Politics and Debt Rain On Chinese Solar

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Doug Young

The solar power sector has become a highly volatile place these days, with company stocks rallying one week on upbeat news, only to tumble days later on more downbeat signals. Much of the volatility owes to 2 factors that have created big uncertainty: protectionism and doubts about funding for many new power plants now being announced. Both of those factors are at play in a new string of downbeat news on industry lead Canadian Solar (Nasdaq: CSIQ), as well as struggling Chaori Solar (Shenzhen: 002506) and the now defunct former superstar Suntech.

Of these 3 companies, only Canadian Solar is currently a serious player, though it is seeing early trouble signs in the important Japan market. Suntech has been mostly liquidated after being forced into bankruptcy last year. But ghosts from its past continue to haunt the company, with word that Suntech is being sued by a former customer. Chaori is also undergoing its own painful reorganization after defaulting on a domestic bond earlier this year, and the latest reports say that debt holders will end up losing most of their money.

Let’s begin with Canadian Solar, which has just announced that some of its projects in Japan are now running into problems after the government stopped approving connection of new solar power plants to the national grid. (company announcement) Japan has become a major bright spot for many Chinese solar panel makers over the last year, as that country tries to wean itself from reliance on nuclear power following a major disaster in 2011.

Canadian Solar now has 500 megawatts in late-stage projects in Japan, and aims to increase that by up to 20 percent by the end of this year. The Japanese government’s suspension of new approvals has affected Canadian Solar’s projects with about 135 megawatts of combined capacity, though the company said it expects to win eventual approval of the projects and sees no near-term impact on its sales.

I’m no expert on Japanese politics, but I do expect that these affected projects should eventually win approval since the country is under a lot of pressure to develop safer power sources. Still, I’ve also heard that protectionist forces may be growing, as Tokyo tries to promote domestic panel manufacturers. If that’s the case, politics could place a damper on future sales to Japan by Canadian Solar and other Chinese solar panel makers.

Next let’s look at the other 2 cases, starting with word that Suntech is being sued by a former customer named ZKenergy for failing to deliver 206 million yuan ($33.5 million) worth of solar panels. (company announcement) In this case the amount isn’t huge, but it could cause problems for Hong Kong-listed Shunfeng Photovoltaic (HKEx: 1165), which acquired Suntech’s manufacturing assets during the bankruptcy liquidation.

Shunfeng is already reeling from bad news 2 weeks ago, when media reported a 500 million yuan, 130 megawatt solar farm being built with the company’s panels had run into trouble. (previous post) Shuntech shares have fallen sharply since that report, and the stock could see more turmoil if other former Suntech customers start stepping forward with similar lawsuits.

Lastly there’s Chaori, which made headlines early this year when it became the first company in modern history to default on a Chinese domestic bond offering. Other struggling solar panel makers like Suntech had previously defaulted on bonds, but all of those were dollar-denominated and sold to more sophisticated international investors.

According to the latest report, Chaori is working on an agreement with its bond holders that could see them ultimately recoup as little as 20 percent of their original investment. (English article) Such payouts aren’t that unusual for this kind of default, and Suntech bondholders probably received similar rates. But the figures do underscore the ongoing risk for solar investors, as the industry continues to clean up after its prolonged downturn that saw many mid-sized and smaller firms go out of business.

Bottom line: A new report from Canadian Solar indicates politics could dampen Chinese panel maker sales in Japan, while separate reports indicate heavy debt continues to plague the sector.

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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