Envoy Global Research

A Look at Four Polysilicon-Based PV Manufacturers' Funding

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.

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

Hi Jack,

I've never said that accounting earnings are false. They adhere to generally accepted accounting principles. However, this not the place to go into US accounting principles, accrual accounting, cash-flow, revenue recognition, working capital etc. All topics which I'm sure you and others are quite familiar with.

There are plenty of books and websites available that explain these principles and why accounting earnings as reported by most companies, are very often, while not false, not a true representation of profits (in both positive and negative ways). Often you'll even find companies with major accounting losses, that are in fact quite profitable. Sometimes, like in this case, it's the opposite. It's not all that complicated an issue. A simple perusal of the cash-flow statements and balance sheets vs. reported accounting earnings usually tells the tale.

In the case of many solars, a simple reading of the risk factors in each 20-F clearly spells out the issues.


Best of luck.

A Look at Four Polysilicon-Based PV Manufacturers' Funding

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.

A Look at Four Polysilicon-Based PV Manufacturers' Funding

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.

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

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.

Will Some Solar Companies Face a Cash Crunch?

I am not questioning whether sales are being made, nor whether solar growth will continue (which it obviously will). The issue is: What are the terms of these sales?

Are the companies just shipping tons of product without actually receiving the cash? When are they getting paid? How will they continue to finance the cash drain that occurs because of prepayment to suppliers and longer credit cycles to customers?

As far as accounting: If you don't have cash in your bank account, you are out of business. That's the only thing you need to know. The only way to get cash is to actually make money or to borrow the money.

To date, may solar companies have been quite successful in borrowing money or selling stock to replenish their cash reserves. It will be interesting to see how successful they are if capital markets dry up.

Best of luck.