Suntech (STP), which was the biggest solar panel supplier in 2011 has seen a sharp rally in its stock price in the last couple of months. The reasons for the solar sector surge are support from the Chinese government and sales of two large utility plants by Sunpower (SPWR). However, we think that Suntech rally will not last and the company's stock price will continue to be under pressure. The overall bearish scenario of global solar panel oversupply, below cost ASP and Suntech's bad management remains unchanged. The huge overcapacity in the solar supply chain is not resolving itself due to the continuous bailouts by the Chinese government. While all solar companies have seen their stock prices fall off a cliff, Suntech has been among the worst affected. This is due to its bad management and higher cost structure. The company has made a large number of strategic mistakes, which has led to its current sad situation. We think that the company's balance sheet does not reflect the true value of its assets and has negative book value.
Why we don't like Suntech
1) Negative Book Value - Suntech has already written more than one billion dollars due to bad investments (thin film, polysilicon etc.). However, we think that Suntech's balance sheet is still not reflecting the true value of its equipment. The company's PPE value ($1540 million) is still quite high compared with Trina solar (TSL) ($900 million), which has similar capacity. Like LDK Solar (LDK), Suntech cannot afford to write down its assets as it would show that the company has negative book value. The company has not released earnings after Q112 due to the Italian fraud in which it lost ~ $60-$80 million.
2) Bad Management - Suntech management has made numerous errors over the last four-five years. The management has been claiming improving gross margins through superior solar cell technology "Pluto" but has never delivered on that promise. The company has also made numerous bad investments into polysilicon and thin film, both of which it had to write-off. The management also entered the solar wafer part of the supply chain by investing a huge amount at exactly the wrong time. When the capacity got built, the whole wafer segment saw a massive price crash. To top off this whole series of blunders, Suntech reported a loss of $60-$80 million due to a fraud by an Italian solar company (in which Suntech CEO also had an equity stake). I think it might not be unfair to say that the company has probably got the worst management in the solar industry. (Though LDK management would run close.)
3) High Debt - Suntech has one of the highest debt ratios in the solar industry and recently hired UBS to restructure its debt mountain. However, with the company continuing to make losses, it seems hard to see how UBS can do anything. The company has to depend on the Chinese government bailouts to operate.
4) High cost structure - Suntech has one of the highest processing costs in the solar industry, which makes it harder for Suntech to gain ground. Even with the lowest-cost players losing money, the situation of Suntech is even worse. Suntech has not managed to catch up to its low-cost peers despite vertical integration.
5) Global overcapacity in solar panels- Despite a number of solar company bankruptcies, the global solar panel market remains oversupplied in a roughly 2:1 ratio with around 32 GW of global demand being supplied by ~60 GW of capacity. With 2013 demand expected to be around ~35 GW, supply-demand balance will not happen soon.
6) Falling Market share - Suntech has lost market share as Chinese rivals like Trina Solar , Yingli Energy (YGE) and Jinko Solar (JKS) have gained market share from Suntech. The company lost its position as the world's biggest solar panel supplier to Yingli Energy.
7) Lack of differentiation - The crystalline silicon solar panel has become a commodity with little differentiation. Suntech, which earlier used to command a big premium, has lost that advantage in recent quarters. Being categorized as a Tier 1 supplier has also been of not much help as there remains excess capacity amongst Tier 1 suppliers.
8) Potential Share Dilution - LDK Solar, which is also a heavily indebted solar company, has diluted itself twice in the last six months as it struggles to stay afloat. We think Suntech too will have to dilute its shareholders to raise cash.
9) European Solar Duties - Europe will soon decide on imposing anti-dumping duties on imports of Chinese solar panels. The U.S. has already imposed ~30% duties on Chinese solar modules and Europe is expected to follow the U.S. example. Some of the biggest European solar companies like Q-Cells have gone bust and others like Solarworld and REC are on the verge of insolvency as well. Suntech and other Chinese companies have become desperate as Europe accounts for almost ~75% of the global demand
Suntech Upside Risks
a) Chinese government and bank support - Suntech like other big solar companies in China have got massive support from Chinese government and banks in the past. They continue to receive bailouts from the government despite the global solar trade wars. LDK, which is as bankrupt as STP recently got an additional ~$70 million loan from Chinese Development Bank (CDB). Suntech has also benefited from local government support and investment. The company continues to win contracts using the Chinese government influence in foreign locations.
b) China's 10 GW solar target in 2013 - The Chinese government recognizes the threat to its huge solar industry employing over 400,000 people. The government is not only trying to fight the U.S. and Europe, but also has announced a massive increase in solar capacity for 2013. China plans to install 10 GW of solar panels, which will make it the biggest solar country in 2013. Suntech being one of the government's favorites should manage to win a big chunk of the orders.
Suntech has been showing losses for the last few quarters as industry pricing remains below cost for most solar companies. The P/S is quite low at 0.1x while P/B is also low at 0.3x. However, the book value of the company may be misleading as we think that the company has not written down the value of its PPE. However, the company's low valuation does not mean it is a good stock to buy. It is a value trap because the company is not making any profits and it does not look like it will do so in the near future.
Stock Price Performance
Suntech has been one of the worst stocks to own in the last five years showing a price decline of ~95%. While other solar stocks have also fallen, Suntech is one of the worst performers. The company has traded between $0.71-$4.4 in the last one year and is currently trading ~100% above it all time low of 71c.
Investors looking to buy into the changing fortunes of the solar industry should avoid Suntech and LDK Solar. These companies are surviving only due to Chinese government generosity. We think that both companies would have negative book value if they wrote down their assets to their true value. First Solar (FSLR) also is not a good investment as its Cd-Te technology is also not cost competitive with the mainstream crystalline silicon technology. We think there are better Chinese solar alternatives in the form of Renesola (SOL), Canadian Solar (CSIQ), Jinko Solar and others.