China’s solar giants predicted state bailouts, say experts

13 November 2012
By David Spencer
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Solar panels

Solar panels

China’s $20bn solar industry is circumventing loan defaults and mergers by taking aid from local governments in order to preserve jobs at cash-haemorrhaging companies, including LDK Solar Co, the world’s second-biggest maker of solar cells.

LDK agreed last month to sell a 19.9 per cent stake to a renewable-energy investor part-owned by the city of Xinyu. Suntech Power Holdings Co (STP), the world’s largest solar-panel maker, received a $32m loan in September, organised in part by Wuxi. The aid is set to assist in what are reported losses of $987m in 2012.

Central governments are attempting to put forward mergers, stated Jeremy Haft, BChinaB Inc founder. Bail-out loans seek to counter merger efforts. China has previously pushed consolidation to strengthen industries such as steel and coal.

Haft reports that municipal bodies want solar manufacturers “to keep the lights on and not lay people off. There are a lot of people unemployed” in China and local government officials seek to avoid factory closures.

The aid efforts have not sparked a rally in LDK and Suntech as they report losses of 27 per cent and 12 per cent respectively in the last three months.

Currently GCL-Poly Energy Holdings Ltd (3800), the world’s biggest solar-wafer maker, has increased 19 per cent in the last three months. The company has been tipped in Chinese news reports as a possible merger partner.

The China Securities Journal said national government-run China Development Bank Corp is encouraging consolidation between panel makers with a pledge for financial support for 12 companies. The move could lead other struggling solar manufacturers to close or agree to takeovers, the journal said.

China Development Bank is committed to keeping faltering solar companies afloat, according to Melanie Hart, policy analyst at the Center for American Progress. Hart reported that the lender is putting pressure on local governments to support companies to prevent defaulting on loans. The bank is telling local officials “we won’t lend anymore to anyone in your region until they pay us back”, she said.

Local government assistance may be the biggest obstacle to making China’s solar industry competitive, said Shyam Mehta, solar analyst at the Boston-based consulting company GTM Research: “Until they stop supporting the uncompetitive manufacturers, this won’t go away. If LDK was allowed to fail, the market reaction would actually be positive.”

Neither LDK nor Suntech remain profitable as both will struggle in debt repayments, says Pavel Molchanov, an analyst at Raymond James & Associates Inc in Houston. LDK is expected to lose $518m this year and Suntech may post losses of $469m. In an interview, Molchanov claimed that LDK and Suntech “egregious” balance sheets and would be “imminent bankruptcy candidates if they were American or European. But they’re not, so we kind of have to look at them differently”.

Molchanov said: “Every province, every city, every bank is going to try to protect their vested interest as best they can. That’s why kicking the can down the road has been the dynamic so far.”

LDK is estimated to have around $3.6bn in total debt. The company agreed in October to issue new shares that will be bought by Heng Rui Xin Energy Co, a company 40 per cent owned by the Xinyu State-owned Asset Management Co, giving it a 19.9 per cent stake. That agreement was the second show of support for LDK from the city in three months.

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