Doug Young
A couple of news bits from the solar sector are showing at once how companies continue to struggle with fallout from the ongoing downturn even as some larger players continue to receive lifelines from Beijing. In the former category, floundering giant LDK (NYSE: LDK) has just announced an arbitration panel’s ruling that it must pay hundreds of millions of yuan for equipment that it ordered at the height of the solar boom but which it no longer wants or needs. Meantime in the latter category, mid-sized player Hanwha SolarOne (Nasdaq: HSOL) has just received a major new credit line from a Beijing bank, becoming the latest to get state funding to continue its operations pending the roll-out of a larger industry overhaul plan.
Let’s start out with LDK, which is in the slow and painful process of being taken over by the state as it struggles under billions of dollars in debt that it has no way to repay. The company has just announced that a Chinese trade arbitration panel ruled it must honor a contract it signed with a company called JYT Corp to buy equipment worth nearly 300 million yuan, or about $50 million, for making polysilicon, the main ingredient in solar cells. (company announcement)
LDK signed the deal in 2008 when polysilicon prices were soaring and it anticipated demand would continue to rise sharply as Chinese and other global manufacturers ramped up their production of solar panels. Of course anyone who follows the industry will know that soaring production led to a huge supply glut that caused prices to collapse starting early last year, leaving companies like LDK with commitments like this new equipment contract that they no longer needed.
Former industry leader Suntech (NYSE: STP) found itself in a similar situation when it became locked into a long-term agreement to buy polysilicon from MEMC Electronic Materials (NYSE:WFR) at prices that were extremely expensive after the market collapsed. (previous post) Suntech later negotiated an early end to the agreement, but undoubtedly paid tens of millions of dollars in penalties for the termination.
This latest $30 million penalty for LDK wouldn’t normally be a huge liability for a healthy company in a healthy industry. But of course LDK is anything but healthy, and this sudden $30 million liability is the last thing the company needs as it tries to renegotiate its huge debt.
From here, let’s move on to Hanwha, which has announced its receipt of a $475 million credit line from state-run Bank of Beijing to help it continue funding its operations. (English article) Ironically, the size of the loan is more than 5 times Hanwha’s current market value, which has plummeted along with everyone else in the sector during the current crisis. But investors are clearly no longer looking at market values or even companies’ long-term prospects, and instead are waiting to see what kind of bigger bail-out package will ultimately come from Beijing and whether their shares will be worth anything after the much-need retrenchment occurs.
We saw clear signs last week that Beijing is prepared to let smaller companies fail as it tries to clear out excess capacity at less efficient firms. (previous post) Perhaps investors sense this latest loan to Hanwha hints the company will ultimately be one of the survivors after the coming clean-up, since Hanwha shares rose 7 percent after the company announced the loan. But if I were a stock buyer, I wouldn’t bet on receive much if any money for my shares when the bailout finally comes. More likely, most or all of these Chinese companies will be forced to reorganize under bankruptcy protection, wiping out all of their share value as part of the rescue plan coordinated by Beijing.
Bottom line: LDK’s newest liability and Hanwha’s new funding to continue operations both reflect lingering fallout in the struggling solar panel sector as it awaits a broader, Beijing-led bailout.
Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He 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 author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.
