Shanghai Chaori Reports Heavy Loss in Q1

Could the continued downward spiral eventually drive the company into the ground?

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Shanghai Chaori Solar Energy Science’s (SHE:002506) Q1 report, released on the 27th of April after three rounds of delays, indicates a loss of 263 million RMB in the first three months of the year, down 3598.45% from the profit gain of 7.5 million RMB in the same period in 2012. The news came after Chaori missed its first interest repayment to bond investors due on March 7th and posted a gross 1.676 billion RMB loss in 2012. In the meantime, the company is scrambling to increase cash flow, with plans of operation restructuring in hopes of riding out the crisis.

Q1 Heavy Loss in Profit

Chaori’s Q1 report posts a loss of 262.6 million RMB, a dramatic decrease from 2012 Q1’s profit gain of 7.506 million RMB. Profit per share now stands at -0.31 RMB.

Chaori has been on a steady streak of losses since 2012. In the 2012 annual report, which was released on the same day as the 2013 Q1 report after much delay, the company posts a loss totaling 1.676 billion RMB.

The company first admitted to having liquidity difficulties in Q4 of 2012, and is at the moment formulating plans of restructuring operation and manufacturing strategies to increase cash flow.

Liquidity Difficulties

Liquidity difficulties are cited by the company as the main concern of the moment, which, unfortunately, shows no sign of easing.

Through April, Chaori held bank loans totaling 1.706 billion RMB from 18 different banks. Among them, 1.376 billion RMB worth of loans from 14 banks are overdue. The amount of Chaori’s overdue debt has surpassed 100 million for five banks: Jianghai Service Hall of Agriculture Bank of China, Shanghai Branch (270 million RMB overdue); Jianghai Rd Branch of China Construction Bank (190 million RMB); Shanghai Branch of Export-Import Bank of China (179 million RMB); Shanghai Pudong Development Bank (100 million RMB); Shanghai Branch of Guangdong Development Bank (100 million RMB). 

Chaori’s partial defaults on its loans have resulted in litigations from its suppliers, related banks and other creditors. In consequence, the company’s main bank accounts and assets have been frozen, exacerbating its liquidity difficulties.

Chaori’s debt matures in 2017.

Chaori was due to repay its first interest to bond investors on March 7th. News of Chaori’s default started circulating before that date amid the company’s Feb. 21st press statement to the Shenzhen Stock Exchange regarding 2012’s huge profit loss and liquidity difficulties at the time.

The company was partially rescued from that crisis thanks to a last-minute bailout from China Securities Depository & Clearing on March 3rd. However, the bailout is not a silver bullet to the problems facing Chaori and China’s solar manufacturers, who collectively face decreasing global demand, oversupply, and diminishing profit margins due to the global economic climate and fierce competition, especially in the EU, the largest market for China’s solar-related products.

Chaori’s Self-Rescue

In the Q1 report, Chaori has pointed to plans of easing liquidity difficulties through its equity transfer agreement with a solar energy investment company in southern Italy and reshuffling its operation strategy. However, the amount of cash flow that could potentially be generated from such efforts appears to either take too long to take effect or provide very little in the way of debt relief.

The company plans to downsize its operation by trimming off non-competitive, non-integrated components of its assets, and transform its mode of operation by way of increased automation in production and incorporating contracted manufacture orders, which could potentially cut down production cost and free the company from paying for raw material while maintaining employment. The amount of liquidation expected from this strategic reform is unspecified.

At the same time, Chaori is actively seeking to liquidate its overseas investment in nine power stations with a total capacity of 12 MW in southern Italy through an equity transfer agreement. According to the deal signed with Solaranlage beteligungs UG (Haftungsbe-schrankt) Basilikata 2, a solar energy investment company based in Italy, Chaori is to receive payment totaling 24.948 million Euros, (or 202 million RMB at the current exchange rate of 8.0917), in 10 installments.

Apparently, the expected gain of 202 million RMB from the deal does not begin to cover Chaori’s debts, which exceed one billion RMB. Worse still, the first payment does not commence until December 20th, 2013, raising doubts that the money may be too distant to alleviate the crisis that is happening here and now.

More Bailouts?

Chaori’s impending doom follows a series of recent debt-related crises of the once-mighty Chinese solar giants. Wuxi Suntech, a subsidiary of Suntech Power Holdings Co., Ltd. (ADR)(NYSE: STP) has fallen into bankruptcy after default on convertible bonds totaling 541 million USD on March 15th. LDK Solar Co., Ltd. (ADR)(NYSE: LDK) missed its debt repayment of 23.8 million USD on April 16th, also due to short cash flow. Every sign seems to indicate that Chaori is now following the same downward trajectory.

While Suntech has collapsed after numerous rounds of investment injection from the local government, and with LDK still opting for possible bailouts from both the local and the provincial government, it still remains to be seen whether the Chinese government is going to extend its helping hand again to Chaori.

China’s numerous development banks and local governments have repeatedly bailed out the country’s struggling solar companies against the harsh global economic climate and the increasingly competitive world solar market. On a national level, this reflects China’s push for global status and economic leadership in the clean energy sector. From the viewpoint of local governments, the major solar companies have all become staples of the local economy, effectively becoming “too big to fail.”

Rumors are circulating that Beijing is finally considering reconsolidating the country’s solar industry. As Chaori progresses deeper into the crisis, the action or inaction on the side of the government will decide the truth of the rumor.