement) The joint venture’s main production assets will consist of Changzhou NESL Solartech, a Yabang unit that makes solar modules. Trina will hold 51 percent of the venture, which has a modest investment of $45 million and production capacity of 500 megawatts of solar modules.

Anyone reading between the lines will see that this is simply a case of Trina buying out Yabang’s assets, as part of a much needed broader industry consolidation. PC maker Lenovo (HKEx: 992) formed a similar joint venture with Japan’s NEC (Tokyo: 6701) in 2011, allowing the former to take over the latter’s PC assets. The news looks positive for Trina, indicating it will become one of the main consolidators in the ongoing overhaul of China’s solar panel sector. Look for more similar deals in 2014, as the sector slowly rebounds and the strongest players return to profitability after 2 years of losses.

Bottom line: LDK won’t be able to collect $40 million owed by Canadian Solar for at least 6 months, while Trina’s new joint venture indicates it will be a consolidator in the China’s solar sector overhaul.

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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