Collapse of a Giant: Widespread Fallout Expected

Base on the scale of the bad debt write-off, it appears LONGi is one of the victims suffering the heaviest from the crumbling of Wuxi Suntech

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The reorganization of solar panel manufacturer Wuxi Suntech in China, a subsidiary of Suntech Power Holdings Co., Ltd. (ADR)(NYSE:STP), is going through a rough patch as the aftershock from its bankruptcy continues to ripple damages both upstream and downstream.

From the recently released unofficial profit report of Xi'an LONGi Silicon Materials Co Ltd(SHA:601012), the company has estimated a loss of RMB 54 million for the year 2012.  The reason behind such a heavy toll is mainly attributed to the bad debt provision for the fallen giant.

From the court ruling of the bankruptcy declaration, to the reorganization case of Wuxi Suntech, the collapse has inflicted damage of up to 90 million RMB onto LONGi, of which Wuxi Suntech is also a major shareholder with 1.79 million shares of Longi’s equity.

A finance department employee of LONGi Silicon Materials Corp. revealed to the press in response to this incident:” We have consulted with our accountant and we will be deducting the bad debt from our books, mainly because we want to reserve room for the financial provisions to come.  If things worked out better than expected and if the bad debt can be collected, LONGi will be expected to get an adjusted profit gain for the following year.”

The same employee has also commented on the current condition inside of the company. ”At least until now, all of the company’s production plans are still following its normal schedule and there’s no plan for downsizing.”

Base on the scale of the bad debt write-off, it appears LONGi is one of the victims suffering the heaviest from the crumbling of Wuxi Suntech.  It seems the bleeding won’t just stop here, as Longi’s public offering prospectus shows the percentage of sales contributed from Wuxi Suntech material purchase was 67.61%, 27.37% and 42.32% for the past three years.  This indicates further possibility of a significant decrease of sales will be expected along the way. 

The wildfire has not yet been contained, and it keeps claiming more victims as it spreads. Guosen Securities, the underwriter for LONGi’s IPO back in April 2012, is also taking a hit as China’s security regulation law has stated penalties will be given to the underwriter if the company suffers a net loss during its first year of IPO.

The punishment for this violation will be a suspension of underwriting privileges for 3 months.  This sends more devastating shockwaves to industries further beyond China’s solar panel industry, as there are nearly 70 other companies that will be starting their IPO submission with Guosen Securities to China’s SEC. The Chinese SEC has clearly stated: ”If the underwriter of an IPO company has been suspended of their underwriting privileges, then all of the related IPO submissions underwritten by them will also be rejected or returned.”       

The final decision from China’s SEC is still unclear, but it’s the last week for the self-auditing requirement for companies that intend to file their IPO, and the crisis has situated these companies in the midst of gloomy uncertainties ahead.

 Guosen Securities is seeking possible recourse to defuse the situation or mitigate the impact on the forthcoming China SEC punishment; most likely they will attempt to produce evidence to support they carried out all necessary steps and followed official guidelines to prevent this ahead of time.