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I am generally a long term investor looking for macrotrends which I believe may play out over the course of several years. While I look at a lot of varying criteria in researching potential investments, I'm more aligned with the analytics involved with investing. Although it's not always a... More
  • Is Jiangsu Shunda in trouble? 3 comments
    Jul 30, 2010 9:34 PM | about stocks: STP, LDK, SOL

         Earlier this week, local newspaper in Yangzhou(China) revealed some rather interesting bit of news.  It was reported that since May 2010, Jiangsu Shunda was late on a 50 million rmb bank payment.  Why this bit of news might be significant to the industry is because it may affect one of the largest solar manufacturers in the world - Suntech(nyse:stp).

         Shunda, based in Jiangsu China, has many subsidiaries that largely serve the crystalline pv industry.  In particular they operate a small 1500(some reports indicate 2500) ton polysilicon plant and have ingot/wafer capacity of somewhere in the neighborhood of 300-400mw.  They have around 500m in assets with sales of around 370m in 2009.  Originally, Shunda had very big plans on being a major player in the global solar industry which included spending up to one billion scaling up their polysilicon plant.  The credit crisis of 2008 changed everything for most in the industry including Shunda.  A month before Lehman's collapse, Shunda tried to ipo on the NYSE in hopes of raising a billion to fund their plans.  But as the credit crisis unfolded, lack of project financing brought global solar demand to a near halt.  Many larger players scaled back expansion plans while many smaller solar companies simply went out of business.  Industry demand did not start to pick up for another couple quarters, but by this time the window for a grand ipo plan had already closed.  Shunda was on its own.

         In the past year, the solar industry has come roaring back after looking right into the mouth of the abyss.  So why did Shunda default on a small loan payment?  Perhaps that is easier explained by looking at larger sister companies to Shunda - LDK Solar(nyse:ldk) and Renesola(nyse:sol).  Both ldk and sol operate in the exact verticals as Shunda, wafer manufacturing.  Both also have polysilicon plants which are in the process of ramping production.  As the credit crisis caused price corrections in the value chain, upstream verticals were hit the hardest and the fastest.  Prices for polysilicon which were on a parabolic rise above 400/kg in 2008, collapsed very quickly below 100/kg to eventually settle at around 50-60/kg.  Wafer prices also collapsed just as quickly.  Wafer manufacturers who did not have high stockpiles of polysilicon could buy it very cheaply at spot market prices, and sell finished wafer goods at much lower prices for a profit.  Downstream verticals such as modules saw much slower price erosion because they were in higher demand; dropping module prices caused internal rate of returns for subsidized solar projects to soar.  As a result, the pricing disconnect among the value chain caused most wafer and newer polysilicon manufacturers into a very tough 2009.  Losses mounted for both ldk and sol, and their balance sheet became incredibly stretched.  However, both ldk and sol were able to raise new capital through secondaries on wall street - a source of capital Shunda did not have access to.

         In addition, almost half of Shunda's invested capital went into their polysilicon plant.  Because Shunda is a new entrant to the highly technical field of polysilicon production, initial production costs may be higher than for established manufacturers.  Many larger polysilicon producers who have years of experience can produce at under 30/kg costs.  However many reports out of China indicate that in most cases, initial costs for newer producers ranged 70-80/kg, with some production costs over 100/kg.  GCL Poly, the largest and most successful polysilicon producer in China, produced at 60-80/kg for their first year, and was only able to reduce it below 40/kg after nearly two years of production experience.  This wasn't a problem prior to the credit crisis because selling prices were 200, 300, even 400+ per kg, but when prices collapsed to 50-60/kg many smaller and newer producers could not produce for a profit.  Thus it is possible that while Shunda is not losing money in their polysilicon business, it may not be generating enough to sustain the large debt the company accrued establishing the plant.

         These are only possible explanations and there could be other reasons why Shunda missed a loan payment.  After they defaulted, it was reported that local banks stopped loaning new money to Shunda.  This is where speculation regarding stp comes into play.  In 2008, stp bought nearly a 16% stake in Shunda for 102m.  Stp also has prepayments made to Shunda totaling 55m ending 2009.  In other words, they have a fairly large vested interest in Shunda.  But perhaps more importantly, Shunda operates in two verticals which stp does not.  A combination of the two companies would result in stp becoming a fully integrated si-pv manufacturer.  stp's scale and resources would also allow them to ramp Shunda to a larger more efficient scale, resources Shunda doesn't have on its own.  Why would becoming fully integrated be important?  As selling prices for end modules continues to drop, gross profits for each vertical shrink and synergies of being fully integrated become more apparent.  In fact, stp has been criticized for being slow to integrate as many of their direct peers originally less integrated than stp have became more integrated over the past year.  There is also one last twist to this speculation.  Shunda is based in Yangzhou, and stp has built one of their manufacturing plants very close to them.  Stp has also committed larger investments in the city, making it increasingly hard for the local government to continually "support" Shunda especially after their default.

         Keep in mind that this is all speculation made by local city reporters, but they do indicate high sources within the Chinese solar industry.  Things may play out very differently but if this speculation becomes reality, it would have a dramatic impact on one of the largest players in the solar industry.

    Disclosure: Long ldk and sol. No position in stp.
    Stocks: STP, LDK, SOL
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Comments (3)
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  • Investing Hobo
    , contributor
    Comments (55) | Send Message
    Author’s reply » As an update, on Aug. 6, 2010, stp decided to write off their Shunda investment rather than attempting to salvage it by buying them out. So that ends this potentially industry reshaping story.
    6 Aug 2010, 11:37 AM Reply Like
  • Dr_sfzed
    , contributor
    Comments (4) | Send Message
    Did STP write off their investment in return for some other value? Or is Shunda doomed?


    I very much appreciate your analysis, which seems accurate and complete. However, the long term value of a fully integrated poly->module internal production may be questionable. If we look beyond the current fall-out of the financial crisis, is it reasonable to compare STP with Intel and the chip vendors? It is true that the cost differentials between IC and wafers is a lot greater than between PV cells and wafers; it is also true that the tricks to make poly for PV may be mostly known now - but it is also possible that some silicon deposition or re-crystalization technique may remove the need for sawn wafers.
    6 Aug 2010, 03:24 PM Reply Like
  • Investing Hobo
    , contributor
    Comments (55) | Send Message
    Author’s reply » From their press release today, it seems stp is writing off their exposure to shunda completely. This involves an equity investment as well as prepayments made for wafer supplies. It still does not rule out a scenario where stp might still try to buy out shunda's assets if they were to collapse. It's possible from a financial point of view, be cheaper to write off their exposure and pick up assets at liquidation, than to salvage their investment and taking on shunda's liabilities.


    As for the question on full vertical integration, it is my belief that in the long term, this will be the only model that works. At least, it is the only model worth investing in because as module asps continue to fall to support demand without subsidies, there is only going to be enough per watt gross margins at the fully integrated level. If we are discussing solar companies from an investment point of view, we should only care about how their business model translates to the corporate bottom line.


    I'm not a tech person so I can't comment on future technologies that might change this. Dr. Shi apparently believes otherwise. From what I can tell from reading his comments, he believes efficient cell technology can make up for the per watt gross margins lost to wafer producers. This would be true if stp had a big technological lead over all other cell producers, but this is not the case at least today.


    To your last point about removing the need for wafers, are you referring to thin film - a-si in particular? Part of stp's charge today was their abandonment of their thin film plans. I'm sure you also heard about amat scratching their sunfab recently in favor of crystalline wafer technology route. But regardless if that type of technology succeeds in the future, stp's fixed assets are cell based currently.
    6 Aug 2010, 10:07 PM Reply Like
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