Doug Young
The nascent state-led bailout of China’s struggling solar industry has taken another step forward with word that LDK Solar (NYSE: LDK) has just sold a big chunk of itself to a partly state-owned consortium for enough cash to perhaps fund its operations for another month or 2. This new rescue package values LDK at just $140 million, which is probably still too high a figure for one of China’s weakest solar panel makers in an industry where everyone losing big money due to a huge supply glut.
Let’s take a closer look at this latest announcement from LDK, which says it will issue new shares and sell them to an entity called Heng Rui Xin Energy, a consortium that includes a state-run entity as one of its major members. (company announcement) Other media are reporting the sale will give Heng Rui about 16.6 percent of LDK’s total shares for a price of about $23 million. (English article)
I’m not a mathematician, but even I know that $23 million is a tiny sum for a company like LDK that is losing hundreds of millions of dollars every quarter, as it scrambles to close to down production lines and lay off employees to conserve cash. The amount is even less than the $32 million emergency government loan received last month by Suntech (NYSE: STP), a relatively stronger player that is facing both a cash shortage and also a major debt repayment that is coming due early next year. (previous post)
Both the Suntech and now the LDK cash infusions are short-term first-aid measures that will help the companies finance their operations for the next month or 2. But clearly a longer term solution is needed to clean up the mess that has become China’s once-promising solar panel manufacturing sector. Ironically, such an overhaul could easily leave many companies’ publicly traded shares as worthless, meaning emergency investors like Heng Rui Xin may be get back little or no return for their investments.
Media previously hinted that the needed overhaul could be coming soon in a rescue package being assembled by China Development Bank, a state-owned policy lender that would provide financing for about a dozen of the industry’s biggest players. Now media have also reported over the weekend that the government is currently crafting a more comprehensive plan to salvage the industry. (English article)
That plan will including a 2-pronged approach, including measures to force consolidation and also to speed up the building of new solar power plants to give the remaining players more business. A crucial piece of the plan will call on State Grid, operator of China’s national power grid, to assume most of the costs for connecting new solar power plants to the national grid. Those costs are typically quite high, especially because many solar plants are located in remote areas of China such as interior Qinghai and Xinjiang provinces, which have the most desert-like conditions.
At the end of the day, this comprehensive plan is what the industry really needs before it can move forward, and any new funds like the ones just received by LDK will only be temporary stop-gap measures. Look for a few more similar short-term solutions through the rest of the year as other players seek money to continue funding their operations, and for announcement of a more comprehensive rescue plan perhaps as early as the end of the year.
Bottom line: LDK’s new share sale marks the acceleration of a state-led bail-out for China’s solar panel makers, with a more comprehensive rescue plan likely as soon as year-end.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters, writing about publicly listed Chinese companies. He currently lives in Shanghai where he teaches financial journalism at a leading local university. He also writes daily on his blog, Young’s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also the author of an upcoming book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China
