Chinese Solar

[HenryTo]

Is the party over for these stocks? And speculative shares in China in general? In a booming market like what we had just witnessed - where valuations have become stretched - it is always much easier to find cases of fraudalent accounting and inflation, as companies are forced to report better earnings and issue more optimistic outlooks every quarter so as to keep the party going. Following story is coutesy of Barron's:
----------------------------------------------------------------------------------
MONDAY, OCTOBER 8, 2007

China's Solar Boom Loses Its Luster
By BILL ALPERT

CHINA'S SOLAR-POWER STOCKS WERE a red-hot bubble until Wednesday. That's when investors learned that an accounting officer had quit one of the industry's hottest firms, the silicon-wafer maker LDK Solar (ticker: LDK), while alleging that LDK's warehouse and financial reports were loaded with junk. As its American depositary shares fell by nearly 30%, LDK defended its bookkeeping and assured shareholders that it has more than 1,000 metric tons of silicon material.

There may be good stuff in that pile of silicon, but that doesn't mean it's worth what LDK's balance sheet says. On Sept. 25, the Xinyu City, China, firm's financial controller, Charley Situ, sent e-mails to regulators, auditors and investment bankers saying that he had quit because his bosses refused to write off bad inventory. His allegations were disclosed, and largely dismissed, in a Wednesday note by LDK investment banker Piper Jaffray. Still, the news sent LDK's depositary shares reeling, from over $71 to 50.95 by Friday.

Even after that sickening dive, LDK's New York-listed shares go for nine times book value and over 40 times this year's forecast earnings-so investors should still care if the book value, and therefore its profit, is overstated. The inventory that makes up that book value may warrant concern. With the help of an interpreter, Barron's talked to someone with knowledge of LDK's manufacturing. That person said that the company's silicon ingots were indeed so impure that a recent production run had produced tons of them that were too contaminated for technicians to even analyze with instruments. The company says it knows of no such problems.

LDK isn't the only producer of solar silicon in China that uses low-paid workers to sort through scrap in search of some good enough to be melted into solar-cell wafers. Nor is it the only one with a high-priced stock, as you can see in the table. Investors in China and the U.S. have rushed into China's solar-cell stocks as rashly as investors jumped onto the Internet in the 1990s.

Table: China's Solar BubbleWith help from China's government, its bankers and U.S. underwriters, green fields have sprouted silicon-wafer factories built by businessmen with expertise seemingly as unrelated to silicon as aluminum siding and safety shoes. Even if financial and manufacturing controls prove to be no problem, competition will. LDK still enjoyed a market capitalization of $5 billion last week, but a couple of hundred million dollars in machinery is enough to reproduce its business anywhere in the world, and dozens of firms in China and elsewhere have been buying wafer-making gear from LDK's vendors. All you need is cheap labor, friendly bankers and a willingness to stomach negative free-cash flow.

Global warming and rising fossil-fuel prices make solar an appealing source of electricity, but it still costs more than other power sources in just about every place except Japan. Nevertheless, demand for the cells has grown smartly in recent years as governments in countries like Germany and Spain have required their electricity consumers to subsidize anyone installing solar-power generators. European solar-cell vendors like Q-Cells (QCLSF) and Renewable Energy (REC.Norway) have thrived on that demand. U.S. solar-cell makers include SunPower (SPWR), the expensively-valued subsidiary of Cypress Semiconductor (CY).

Eager for clean, oil-independent energy, China's government encouraged entrepreneurs to start making solar-power components. Businesses from diverse corners of the economy answered the call. Until April 2006, Trina Solar (TSL) made aluminum siding. LDK's 32-year old chief executive and controlling shareholder, Xiaofeng Peng, made industrial safety shoes and gloves.

But a shortage of refined polysilicon has pinched solar-cell makers in the past few years. The raw material's price has gone from around $30 a kilogram to over $250 on the spot market, creating a windfall for producers like MEMC Electronic Materials (WFR). But the higher prices have hurt China's latest solar-cell contenders, which lack established supplier relationships-which helps explain the net losses at China-based Canadian Solar (CSIQ).

So firms like LDK and London-listed ReneSola (SOLA.UK) have developed recipes that use large portions of recycled silicon. LDK has more than 3,000 workers sorting and testing scrap the company obtains from broken wafers, semiconductor rejects and ingot sawdust. LDK brags that its secret recipe lets it make wafers with as little as 25% virgin polysilicon. Since silicon accounts for 75% of LDK's cost-of-goods-sold, the potential savings are a big deal.


And LDK's industry-leading profit margin of 29% would seem to validate the savings from the company's scrap recipe. But those savings may be a mirage, according to the allegations of ex-controller Situ and a person familiar with LDK's manufacturing.

Via a translator, Barron's learned that LDK's furnaces are often short of usable feedstock, even though the company's piles of silicon scrap keep growing. The factory's internal information is unreliable, with one record reportedly indicating that LDK's wafer-cutting saws had an impossible yield of 140%. Industry experts say that most wafer-cutting enterprises break even at 90% usable yields. Instead, according to the person knowledgeable about the manufacturing, LDK's wafering operation has yields that actually range from 55% to 70%. The company won't comment on its yields.

Low yields from LDK's production may stem from its practice of buying just about any scrap that has silicon in it, says this same person. Several months back, the company's furnaces produced a batch of several dozen 270-kilo ingots so motley that testing instruments couldn't even tell whether the resulting silicon was positively or negatively charged. The virgin-silicon supplier MEMC was so alarmed at the quality of wafers produced by LDK, says the source, that it stationed its own quality-control monitor at the LDK factory in China's Jiangxi province.

LDK's Chief Financial Officer Jack Lai says he knows nothing of such manufacturing problems and insists that the company is making its deliveries on time to satisfied customers. He says the company fired Situ, the controller, for absenteeism after Situ didn't come to work for eight days. Lai says he never saw a Sept. 25 resignation e-mail that Situ addressed to him and copied to the SEC (and many others).

The Bottom Line

LDK Solar still looks expensive in light of questions about its accounting for inventory and therefore profits. The shares, already off sharply, could keep heading toward zero.In his resignation letter, Situ said that LDK's inventories might be overvalued by $46 million to $92 million, which is more than the company reported in profits before its May 31 initial offering in the U.S. E-mail discussions that started before the May IPO show Situ trying to get colleagues to reconcile discrepancies between LDK's accounting ledger and its warehouse ledger. A spreadsheet circulated by Situ showed that by the end of August, LDK warehouse records listed about $54 million worth of silicon feedstock, but accounting records showed $100 million.

Through August, according to Situ's spreadsheet, LDK sank about $119 million of cash into inventory. LDK's Jack Lai says that Situ's numbers are wrong.

Situ's internal campaign ended on Sept. 13, when financial chief Lai held a conference call with him and other accounting staff. Situ argued that LDK should take a charge for its unusable silicon scrap. In a subsequent statement, Situ says the conference ended when he was overruled by the company's chief accounting officer, Qiqiang Yao. The ruling: Silicon scrap that was not usable today might someday become usable with the new processing techniques.

That sounds like a judgment on a par with the decision to freeze Ted Williams' head, in hope that future medical miracles might someday revive the Red Sox legend.

Situ says he quit after that decision, not wanting to be party to what he considers a stock fraud. Finance chief Lai says that Situ just didn't understand the silicon-wafering business. In a Thursday press release, LDK says that a management team took a physical inventory of polysilicon feed stocks and found no accounting discrepancies. When LDK's auditors at KPMG complete an independent investigation, the company says it will disclose the results.

Financial chief Lai points to hundreds of millions in sales agreements announced in the last few months. Of course, every firm in the solar-cell industry has been announcing sales deals. That's because companies are double- and triple-ordering, to combat the shortage of good silicon.

Despite LDK's controversy, China's solar stocks ended last week with their handsome valuations largely intact. That's in part because investment bankers like Piper Jaffrey stubbornly maintained their Outperform ratings, even as they circulated Charley Situ's e-mails to institutional investors. Sound familiar? That's how analysts like Henry Blodget behaved before the bursting of the Internet bubble.

[rffrydr]

Quality vs. Quantity.

Spending as savings: the secret to untying the Gordian knot of chinese consumer spend (as it has been our own):

http://www.bloomberg.com/news/2013-01-15/behind-china-s-roaring-solar-industry.html

[rffrydr]

Devastating article in Barron's talking 44 GW capacity with EVERY chinese solar maker underwater and govt. supported. $0.66/watt installed checks out on ebay (US made panels without Obama tariff available at 75-85cents). Polysilicon substrate gone from $115/unit to $15/unit.... Go Solar City!

Buffett's investment has locked in rates.

Sequential european govt. support withdrawals created the synthetic demand we needed to crash this industry--and generate the social benefits we need.

12 litre natgas Cummings in testing and a decade of war in the mideast.... I think the days of $100 WTI crude are past. Am NOT betting (directly) on it however... once burned
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

China Quadruples 2015 Solar Power Target to 21 GW, or nearly the installed Solar PV capacity of Germany.

http://cleantechnica.com/2012/07/02/china-quadruples-2015-solar-power-target/

[rffrydr]

As with all great infrastructure build-outs the investor winds up on the chopping block while society gets the gains. Mismatch of time and price; infrastructure exists for the long haul--a place the investment dollar seldom visits.

http://www.bloomberg.com/news/2012-03-21/grid.html

[HenryTo]

US policy on Chinese solar products. Following is Morningstar's take.

[rffrydr]

Efficiencies doubled while replacing silicon with plastic; and the chinese, Xiaoyang Zhu, is an american from Houston:

http://www.latimes.com/news/local/environment/la-me-gs-breakthrough-double-solar-energy-output-20111216,0,3897047.story

Solyndra's revenge.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

$1/watt....Solyndra is exactly why we should make the big putsch. But, sadly the world doesn't work that way. --Certainly not the market.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Morningstar on Trina Solar:

[rffrydr]

China now the world's largest producer of panels yet exports 90%. No-one could use this tech more than china herself however and this will be a good test of what chinese "consumption" might look like in the near term--rather like ours, spend to save.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

The solar boom in China has been on a tear since March, and valuations are now again sky-high. From an economic standpoint, the latest subsidies for solar investment should make China the leader for installed solar power in just as little as three years:
------------------------------------------------------------------------------------
BUY OR SELL-China's solar stocks: Make hay while the sun shines?
Wed Jul 22, 2009 2:16am EDT

* Bears wary of rich valuations, weak demand
* Bulls see more upside with cost advantage, govt stimulus

By Sui-Lee Wee and Leonora Walet

HONG KONG, July 22 (Reuters) - Chinese solar stocks have been stellar performers since March, outshining their Western peers on hopes renewable energy support from Beijing will boost demand from the world's second-largest energy user.

Shares of Chinese solar product makers Suntech Power Holdings (STP.N) and Trina Solar (TSL.N) have tripled since March, when Beijing first announced subsidies, easily outperforming Western peers such as First Solar Inc (FSLR.O) and Q-Cells SE (QCEG.DE).

Beijing said on Tuesday it would subsidise 50 percent of investment for solar power projects, a move that could put China on track to become a leading market for solar equipment in the next three years.

The question now is whether investors should snap up Chinese solar stocks as second-quarter earnings approach.

SKY-HIGH VALUATIONS

"It's certainly not something to rush into ahead of the second-quarter earnings," said CLSA analyst Charles Yonts, adding the second quarter should improve from the first.

"But the big question will be on how the third quarter looks -- how much and where prices are headed is what everyone is watching for. Prices are still continuing to go down."

Global prices for solar panels dropped by about 23 percent between the end of May and mid-July due to weak global demand, according to a July 16 report by UBS.

Any share price upside for Chinese solar firms will be limited as the market still remains cautious about falling panel prices and inventory concerns, said Chan Ka-keung, chief executive of private equity firm Nature Elements Capital.

Despite the uncertain outlook, the Chinese firms are trading at astronomical valuations compared to their Western rivals.

Suntech trades at an estimated forward price earnings ratio of 46 times, while Trina Solar trades at 25 times, according to Reuters data. U.S. bellwether First Solar trades at 20 times and its rival Energy Conversion Devices (ENER.O) trades at 21 times.

"I advise investors to be cautious in investing in solar," said Jong-Yuk Kim, fund manager for KDB Asset Management. "Anyone who decides to invest in China's renewable space should have a huge appetite for risk."

COST ADVANTAGE

Despite the high valuations, some investors say Chinese solar stocks are still a good buy when one looks at projected future earnings.
China's solar panel makers are bidding for projects on the back of Beijing's stimulus package for renewable energy --- expected to be the biggest in the sector globally this year.

"With China moving strongly into renewables, these companies will certainly see some sort of upgrade in terms of valuations," said Thiemo Lang, a Zurich-based senior portfolio manager with Sustainable Asset Management.

"We feel more comfortable with the Chinese and Taiwanese companies like Gintech (3514.TW), E-TON (3452.TWO), Yingli (YGE.N), Suntech and Canadian Solar (CSIQ.O). These companies have a superior cost position compared to the Western manufacturers," he said.

Chinese manufacturers have been able to cut their prices more aggressively than their German and U.S. peers because they buy more polysilicon from the spot market where prices are falling and because of low electricity and labour costs.

European solar cell and module makers are selling their products 30 percent higher than Chinese firms, Lang said.

"It's difficult for Western companies to enter the Chinese market. Given the Chinese companies' superior position in China, it's a no-brainer that they will dominate the solar module market on a mid to long run," Lang said. (Editing by Doug Young and Valerie Lee)