For most participants, the third quarter meant a drop in shipments and revenues, showing the same pattern of losses and ASP decline. Conversely, there was an interesting reversal in how Chinese companies managed debt and other liabilities. Outside of few exceptions, there was a reduction of receivables, manifested across the peer group. Cash received this way was unloaded alongside cash held in cash accounts in paying of debt and payables. In general, companies no longer borrowed; instead, they cleaned up balance sheets, in contrast to the last three subsequent quarters. The first half of 2012 was dedicated to the preservation of cash. Since there was no positive income, companies tapped into borrowing to supplement it. Profitability seems as distant today as quarters before. In fact, the manufacturing process improvements, a driving force behind lowering costs, are reaching their limitations. On the opposite end, ASP continues its walk downward, however this time with a more relaxed pace, bringing hope that it actually is slowing down to an eventual stop.
China is now expected to reach 40GW of installations by 2015. There is a certain amount of expectation that small companies will be marginalized and financial support will be given to an elite group. Nevertheless, improvement of balance sheets had put cash back into the cash-starved domestic industry. A large injection of $187M into vendors helped with liquidity, and curbed further relationships with non-payers, while forging stronger ties with those who pay. Paying off bank debt also helped wavering bankers into a clear understanding of who has abilities in the market. Furthermore, transition from manufacturer to developer, a trend exhibited domestically by smaller companies, is also appearing to be an objective for US-listed, Chinese companies. There is no doubt that new money will be required to finance EPC activities; therefore, clearing potential obstacles and meeting covenants, or like LDK Solar Co., Ltd (ADR)(NYSE: LDK) has just done, soliciting changes to agreements to get more money, are behind sprucing up the financial picture.
Here we have a basic review of the operational results for Q3 populated with parts of income statements. The only “earners of income” exceptions were First Solar, Inc. (NASDAQ: FSLR) and REC Group (STO: RECO). REC recorded gains when it abolished itself from costs associated with REC Wafer. This was a division of the company, which went under insolvency proceedings. Suntech Power Holdings Co., Ltd. (ADR)(NYSE:STP) continues outside the analysis for a second quarter of the year, since the company has not provided financial statements. As a victim of fraud, Suntech will further restate its revenues and financial statements as far as 2010 yearend.
Chinese companies covered by this analysis have shipped collectively 2.41GW of solar products. Taiwanese companies Neo Solar Power Corp. (TPE: 3576), Gintech Energy Corporation (TPE: 3514) and Motech Industries (6244: TT) have shipped 731MW of cells during the quarter. Europeans REC shipped 169MW of modules, Conergy AG (ETR: CGYK) shipped 208MW and SolarWorld AG (ETR: SWV), 98MW. SolarWorld, which has been solely behind the US tariffs and EU investigation, has dropped its shipments in comparison to 187MW in Q2 and 146MW in Q1.
American companies featured in comparison have been delivering strong sales, with First Solar receiving net income, solely from its EPC activities, leaving no doubt why everyone else wants to follow this path. SunPower Corporation (NASDAQ: SPWR) has delivered in both residential and commercial fields. Its efficiency modules caught the eye of Sharp Corporation (TYO: 6753), who will outsource production of its brand-named modules to the American company. Toshiba Corp (TYO: 6502), which has been doing the same with SunPower since 2010, added more volume by way of extension, which will see both companies cooperating until 2018.
As stated, the majority of companies have used cash flow and cash accounts to pay off debts and by and large, Chinese companies have paid off accounts payables. A total of $1.04B of cash was spent by the entire group of 17 to pay off $1.2B of debt.
The largest amount of debt paid was $434M by LDK Solar. The company used $367M of cash, which was also a record on spending. While LDK sold 230.2MW of wafers and 161.9 modules and cells, in its revenue of $291.5M, the company had recognized over $102M from customer prepayments. LDK also reduced inventory by approximately $142M including inventory write-down of $37M. Reductions in accounts receivables added $51M to cash flow for LDK, allowing payments on other liabilities.
The second largest, $290M cash spent, was made by Yingli Green Energy Hold. Co. Ltd. (ADR)(NYSE: YGE). The company paid off $184M in interest-bearing debts. Another $102M was also paid by the company in accounts payables. Inventory reduction was around $140M, but included a massive write off of $91M, which drove operating margins to negative 22.7% even after $11M in provisions made toward the US tariffs was reversed. Other non-interest-bearing liabilities increased by $37M. Yingli was the largest shipper of modules in Q3 with around 500MW, and appears to be only second to Suntech to cross 2GW of module shipments in history this fiscal year.
The second-largest reduction of debt was made by REC Group with $304M. REC also added $56M to their cash account, which was the largest cash influx in the quarter. Both were possible by issuance of new equity by the company. The largest percentage of debt reduction was 23%, made by Gintech with payment of $76M, leaving the company with $256M in debt obligations.
The largest amount paid in accounts payables was made by Trina Solar Limited (ADR)(NYSE: TSL) with $146M. In addition, Trina paid off $93M of debt and added $61M in cash over the revenue from reduction in accounts receivables. Cash spent in the quarter was $137M. There was also an inventory write-off of $13M along with an approximately $30M drop in value of inventory recorded in the period. The total amount of inventory reduction was $96M.
In addition to REC Group, SunPower and Taiwanese Green Energy Technology Inc. (TPE: 3519) added cash while reducing their borrowings.
The second-largest percentage of cash reduction, after the previously mentioned LDK, was JinkoSolar Holding Co., Ltd. (NYSE: JKS) with $42M spent, leaving cash totalling $55M. Jinko was one of two companies which have increased their accounts payables. Jinko added $60M in this account, but was able to pay off $87M in debt. In the quarter, Jinko also sold on credit, increasing accounts receivables by $44M.
The second-large accounts payable increase was made by Hanwha SolarOne Co Ltd (NASDAQ: HSOL). The company added $55M in accounts and notes payables. The company also sold on credit, adding $57M to receivables.
Only two companies increased their debt. Canadian Solar Inc. (NASDAQ: CSIQ) added $50M and ReneSola Ltd. (ADR)(NYSE: SOL) added $29M. Renesola has added around $49M in various assets, including $17M under plant and property. Furthermore, ReneSola appeared to purchase $57.6M in inventory, while taking a $31.6M write off for obsolete materials, resulting in an increase of $26M of this asset, the second company besides Hanwha to add inventory in the quarter. To support those activities, ReneSola used $58M of its cash account and likewise added cash beyond the revenue, due to a $71M reduction of accounts receivables.
In all, inventory for Chinese companies was reduced by $423M, but still a large portion of the reduction was only possible due to write offs and changes of its value compared to the beginning of the quarter versus the end of the quarter, instead of actual sales.
Operationally, the highest ASP belonged once more to Suntech, at $0.74 per watt, while the lowest one, $0.67, was shared by Hanwha SolarOne and ReneSola. The lowest all-in processing cost was Jinko’s $0.59 per watt.
In recent weeks, a large number of supply deals have been announced and almost all companies have expressed interest in joining the EPC segment. South Africa’s renewable initiative attracted Chinese companies, which appeared to win over 500MW worth of projects, including the very active Chint Solar/ Astronergy, a subsidiary of Chint Group. In China, 2.8GW of projects under Golden Sun have been awarded with Yingli receiving 288MW. Despite tariffs, Yingli received over 249MW in orders from the US. Not covered by this analysis, but belonging to a group of companies listed in the US, China Sunergy Co Ltd (NASDAQ: CSUN) had moved 100MW of its equipment from Shanghai to Istanbul, Turkey, to avoid potential costs with EU levies. In pursuit of globalization, more similar activities are anticipated.
In similar fashion, ReneSola has outsourced its cell and module production to an Indian company, Websol, to deliver over 250MW of modules to local markets, a positive move against the investigation started by this country into the dumping of cells and modules made abroad. This time, there is a twist, as India will investigate imports from the US, Taiwan and Malaysia, in addition to what became a usual suspect, China.
Based on the Q4 guidance from nine Chinese companies, an average growth in shipments is limited to only 4% over to Q3, totaling around 2.52GW. It is projected that China will become a dominant destination in Q4, with speculation that a second lineup of Chinese US-listed companies may ship larger quantities overseas, in comparison to the likes of Yingli and Trina. One exception from this assumption is Canadian Solar, which appears to be on the path to overcome Trina in amount of shipments for the year, and certainly is expected to have larger overseas shipments in Q4. Thus far, results from Taiwanese companies reporting revenues for October and November showed a 27% drop in comparison to July and August revenues. Taiwanese index results of Q3 versus Q2 showed a 25% reduction in revenues. In the comparable period, the nine Chinese companies analyzed here showed a 9.33% reduction in revenue on a 5.53% reduction in shipments. Despite full utilization scores for the majority of module makers, October overseas shipments for the same set of companies may already be showing a deficiency toward the guidance, unless the assumption was to be made that the domestic segment had a significantly larger scope than described. Additionally, certainly shipments fluctuate monthly and a better view of the quarter will be available with November data, when Solarzoom will publish it around December 25th. In addition, parts of September shipments would have been recognized in Q4, making potential forecasts inaccurate at this stage.
