I came across this article recently: "Chinese Solar Development Funds: Recipe For Disaster?" I also found the same article under a milder title: "Canadian Solar Joins China Solar Financing Club" on SA. The author writes the following:
"Canadian Solar (Nasdaq: CSIQ) has joined a growing field of Chinese solar panel makers entering the risky business of speculative development in China, with its launch of a new locally-based fund for solar power construction. The move follows the establishment of self-financed vehicles for similar speculative construction by rivals Trina (NYSE: TSL), Yingli (NYSE: YGE) and wind power equipment maker Ming Yang (NYSE: MY), as they try to create more demand for their products."
He adds:
"Under such a strategy, solar panel makers typically provide some or all of the money for new plant construction, and then sell their panels to the project. They later recoup their money by selling off the plants upon completion to long-term institutional buyers."
It certainly seems, due to the frequency of the words "speculative" and "risk" used in the paragraph, that this is not the right thing to do for Canadian or the company's shareholders.
However, when I read Canadian Solar's original news release, I read the following about the fund's purpose:
"to establish an investment fund to finance the development, construction and ownership of solar power generation projects in China."
I could not help but focus on the word "ownership." The purpose of being in the fund is to establish an avenue to construct solar plants and hold them for power generation. It appears to me that adding a province's SOE to fund the project is a strategy to deleverage Canadian Solar from carrying the cost on its own balance sheet. Lower liability and revenue recognition is not a risk, but an improvement to the operational dynamic of any company. The fund is the buyer; there's no need to find one.
How Trina is considered to be an example of the same is not clear to me. Trina bought 90% interest in the company that holds the development of 300MW solar projects in Yunnan province. It is an acquisition, not an investment in the fund. The immediate thoughts: Trina cannot sell to itself, and 300MW of modules must be supplied to the project starting in Q4. In another article by the same author, "Trina Thrives on Solar Financing," the author worries about the cost of the acquisition, quoting the cost of panels needed for the project. The conclusion reads:
"Trina could be left holding a big pile of problematic debt if its plan to build a massive new solar plant in southwest China runs into difficulties or fails to find a long-term buyer."
The cost of developing a solar plant in China is about $1.20 per watt. After deducting the module and the infrastructure costs from the acquisition, since Trina will supply modules and EPC, we're left with $0.50 per watt. At 90% of ownership of 300MW, this is about $135M, well within the $452M the company has in the bank.
Yingli is a second example. Yingli bought a 51% majority stake in the investment fund in April. The similarity ends with a look at the partners: a state-owned enterprise for CSIQ and a private equity fund for YGE, and size of the equity: $810M in the CSIQ fund and $166M for the YGE fund.
In conclusion, the liquidity of each company plays the largest role. CSIQ had $758M in cash and restricted cash, $441M in inventory and $571M in project assets, with $441M in project assets slotted for sale in one year as reported for Q2. On the other hand, YGE had $398M in cash and restricted cash, $115M in long-term project assets, plus $369M in inventory. For every dollar of Yingli's liquid assets, Canadian has two. How leveraged are those assets? YGE paid $37M in interest in Q2, Canadian $12M; it looks as if YGE operations are three times more leveraged than Canadian. Comparing both, it looks like apples and oranges, or at least Yingli looks like a very rotten apple.
One final thought quoted from the article to support the risk and potential disaster:
"But such speculative development proved ruinous 2 years ago for former industry pioneer Suntech, which launched its own such fund for speculative development in Europe. Conflicts involving that fund set off a downward spiral that ultimately led to Suntech's bankruptcy last year."
Suntech's bankruptcy was triggered by the valueless bonds offered by a partner, to buy its stake in GSF, a global solar fund, in the majority owned by Suntech. The company used this piece of paper as collateral to obtain financing from the Chinese Bank. The so-called "German bond," being a fake, could not be used to pay off another bond, this time sold to Western investors by Suntech.
Fortunately to the idea of the investment fund, the solar plant ownership did not cause the bankruptcy of Suntech; dealing with shady Europeans and failure to understand the local market, Italy, paved the way to it. In this context, the Suntech story has no application to Canadian's financial condition and its Chinese business acumen. One could argue that Canadian Solar's ability to prosper in Canada and the US, building solar plants and dealing with likes of Samsung, Blackrock and Duke Energy, adds legitimacy to the investment fund idea not only for China, but for other companies as well.
