A Look at Four Polysilicon-Based PV Manufacturers' Funding

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.

Solarfun (SOLF)

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".

Conclusion

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.

Disclosure: None

Comments

[fxtrader07]

In this latest article of a whole series you are finally revealing your true objectives (which you managed to hide somewhat in the earlier installments though in my perception the language and tone used by you were already pointing towards it):
' 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.'
Note 'all of these Chinese' which has a familiar sound of 'all of this chinese crap' to it.

Yeah, right. First you raised 'questions', then 'concerns' and now you 'continue to advise to avoid'. Hm. Very telling.

The only thing missing here is that you recommended your darling FSLR outright (you did that in a more subtile manner when bragging about their great cash flow in earlier articles. Never mind that they are the most overpriced solar stock out there - but you sure rather pay up big time for that cash flow and relatively mediocre earnings, right?)
Disclosure none? sure.

[beegdawg007]

You fail to acknowledge a fundamental and basic bit of reality here... right now short term debt financing is a lot cheaper than is longer term financing, and, short term rates are continuing to fall. Until short term interest rates have clearly bottomed, there is little incentive for these companies to even seek longer term financing.

My bet is that these companies will all engage in significant secondary offerings once their stock prices rebound. And, since that is probably their plan, why would these companies engage in longer term financing now! A company like YGE could issue 12 million shares (a 10% increase in outstanding shares) with a stock price of $30, and the company would have virtually no debt at all.

[RobertNilsen]

I am the new kid on the block here .. just had my first contribution published. I joined Seeking Alpha because I feel the contributors appear to be earnest people presenting their opinions in a professional manner.
If one wants the opposite of this just go to Yahoo Finance, pick a stock, go to Message Board and you will find some of the most puerile, vile language I have heard since being in the US Army. Most of the contributers there use 4 letter words .. some longer .. and they usually end in "er." Like m er. Get my point.
So .. lets keep this site civil and productive. It is ok to attack an analysis .... but not the author.
Final Point. Maybe a Goldman analyst can effect a stock price in the SHORT TERM or some analyst can cause movement in Merck (as said analyst has "concerns" over the drug Gardisal ... just as I have "concerns" whether my car will start in the morning), but to think that I or Envoy Global or Venus / Serena Williams or Art Callahan (my next door neighbor) can effect the stock price of any security by posting here is either supreme stupidity, ego, a severe reaction to too much alcohol or someone who has been watching too much Dr. Phil.
SO Envoy Global .. I do not care if you are long, short, fat or ugly. IT DOES NOT MATTER!
I disagree with your analysis ... but I will never attack you.
God Bless America and Freedom of Speech!

[fxtrader07]

yep, the author's hostility towards 'these chinese companies' is clearly increasing every time he publishes an article on them. I wonder how the next in the series will read. perhaps: mortgage the farm,'sell them short and buy fslr instead because of their 'great cash flow'?

[alpha24seven]

It's really funny how when somebody does some thoughtful analysis (whether you agree or not is up to you) but it draws out all the venomous "investors" saying stuff like "you must be a short".

Well folks, if he is right, and I think he is for the record, then why wouldn't YOU be a short?

The really interesting thing that these articles bring out is the lack of rationality and sophistication of supposed investors. He's not attacking China. He's not not attacking Solar. He's simply showing certain and potentially fatal weakness in these companies. No more no less.

[Piggybank]

if anything has been proven on this site it is the fact that youre average investor and commenter reading this site aint naive and stupid neither. We have the right to criticize these article's, and many a analyst article has clearly been found to light and absurd for us to believe.

There is some point towards attacking the contributor to, well atleast if he's comming from some bank that was instrumental in providing us the current crisis that has proven to be an unnesecary fly in the ointment to us alt energy investors, we havn't asked for this crisis, but the banks behidn the crisis are downgrading stocks now because of the crisis, thats just to ironic.

And they can clearly affect stock prices and make money on their own by it. Stocks move quite often on analysts down or upgrade's, and they can build their position before the move happens..

[puerhfan]

You all just need to chill out. Everytime someone writes anything bearish about any solar stock, all the personal attacks begin. If you don't agree then state your rationale instead of attacking the author and seeking alpha. All the personal attacks make me think the bears are on to something.

Long AMAT. No other solar position either long or short.

[DALE 10,1]

I HAVE GENERALLY FOUND YOUR ANALYSES INFORMATIVE, BUT I'M BEGINNING TO SUSPECT A LACK OF ETHICS FROM NEGATIVE APPRAISALS FROM ANALAYSTS DOWNGRADING STOCKS IN WHICH THEY HOLD SHORTS. I SHALL CEASE READING SEEKING ALPHA IF I CONCLUDE THAT YOU ARE GRINDING AN AXE AT YOUR READER'S EXPENSE. I BELIEVE THAT ANALYSTS SHOULD NOT APPRAISE ANY STOCK IN WHICH THEY HOLD A LONG OR SHORT POSITION.

[Jack Yetiv]

Since very few commenters have actually done so, let me comment on the merits of your article, VERY briefly (side-note: The vitriol contained in some of these comments is not helpful--if a poster says stuff you disagree with, address the issue):

1) The major newsflash from your article appears to be that these four companies will either (a) have to borrow more money, and/or (b) issue shares in one form or another.

Anyone semi-informed in this area knows that. No newsflash here.

2) Borrowing money may be difficult, issuing shares may be difficult. As to the former, I'm not sure how true that is in China. I suspect the Chinese govt would prefer these concerns not go belly-up. In addition, recall that these companies have presold all their production in 2008--and much of 2009. Seems to me the risk is pretty low.

As to the latter, ENER and CSIQ and others have had no problems selling extra shares because the resulting dilution is tolerable in the eyes of investors.

3) Be careful out there! Appreciate the sentiment, but shouldn't we "be careful" if we are paying a PE of 100 for FSLR--or are capital issues the ONLY way you value a company?

Jack Yetiv

[noirplease]

They say..."neighbour'... grass is always greener" so FSLR's as fat as the oil itself...regardless the Chinese bank has more cash than the " US printer". Oh well...the right thing to do is to pray Chinese won't pee that dollar, because something tells me they will flood Wall Street....if they will...quite frankly:)
Just think about,

[aquaculture]

This article is somewhat better. But still:

<<"the polysilicon supply/price situation will ease soon" meme appears to resurface every once in awhile...

If a commodity can be produced for between $20-$30 and sold for between $200-$500 is it not reasonable to assume that market forces will correct the current situation?

But don't take my word for it.
In this regard, the weighted Photon Consulting Silicon Price Index (PCSPI) a $-denominated market index, started in May 2008 designed to benchmark global spot and contract prices for high purity silicon, will increase price visibility. The PCSPI report is published every 3rd monday of the month at 4pm ET.
(As a side-note: Virgin Poly Spot prices for Taiwan and the greater China region are down to $430 this month having peaked at $500 earlier.)
Do your own research Envoy.

<<particularly since none of them have any particularly unique/defensible technology and/or pricing power.....

Untrue and as far as pricing power: a bit misleading.
As a "unique" example: new Upgraded Metallurgical Grade Silicon UMG-si technology.
CSIQ started production in April 2008 under the e-panel brand. Well received in the conservative German marketplace. Sold out for 2008 and 2009. CSUN to start UMG-si technology in 2009. Others no doubt will follow as "by 2015 half of all silicon in solar panels will be UMG-si" (not my words).

[DALE 10,1]

I HAVE FOUND SEEKING ALPHA INFORMATIVE UNTIL LTELY, WHEN YOU HAVE BEGUN DUNNING SOLAR STOCKS ON VARIOUS QUESTIONABLE PREMISES. IT IS UNETHICAL FOR AN ANALYST TO RECOMMEND .DOWNGRADING AND SHORTS FOR STOCKS FOR WHICH THE ANALYSTS HOLDS SHORT POSITIONS!

[EnvoyGlobalResearch]

Thank you all for your comments. Even those of a vitriolic quality, have taught me a few things about the nature of investors in these stocks, and their thought processes.

If you are inclined to believe that accounting earnings are a true measure of a company’s profitability and that soaring debt levels are a sign of financial health and investment quality, please stop reading this comment now, and safely ignore all our posts.

If, however, your investment experience has shown you that a large, negative, mismatch between accounting earnings and operating cash flow (before cap-ex), combined with soaring debt levels is a sign of financial trouble, and in some rare instances financial fraud, I think you’ll at least pay some attention to the concerns we raised, though perhaps you will disagree, and rightfully so, on the eventual outcome.

At the risk of repeating myself, the point of these articles on some polysilicon-based PV Solar Manufacturers, whether Chinese or not, is merely to point out the following:
1. Despite positive accounting earnings reports, not one of the solar companies mentioned in these reports, and a few others not mentioned, actually makes any money. As such many valuations, such as P/E valuations, are not useful and are misleading. Once again, Accounting Earnings believers, please read paragraph 2 of this comment. Others, the proof of this is in the financial statements in every single 20-F.

2. The reason these companies don’t make any money has nothing to do with their growth profile or cap-ex needs. They can’t make money simply because the competitive nature of the polysilicon-based PV industry (every Joe Schmo can manufacture the same type of panels and cells) and tight supply of polysilicon, has created a unique working capital situation where companies are forced to offer ever longer credit sales, while at the same time are forced to pay huge amounts of money upfront for raw materials. This lower level of actual cash receipts from customers, combined with an ever increasing amount of cash payable to suppliers (known as purchase obligations and also available in every 20-F) makes the business unprofitable. I see no reason why this working capital situation will change any time soon. Nor do any of the companies, as they all openly warn in their 20-F's.

3. Since these companies don’t make any money, they are forced to borrow money at ever increasing rates to stay in business. Companies, like individuals, that are built on debt and do not really have the necessary self-funding cash flow to meet future obligations are destined to collapse when funding dries up, which it always does.

Best of luck to everyone here.

[mistermaumau]

Envoy, you base your arguments on pretty specific details and never look at the whole story to estimate the level of risk. You also do not compare to historically safe stocks that resort to risky lending practices or previous startups in booming sectors that have become leaders despite having no own cash initially. You would do well to remember the outlook for solar over the next 10, 20 or 50 years or find arguments to explain why the solar industry might just die (like some biofuels will do soon) because no-one will ever make money, right? Is this maybe why the US is so hesitant to invest in this industry? How many US companies really are into solar and won't they end up producing in China when margins get tight anyway, like all other companies?).
You would do well to explain to all the motive behind GE's purchase of a 35% stake at the price they paid. Sorry to say it but I'd rather trust a 5b$ investor's research and opinion who puts money where his mouth is than some unaccountable blogger who cannot publish unbiased analysis. The word analysis should be removed from your text as it is only opinion/desire you are stating and nothing more, company 20-F's are more objective than your texts by the nature of all the inherent warnings, they permanently remind us they may not have access to financing or be able to complete plans. As Jack mentioned and you didn't, look at estimated revenues knowing that it is based on PURCHASE OBLIGATIONS. Knowing that most of the distribution sequence from raw materials to wholesalers functions on this basis and that there is a waiting list for orders for most products, the only thing that need worry anyone is if end-users suddenly lose interest in solar and that doesn't look to be anywhere near (on most of the planet anyway). You may want to watch There Will Be Blood for a reminder how oil prospecting and financing worked some 100+ years ago and see what it led to.

[bigswing]

First, all the 4 companies are high growth companies (see their quarterly and anual revenue and net earning growth)... for a high-growth company in a high growth industry, carrying some debts (either long-term or short-term) are very normal. They need to spend borrowed money in expanding their capaticy. Therefore some cap-ex are very normal so long as these debts are within managable level.

Second, these comapnies are making money, not as you said "lossing money"... Solar companies that are losing money now are ENER, ESLR, AKNS, ASTI, HOKU, DSTI... which are not included in your discussion...

[EnvoyGlobalResearch]

Once again, you are mistaking my critique of several specific solar companies as an argument against the entire solar industry. I've never once mentioned anything negative about the entire solar industry. In fact I am very bullish on solar and I 100% agree that the solar industry presents some great investment opportunities, but I don't think the companies mentioned here are one of those opportunities.

[bigswing]

The fact is none of the 4 companies need borrowed money to support their currently operations which are profitable despite high silicon costs... Their debts are used to expand their production capacity due to worldwide growing demand...

Another fact is that polysilicon is dropping now from the peak price $450-$500/kg earlier this year and more drop is expected later this year... There are several authorative forcasts now predicting that polysilicon price will drop well under $200/kg in 2 to 3 years...

[Aalan]

As a recent and somewhat worried solar investor, I appreciate being able to read all sides of the discussion in the format. Seeking Alpha is a great resource! I'm especially looking forward to reading more from Jack Y.

[gebby]

there is a concerted campaign amongst threatened industries to down play solar. unless of course they are willing to build solar farms. the demand is so great for these chinese solar products that short term financing is not a problem. the cash flow is there. look to buy them on further weakness.if u watch cnbc the only solution to the energy crisis is drill drill drill or coal or n gas. never solar...why is that. cnbc is owned by ge. oh ge likes wind.

[bigswing]

Anyway, all solar stocks (including the 4 you mentioned) will bounce back from their recent low and will see 30%-60% gain in stock price in 2 months (depends on market condition)... wait and see

LDK $29.72
YGE $13.57
STP $32.02
JASO $13.75
TSL $26.40
SOL $12.02
CSUN $6.68
SOLF $12.70
CSIQ $29.55
FSLR $234.00
SPWR $59.58
WFR $53.59

[ac_48]

Envoy global,

You said < In fact I am very bullish on solar and I 100% agree that the solar industry presents some great investment opportunities, but I don't think the companies mentioned here are one of those opportunities. >

Name a few companies you think will do well, and explain why they are better than the 4 companies you are so bearish about.

[gebby]

who is funding envoy capital? the oil and gas industry?

[vitamin_j]

I agree with "Envoy" that one should consider cash flows when assessing solar companies. "Earnings" should be viewed with a grain of salt, or at least in context, since they're the sexy numbers everyone oohs and ahhs at (or the opposite) each quarter.

I also agree with other comments that Envoy's analysis doesn't seem to consider these as high-growth companies in a high-growth industry - these companies will need to spend lots on cap-ex, of course, but most solar investors are aware of how much silicon costs right now and take that into account.

Also, I'm still skeptical of Envoy's apparent view that silicon costs will stay high. I'd especially like to hear a reaction to the reports by several companies that long-term contract prepayments - the financial albatross that will supposedly sink these companies, in Envoy's view - have gone from 10 - 12% of the contract to 3-5% of the contract in the past year. This would indicate a trend, right? Envoy doesn't seem to think so. In my view, he is wrongfully taking a snapshot of today's environment and projecting it too far into the future. I think instead it is safe to assume declining silicon prices from 2008 on - one could argue about how fast prices will fall, but fall they will, based on the reporting of long-term contracts mentioned above.

[ac_48]

Envoy global,

One thing you seem to miss is the "scale". A good example will be Dell Computer, it has no proprietary technology, low threshold to entry, but it has the scale to become a $45B business today. That is exactly the 4 companies you mentioned are trying to achieve- scale. They could over extend themselves financially, if the demand does not keep up with the supply. But they bet on it with their money. All the major players are doing the same thing, including Q-cells and First Solar- your favorate solar company. Their huge investment in CAP-Ex may turn out to be a bad investment... we will see.

[klemenv]

According to pv-tech on 7th of July:

Canadian Solar, Inc. has inked five new sales contracts totalling 14.9MW over the past three weeks. The Italy- and Czech Republic-based companies, who will receive a total of 14.9MW of modules from Canadian Solar in the second half of 2008, are: Arco Energy, AC Service, Ravano Green Power and Albatec in Italy and WSW in the Czech Republic.

With this new set of orders, CSI's geographic sales are as follows, with all figures estimated: 60% from Germany, 15% from Spain, 7% from the USA, and 10% from newly emerging markets in the rest of Europe. Approximately 8% of this year’s sales figures are from South Korea and China.

[buystocks]

"Once again, you are mistaking my critique of several specific solar companies as an argument against the entire solar industry. I've never once mentioned anything negative about the entire solar industry. In fact I am very bullish on solar and I 100% agree that the solar industry presents some great investment opportunities, but I don't think the companies mentioned here are one of those opportunities."

Come on, CSIQ already pre-sold their Emodule into 2009, on the Q1 stating about 130mw, the E-module can compete with price and efficiency. ALSO CSIQ is seeing a very strong demand in 2009, and expecting 500-550wm in 2009 in conservative view.

[buystocks]

So CSIQ is an opportunity...anyone agree?

[Chipstocktrader]

Envoy,

Great analysis. Bu how would you compare Amazon.com in this regard. They were unprofitable for many many years and sunk every dime into developing their business. In the end - it paid off.

I read a recent report from UBS (and others) that over a 170 companies are now intensely engaged in bringing new raw poly to market - and as this poly came onstream in 2H2008 and 2009 the increase in poly supplies will be four fold from present levels. That's a lot of new supply. Hemlock - one of the world's leading suppliers - believes that the supply/demand curve has already turned and that existing suppliers can easily provide all or more of 2008's poly needs.

So I see two dynamics here: falling supply costs + the hope that the United States would embrace solar and wind with initiatives similar to California, Spain, Japan, and Italy to get solar back onto the front burner. I find it remarkable that the only decision-makers in the U.S. who seem against the government supporting and developing FREE alternative energy sources(solar/wind/wav... are the U.S. congress (18% approval rating), the president (23% approval rating) along with the biofuels farmers and Big Oil.

The PV industry very much reminds me of the early days of the semiconductor chip equipment companies: it's like high-stakes poker. They have to ante-up in order to buy the new equipment with the better die sizes (cost efficiencies) and better technology development (technology improvements) in order to stay in the game. Right now, it looks like thin-film is winning the game because poly costs are a minimal or non-existent part of their business (ENER, ESLR, FSLR, Nanosolar). But poly technology has been around 40 years. Is it just going to "go away", supplanted by thin film? And if the long-term poly costs return to $100/kg - after that it all comes down to labor costs and manufacturing costs. Last time I looked China was the world leader in those areas.

Probably - within three years from now - all the companies you mentioned will have been consolidated into a company like Q-cells with deep pockets. They only thing they really need is money, yes?

[buystocks]

"2. The reason these companies don’t make any money has nothing to do with their growth profile or cap-ex needs. They can’t make money simply because the competitive nature of the polysilicon-based PV industry (every Joe Schmo can manufacture the same type of panels and cells) and tight supply of polysilicon, has created a unique working capital situation where companies are forced to offer ever longer credit sales, while at the same time are forced to pay huge amounts of money upfront for raw materials. This lower level of actual cash receipts from customers, combined with an ever increasing amount of cash payable to suppliers (known as purchase obligations and also available in every 20-F) makes the business unprofitable. I see no reason why this working capital situation will change any time soon. Nor do any of the companies, as they all openly warn in their 20-F's."

So you are saying Q-Cell don't make money too as a silcon base company?

[CSIHawaii]

This must have hit a nerve, perhaps because it gives Envoy Global's real name! I posted it yesterday and I presume Yehuda had it deleted.

Seeking Alpha Profile:
Yehuda Fruchter is Founder and President of investment firm Envoy Global, Inc., where he leads investments in private and public companies. He has over ten years experience in the financial industry. He started by day-trading at Schonfeld Securities, became a regular contributor to InsiderTrader.com, then joined Value Line’s equity analyst team, and now provides equity research services to institutional and high net-worth investors.

Translated this means that former day-trader and analyst Yehuda Fruchter didn't succeed at making enough money at his previous occupations and is now advising clients. If (just if) he has advised clients to short the 4 stocks and they have not yet reached his target, it is only natural that he would want to share his reasoning with the rest of us. This might just be enough to drop the price to his cover price target and help him look good. Everyone has an angle. If Yehuda had done a disclosure we may not have to guess about his.

The overwhelming negative response to the article and to Yehuda is because we can immediately recognize that he has an angle - and it is not to serve Seeking Alpha or its readers. This narrow article exhibits a narrow portion the companies financial circumstances and analyses this with an American bankers conservatism. For example, the exponential growth as projected by most analysts and the differences between American and Chinese business culture could completely change the conclusion. Facts + assumptions + innuendoes do not equal facts.

[tosif]

yge appears to be good for day trading .2 days only, do you agree?

[tosif]

YGE appears to be good for day trading, 2 days only, do you agree?

[noirplease]

Envoy,
supply/demand curve? If any "Joe Schmo" has petrolium refineries, does IT makes petrolium cheap? There isn't any metric supporting high silicon prices but I can name many reasons supporting polysilicon based PVs. In fact, there is one for every contract which Chinese solar companies are signing? hmmm... Just too many customers crazy about that silicon based PVs...too many to be so "wrong"? Don't you think...SO? SB?

[rana]

in this post i'll be an advocate in behalf of envoy.
untill this post he gave no data and was plain negative.
in this post he specified the cash needs of the companies as he translates them form the reports and gave us his opinion of the danger that lies ahead.
in his opinion this will bring this companies to bad times in the future.

there is nothing wrong with that. on the contrary, we must embrace any opinion that is based on data, as this makes us more educated about what we are facing.

we don't need to afree with this, but we must say thanks for the data presented to us.

those of us that already knew this will look forward for other new data which will be posted.

so to you emvoy don't mind what people are saying. as long as you bring data to support your assumptions and your analysis this is a good thing.
this is coming from one of the people that really disliked the early posts as they gave no references to any data. on this post and somewhere earlier in another thread there were references so it's a good thing.

i personally read things differently, but i totally agree that there is big risk when money needs to be raised constantly, for a company and even can be for a sector as a whole. at least in the short to medium term regarding the sector.

[EnvoyGlobalResearch]

Thanks again for your comments.

I would just like to clarify that SeekingAlpha.com merely syndicates our summary content from Envoy Global Research with a time delay, while the full research, including spreadsheets, numbers, and contrary opinions, is only available to subscribers at our website.

So, if information seems to be lacking from some of the posts here it is not the fault of SeekingAlpha or Envoy, but merely due to the way these summary articles are syndicated online. Unfortunately, we cannot publish the full reports here.

Best of luck to everyone.

[Skaterdude]

I've been "lurking" through these posts and finally had to comment. The postings here got me to actually read the SEC filings (2007 year-end) for SOL and SOLF. (I know SOL is not one of the companies mentioned in this article, but it's pretty much in the same boat.)
One of the things I wanted to see was the "growing operating cash losses" mentioned at the start of this article. I don't see them. I expected to see some odd accounting charges, outright negative net income, etc., but it's not there. Yes, I agree that these companies have heavy capital needs due to the situation with advances to suppliers. That's only a serious problem if the suppliers go under and the advances cannot be recovered. The other risks seem to me to be the same risks any growing technology company assumes (as someone else already mentioned). With committed contracts and prices on both sides, it would seem like neither the upside nor the downside is significant in the near term (2 years).
So ... could you walk us through your numbers and show how you come up with the operating cash losses?

Thanks

[Just a Hick]

Iomagens,Press-Tekians... Solarfanians.....

[aquaculture]

Whats that? a hick-up?

[10QDetective]

BRAVO! Solid Research. Two other issues weighing on probability of SolarFun's LT survivability:


there is another squeeze going on here, an alleged scam i see developing between SolarFun founder Lu and GCL

To wit:

1. Contrary to statements made by news hounds and industry watchers, the GCL contract will not help will help Solarfun meet expected shipments in the range of 160-180 megawatts for 2008. Look closely, for the contract is just a restatement of an existing — and unfulfilled — contract!

industry.bnet.com/ener.../

2. Founder Yonghua Lu is powering up only his own bank accounts--will all collective monies common from naive ADS shareholders.

industry.bnet.com/ener.../

My Best & Stay in touch!

David J Phillips - Editor, 10qdetective.blogspot....
Contributing Energy Analyst
CNET/BNET

[alphameister]

It seems to me inevitable that companies growing at explosive rates in one of the most promising markets are going to have negative cash flows, not simply because of needed capital expenditures but also because of hugely expanding working capital requirements. But as long as the substantial purchase contracts for their products are sound, it doesn't seem likely that financing will be a problem. Tight markets for polysilicon permit suppliers to dictate stricter payment terms than can be achieved from customers of these firms within a highly competitive environment. So the negative cash flows seem entirely reasonable to me, and it does not follow that these firms are reporting earnings based on smoke and mirrors.

[stoyan]

read the article and all the comments -- let's keep the good discussion going !

TSL priced the convertible offering a couple of days ago -- I have to say -- very much supports what envoy had suggested...

longs, shorts - what do yo think? now that the dilution is official, should TSL be removed from the 4-company list above or not?

[imuni4fun]

Personally, I was not bothered by the share dilution of CSIQ and TSL. Since financing seems to be the only problem analysts point at when warning about these companies, I would just assume take a small dilution hit (when compared to the growth potential) so that the analysts can't say these things anymore. If the fears are abated, this sector would be much healthier and would grow much faster. Those P/E's would approach more reasonable levels :)

Long TSL, SOLF
Long Calls on TSL, SOLF, CSIQ

[bigswing]

Solar stocks rise more than 30% on average since this article published. I listed the price on July 8 and predicting it will rise in 2 months, now see the result:

Price on 7/8/08 Price on 8/25/08
LDK $29.72 $50.95
YGE $13.57 $18.39
STP $32.02 $47.26
JASO $13.75 $18.43
TSL $26.40 $34.92
SOL $12.02 $19.70
CSUN $6.68 $12.31
SOLF $12.70 $20.60
CSIQ $29.55 $33.24
FSLR $234.00 $277.00
SPWR $59.58 $96.98

This proves how wrong and how stupid this author.