Chinese Solar Development Funds: Recipe For Disaster?

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Doug Young

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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.
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.

Such a model often works well in the west, where power station developers are very familiar with their industries and know they can easily sell completed projects to a sophisticated long-term institutional buyers that understand the business. But such speculative development could be much riskier in China, where most solar panel makers have limited experience with plant construction, and few experienced institutional buyers can step in to own and operate such facilities over the long term.

That mix could become a recipe for disaster over the longer term, potentially leaving solar panel makers with huge debt if they can’t find buyers for projects that may have design flaws and other logistical problems. Accordingly, Beijing should take steps to cool such speculative construction, or at least offer guarantees and guidelines that could lower the risk.

Canadian Solar made headlines last week when it announced it would launch a new solar power investment fund with Sichuan Development Investment Management. (company announcement) The fund would have 5 billion yuan ($810 million) in investment, making it one of the largest to date to focus on solar power development in China under Beijing’s ambitious plans to clean up the nation’s air.

Canadian Solar and Sichuan Development would each contribute equal, unspecified amounts to the new fund, with the remainder coming from other investors. That means Canadian Solar could probably expect to provide at least $200 million and possibly more, equaling more than a quarter of its current cash reserves.

Canadian Solar’s plan follows a similar move by rival Yingli, which in April announced its own new fund in partnership with local partner Shanghai Sailing Capital. (previous post) That fund had an initial target of 1 billion yuan, a more modest figure than the Canadian Solar plan but still sizable for a company like Yingli that had just $150 million in cash reserves at the end of June.

Trina also embarked on a similar plan earlier this month when it announced a partnership with 3 local partners to build the largest solar power plant in southwestern Yunnan province, with a massive capacity of 300 megawatts. (previous post) Under that deal, Trina is providing 90 percent of the project’s financing, again stretching its own limited cash resources. Wind power equipment maker Ming Yang also joined the speculative development team in June, when it announced its own plans to build and co-finance a massive 300 megawatt wind farm project in eastern Jiangsu province. (previous post)

This kind of short-term self-financing for new projects works well under healthy economic conditions in mature markets. It has served Canadian Solar well in Canada, where the company frequently finances and builds new plants using its own solar panels, and then sells the projects after completion to local institutional buyers who understand the business and the returns they will get.

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.

Beijing is eager to foster more clean power generation under its plans for building 35 gigawatts of capacity by the end of next year, in its bid to clean up the country’s air and support the development of companies like Trina, Yingli and Canadian Solar. Thus it’s likely to support the establishment of these new funds, and perhaps even provide them with some money.

But central policymakers also need to take steps to ensure these speculative new projects are economically viable and can find long-term buyers once they are complete. Failure to do so could spark a new crisis for the sector if these projects turn out to be lemons and can’t find long-term buyers, creating new financial woes for manufacturers just as they start to recover from the recent downturn.

Bottom line: Beijing should step in to offer guidelines or guarantees to ensure a new generation of solar farms being built by panel makers are economically viable and can find long term buyers upon completion.

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.

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