Q-Cells Sale Sells Solar Growth Short

by: Peter Pham

The insolvent German solar panel manufacturer Q-Cells is being sold to the South Korean group Hanwha. Q-Cells will be integrated into Hanwha's solar subsidiary Hanwha SolarOne (HSOL). On 29th August, the creditors of the once leading global solar panel manufacturer decided to accept Hanwha Group's bid for the struggling firm. This would be the second solar company from Germany that is being sold at a discount this week, after Solon was also sold to an Indian buyer.

In April this year, Q-Cells had filed for bankruptcy citing intense competition from Asian rivals such as Trina Solar (NYSE:TSL), Suntech (NYSE:STP) and Yingli Green Energy (NYSE:YGE). Between global oversupply and reductions in government support and subsidies margins have disappeared for many companies over the past two years. The European debt crisis and subsequent recession across Europe have pushed several local solar firms into bankruptcy.

This is a natural consequence of building an industry through non-market mechanisms and always ends in tragedy for some while those with either deeper pockets or ties to the local government scoop up unproductive assets at pennies on the dollar.

The Hanwha Group will take over most of the business, including the manufacturing plants in Germany and Malaysia. The company will lay off 200 people, mostly in Germany. The acquisition still needs the approval from EU authorities but industry analysts consider this a formality, since Q-Cells was lucky to have a buyer at all.

Hanwha has struggled along with the rest of the industry with revenues dropping 64% year over year and are currently hemorrhaging money. But, the parent group's deep pockets are obviously committed to the long term viability of solar power and are continuing to invest in it. Purchasing Q-Cells was probably cheaper than spending money directly on R&D. Hanwha will not likely ever be a leader in this industry, but stripping Q-Cells of what it has left will help them stay competitive while the industry recovers.

The global solar industry continues to struggle. Solar ETFs like the Guggenheim Global Solar Index ETF (NYSEARCA:TAN) looks like it is building a base between $16 and $20 per share. If the industry is to turn a corner it will have to do so after more deals like this one without support from government intervention. U.S. based First Solar (NASDAQ:FSLR) posted stronger results for the second quarter but it benefited mainly from the trade tariffs on Chinese competitors and pulling deliveries forward, and over-supplying a major solar farm in Agua Caliente in Arizona, which caused its stock to crash late in the week.

The global solar industry is still coping with the downward trend in panel prices. Trina Solar's earnings made it clear that ASP's and cost of production right now were practically equal at around $0.70 per watt. But, they are forecasting continued contracting in their cost of production and are looking to squeeze $0.05 per watt out of their material costs, from $0.50 to $0.45/watt, on average in 2013.

More bankruptcies and takeovers will have to take place before profitability can be restored, if at all. The leading Chinese firms, such as STP, TSL and YGE have all posted declining profits with shares falling by 11.9%, 7% and 12.4% respectively. Europe is one of the biggest markets for solar panels but the European debt crisis has weakened the value of Euro against the Yuan and U.S. Dollar, which is translated as millions in foreign exchange losses for both Chinese and American firms.

The demand for panels is increasing, of that there is no doubt, but there is still too much supply on the horizon to make any of these firms look attractive in the medium term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.