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Performance of Companies Indicates Transitioning Chinese Solar Industry

Jul 28, 2013 Hit: 9 Written by 
Performance of Companies Indicates Transitioning Chinese Solar Industry

Companies focusing on solar power station development significantly outperform those that continue to rely on module manufacturing and export in recent years

2012 has proven to be the toughest year ever for China’s solar industry, which collectively has had to face a series of blows from the world solar market and the aftershocks of the global financial downturn.

The challenging year, on the other hand, has provided an invaluable lesson: diversified market approach and downstream solar power generation projects have proven to be far more adapt at withstanding the testing challenges. This article seeks to review the four individual cases of Trina Solar Limited (ADR) (NYSE:TSL), Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP), Canadian Solar Inc. (NASDAQ:CSIQ), and Zhongli Science and Technology Group Co., Ltd. (SHE: 002309), to illustrate this point.

For the investors in the industry, however, it is as much a time of challenge as a time of opportunity. The good news is, the market is at a point where there is no way to go but up. Companies that have not been completely destroyed are actively restructuring and adapting to the evolving market situation and are highly likely to re-emerge as more mature contenders.

Heavy Losses for Trina Solar

As the biggest manufacturer of solar modules by scale, Trina Solar is heavily invested in the upstream manufacturing sector and excessively reliant on the European market – products sold in Germany and the UK alone contribute to almost half of Trina Solar’s revenue. This situation has left the company particularly prone to the unique combination of crises affecting the Chinese solar industry – decreasing demand from Europe compounded with the recent hefty punitive anti-dumping tariffs. (publisher note: EU/China agreement changed this condition)

The result is a dramatic losing streak since as early as 2011. Trina Solar’s Q1 2013 report, released on May 29th, reported a 14% revenue drop from the last quarter and a year-on-year drop of 25.5%. The company’s Q1 profit loss continued to expand to 6.37 USD million, more than double the Q1 2012 amount. The Q1 numbers follow in the footsteps of a bleak 2012 with a deep drop of 36.7% in revenue to 1.2 USD billion and a huge loss of 266 USD million in profit, seven times the amount in 2011.

At the moment, Trina is continuing to sell at cost just in hopes of adding to its cash flow to kick-start its re-focus away from Europe. Trina expects to expand its sales in the emerging markets worldwide to 20% of its total revenue in 2013.

Wuxi Suntech To Be Sold

Suntech was another big ship that was too late to steer away from the big iceberg of bankruptcy. Suntech declared bankruptcy on March 20th this year, with debts totaling 17.4 RMB billion on its shoulders – 7.3 RMB billion to twelve banks and over 10 RMB billion to suppliers. On June 28th, Suntech reached a third debt forbearance agreement with its overseas convertible bond holders to defer the repayment to August 30th of this year. However, Trondheim Capital Partners LP and an individual, Michael Meixler, have rejected the agreement and taken legal action to ask for Suntech’s involuntary insolvency.

Wuxi Suntech is, at the moment, actively seeking new buyers for the restructured company. The conditions for potential buyers initiated by the bankruptcy management authority stipulate that the buyer’s total assets should be at least five RMB billion, net assets more than two RMB billion, registered capital more than one RMB billion and available cash at least 50 RMB million, with previous operation and management experience in the solar industry. Group investors are accepted as well.

Conspicuously absent among the four buyers that have submitted an expression of interest – including one state-owned and three private companies – is Wuxi Guolian Development Group Co., Ltd., which has effectively been directing operations at Suntech since its bankruptcy and whose clout has been instrumental in reaching debt forbearance agreements with Suntech’s overseas creditors.

Canadian Solar Holding its Ground

Canadian Solar, which is comparable in scale to Suntech and Trina Solar, has fared much  better and suffered comparatively far fewer losses thanks to its diversified market strategy and its ongoing transition to a downstream provider of total solar power generation solutions.

Canadian Solar’s Q1 2013 report, released on May 28th, points to a profit margin of 9.5%, a 4.7% increase from last quarter and the highest among the big names of the industry. The company was also successful in reigning in profit losses in Q1 to a moderate 3.9 US million, also the lowest among companies of comparable size.

Correspondingly, the company has proven successful in reducing its reliance on the European market, reducing the region’s contribution to its revenue dramatically by 42.6% to only 24.7% percent in just one year’s time and pumping up sales in the Asian market to 57.5% of total revenue.

Solar power station projects continue to grow. Canadian Solar has set the goal to eventually increase power station projects’ contribution to 50% of revenue.

Double Growth for Zhongli Science and Tech

With a growth model that puts solar power station development as its mainstay, the latecomer Zhongli Science and Technology Group is reaping double growth in revenue and profit through 2012 to 2013.

Zhongli is unique, having set power station development as the main growth engine from early on. The company now has established numerous projects in the Chinese provinces of Gansu, Qinghai, Jiangsu and overseas in Germany and Italy. Zhongli has an abundant stock of ongoing projects ready for sale, a series of joint development projects with China Merchants New Energy Group and China General Nuclear Power Corporation, whose total capacity reaches 1.5 GW, as well as an ample supply of future projects in China and overseas under its belt.

In 2012, according to Zhongli’s annual report, the company’s total 2012 revenue increased year-on-year by 31.82% to 6.326 RMB billion. Its net profit also increased year-on-year by 13.61% to 236 RMB million. In Q1 2013, Zhongli’s revenue continued to rise to 1.6 RMB billion, a 15.3% increase year-on-year.

At the current moment, the return on equity (ROE) of solar power station projects has reached over 13%. The central government has also introduced a series of policy incentives to encourage investment and growth in this sector. The varied performance of the four companies in this article vividly illustrates that power station development has entered onto the center stage of China’s solar industry vis-a-vis the retreating manufacture-and-export way of business, a transition that is very much in line with China’s macro-economic restructuring.




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