In this post we will take a look at the future capital needs and funding requirements of four Chinese polysilicon-based PV Manufacturers.
Briefly, our conclusion, based on current low cash levels, high outstanding short-term debt as a percentage of total capital, and future capital needs, in the form of outstanding purchase obligations listed in recent 20-F filings, is that nearly all of the companies mentioned here will have a significant weakening of balance sheets in the near term, as short-term debt levels soar to support growing operating cash losses and purchase obligations. The prospect of immediate dilution via direct equity share offerings is clearly remote, as past history shows that these companies prefer to use convertible debt issues, as opposed to straight equity, as a longer-term financing vehicle.
The current method of financing for these companies, in the absence of converts, is short-term bank loans from local Chinese banks, with much of these loans secured by related parties. The growing balance of short-term loans is apparently not seen as risky, even when they approach high levels of total capital, since these companies have, in the past, been able to quickly flip these loans into longer-term convertible issues, when, and if, share prices recover for short periods.
This ponzi-like cycle of financing can, in theory, continue indefinitely, until foreign investors become concerned about the continued cash losses, and deteriorating balance sheets. At that point business models may be questioned, share prices could plummet further, and investors could refuse to participate in the longer-term financings to replace the local bank loans. Chinese banks may conceivably continue to support these companies, but ironically their seeming refusal to currently finance these companies on a longer-term basis, does not bode well for their willingness to offer longer-term financing in the future if cash becomes scarce from foreign investors.
Alternatively, it's conceivable that some of these polysilicon-based PV Manufacturers will secure enough financing to survive until they become self-sufficient on an operating cash-flow basis. However, as noted in past reports, the nature of the business implies that operating self-sufficiency is far off into the future for all these companies and given their position in the solar supply chain may, in fact, be a "pipe dream".
Interestingly, though the "polysilicon supply/price situation will ease soon" meme appears to resurface every once in awhile, supporting improved cash-flow projections, it's unclear where the source of optimism originates from. Every single 20-F from each of the mentioned manufacturers, as well as reports from other industry participants, projects continued polysilicon shortages and high poly prices for the foreseeable future.
In sum, we continue to advise investors to avoid the shares of all of these Chinese polysilicon-based PV Manufacturers until specific financing is announced and the longer-term financing and negative cash-flow issues facing these companies is addressed.
And now onto specific companies:
Trina Solar (TSL):
TSL is currently the company that is most heavily reliant on short-term financing, with $322 million in short-term loans as of May 2008 (see page 58 in 20-F), up an incredible 100% from $160 million at year end 2007. The current short-term debt figure represents nearly 50% of the company's total capital. TSL had $38 million in cash as of 3/31/2008, but that cash level has been increased via the recent boost in short-term loans.
With an Envoy estimated 2008 EBITDA of approximately $145 million, and purchase obligations of roughly $245 million this year (including cap-ex), and $217 million in the next 1 to 3 years (page 58 in 20-F), we estimate that TSL has a funding gap of at least $180 million in the coming year. (Note that due to accounts receivable, and other financing, issues as discussed in previous posts, not all estimated EBITDA can be used for capital purposes).
As noted above, since TSL has already secured nearly $160 million in short-term financing already this year, it would appear that the company will probably only need to raise an additional $50 million or so in the next six months to support operations.
However, given the company's already high level of short-term debt, one wonders how much more debt the local Chinese banks will lend to TSL. More importantly, it's unclear why these banks will care to hold onto this debt, particularly given the prospects of continued cash losses for TSL in 2009. As such, it seems highly unlikely that TSL can carry such a high balance of short-term loans for much longer and the company must surely be facing pressure to refinance these loans. As such, we expect a convertible offering from TSL in the coming months, which will be used to pay off these short-term loans.
The higher proportion of short-term financing as a percentage of total capital, could be the reason for TSL's lower valuation relative to the others in the group. At current prices, TSL trades for an Enterprise Value or EV (Market Cap – Cash + Debt) to estimated 2008 EBITDA of about 6.5 and EV/Sales of 1.2X. (Note: The level of debt at these companies necessitates an enterprise valuation, and market cap valuations, such as P/E's, which do not take current and future debt levels into consideration, are highly misleading and unjustifiable).
Canadian Solar (CSIQ)
CSIQ has the highest relative valuation of the current group of companies, and at the same time the highest purchase obligations in the next 1 to 3 years.
As of 3/31/2008, CSIQ had total debt of about $90 million ($71 million in short-term debt, up from $40 million at year end 2007) and $32 million in cash, taking into consideration the conversion of the company's previous $75 million of convertible notes, which added about 4 million shares to the company's share count.
Though, CSIQ's total debt is still relatively low as a percentage of total capital, that situation will surely change dramatically in the coming weeks or months. That is because, CSIQ has $338 million in purchase obligations (including cap-ex) this year and an additional whopping $632 million is due within 1 to 3 years (see page 60 in CSIQ 20-F). As noted above, the company had a mere $32 million of cash as of 3/31/2008, to support these obligations. Moreover, CSIQ recently upped its cap-ex budget for 2008, so our estimates above could prove to be too low.
With an Envoy estimated EBITDA in 2008 of about $115 million, and increasing accounts receivable growth, we believe that CSIQ is need of at least $320 million relatively quickly, in order to support operations. It will be interesting to see how the company plans to finance these cash needs when the next earnings report is announced. If we had to guess, the company is currently being held on life support by Chinese banks until a very large convertible can be completed on Wall Street.
At over 10X EV/2008 Est. EBITDA and 1.5X EV/2008 Est. Sales (EV is calculated using the additional 4 million shares from the recent Note conversion), the shares appear quite expensive, especially considering the near-term financing issues.
As of 3/31/2008, SOLF had $85 million in cash, and $339 million in total debt ($143 million short-term and $172 million in converts due in 2018).
With an Envoy estimated $95 million in 2008 EBITDA, and nearly $550 million in purchase obligations (includes $150 million in cap-ex) in the next year and $350 million in the next 1 to 3 years (see page 65 in SOLF 20-F), we think SOLF is on the hook for at least another $400 million in 2008.
Given SOLF's already high debt level as a percentage of capital and lower EBITDA prospects as compared to the CSIQ and TSL, we think the financing of $400 million for SOLF will be quite tricky in the months ahead. Luckily, the company completed a large convertible earlier this year, and the cash proceeds could conceivably support the company for one more quarter or two. After that, expect another large convertible.
At over 9.5X EV/2008 Est. EBITDA and 1.3X EV/2008 Est. Sales, the shares appear expensive and we have strong doubts about SOLF's long-term viability given the already high debt level.
Yingli Energy (YGE)
YGE is seemingly the most vertically-integrated of the companies mentioned in this post, and therefore reports the highest reporting operating margins of the group. Nevertheless, despite the relatively better operating profile, the company is not immune to the cash-flow issues facing the industry.
As of 3/31/2008, YGE had $80 million in cash, and $290 million in total debt ($115 million short-term and $175 million in converts).
With an Envoy estimated $200 million in 2008 EBITDA, and nearly $585 million in purchase obligations (includes cap-ex of about $275 million), in the next year and $150 million in the next 1 to 3 years (see page 98 in YGE 20-F), we think YGE requires about $450 million 2008.
Given YGE's lower overall debt level as a percentage of total capital, higher estimated EBITDA and lower capital needs looking out 1 to 3 years, it would appear that the company may have a somewhat easier time raising appropriate financing than the other companies mentioned in this report.
However, at about 10X EV/2008 Est. EBITDA and 2X EV/2008 Est. Sales, the shares appear to already reflect the company's better relative positioning and financing "breathing room".
In conclusion, for TSL, CSIQ, SOLF, and YGE, the same basic story should play out over the next few months and year. Balance sheets will continue to deteriorate as debts pile up to support operating cash losses (due to previously mentioned raw material purchase obligations and higher accounts receivables) and cap-ex. At some point, foreign investors will tire of financing these companies, particularly since none have them have any particularly unique/defensible technology and/or pricing power. Investors should continue to be suspect of valuations of these companies that utilize accounting earnings and revenues, and instead should focus more on operating cash-flow, balance sheets, financing options, and future purchase obligations.