GCL-Poly Mops Up Chaori Solar Mess

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Doug Young

Bottom line: Solar consolidators like GCL-Poly and Shunfeng will suffer short-term pressure due to difficult acquisitions, but could be longer-term beneficiaries as they earn government goodwill for their actions.

The latest deal involving an insolvent solar panel maker is seeing a group led by GCL-Poly Energy (HKEx: 3800) take control of bankrupt Chaori Solar, in a takeover that looks slightly ominous but also potentially interesting for investors. The ominous element comes from the fact that these bankruptcy proceedings are occurring Chinese courts, where local politics are often more important than forging deals that make commercial sense.

But the interesting element comes from the fact that many of these insolvent companies enjoy strong backing from their local governments. That means that once all the finances are cleaned up for these insolvent firms, they could actually become good longer-term assets for their new owners.

The short-term headaches for solar buyers are evident in the recent mixed fortunes for Shunfeng Photovoltaic (HKEx: 1165), which looked like a rising solar superstar when it purchased bankrupt former solar superstar Suntech. But Shenfeng’s fortunes have suffered a sharp setback in the last month, as the Suntech effect wears off and people realize the turnaround story could be long and difficult.

We’ll come back to the Shunfeng-Suntech story shortly, but first let’s look at the latest news that has the parent of GCL-Poly leading a group that will buy 66 percent of Chaori for 1.46 billion yuan ($240 million). (English article) The deal was part of a broader restructuring for Chaori, which made headlines this year when it became the first company in modern China to default on a corporate bond. (previous post)

The restructuring plan was approved by the Shanghai Municipal First Intermediate People’s Court late last month, and the buyer group has pledged to return Chaori to profitability this year and re-list it in 2015. That kind of pledge means that the buyer group has probably received key government support for the restructuring and will find a way to meet its targets, even if that means using aggressive accounting to return to profitability and calling on state-owned investors to make the new IPO a success.

It’s important to note that this GCL-Poly deal has several key differences from the earlier Shunfeng-Suntech one. In this case the buyer is actually GCL-Poly’s privately held parent, Golden Concord Holdings, meaning the risk associated with taking over Chaori isn’t being shouldered by the publicly listed company. In addition, the GCL-Poly parent is part of a larger group that includes 8 other members, and thus Golden Concord will only own 30 percent of Chaori after the deal, equating to an investment of about $72 million.

So, how have GCL-Poly’s shares reacted to the news? The stock has dropped steadily over the last 6 weeks, and is now down 17 percent from a peak at the end of September. That performance mirrors Shunfeng, whose shares have lost nearly half of their value over the last 2 months after media reports emerged saying a major solar plant it was helping to build had run into trouble. (previous post)

I suspect the magnitude of the Shunfeng sell-off was at least partly due to profit taking after a big run-up in the company’s shares on high hopes after the Suntech deal. And in fact, Shunfeng’s shares are now almost exactly at the same levels where they were at the start of this year before they embarked on a major rally.

So, the next bigger question becomes: What’s ahead for consolidators like GCL and Shunfeng, whose actions are motivated as much by local politics as by commercial factors? As I’ve said above, the political element of the equation means the stocks could come under short-term pressure as they deal with financial issues related to their purchases. But the goodwill they receive from local governments could be quite valuable over the longer term, meaning the stocks could see some strong upside potential once the current messes get sorted out.

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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