Solar: Beijing Worries, Suntech And LDK Wind Down

| About: LDK Solar (LDK)
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New signals from Beijing hint at a problem I've talked about for the last 2 months as China embarks on a major solar energy program, namely that many new plants being built could become useless white elephants. Potential for such a problem is very real, and could end up not only costing enthusiastic builders of new power plants billions of dollars in wasted funds, but could also leave solar panel makers themselves with huge amounts of unpaid bills. Meantime, the latest signals from Suntech (OTCPK:STPFQ) and LDK (NYSE:LDK) indicate these 2 former giants are nearing the end of their lives, as each looks set to disappear in an ongoing industry consolidation.

Let's start with the latest news from Beijing, which is crafting a broad set of guidelines aimed at promoting orderly development of the solar energy sector. (English article) The guidelines issued by the State Council, China's cabinet, represent some much-needed direction for the industry, which has seen a flood of announcements for new solar plant construction over the last few months. Nearly all of those are being built and funded by state-run companies rushing to fulfill Beijing's ambitious target to install 35 gigawatts of solar power generating capacity by the end of next year.

The new guidelines look like Beijing's attempt to bring order to an ongoing industry consolidation, with the regulator that oversees the sector drafting rules for mergers and acquisitions and promotion of standardization. But perhaps more importantly, the Ministry of Industry and Information Technology (MIIT) is also taking steps to encourage innovation related to plants not connected to China's central power grid, according to the State Council's statement.

That second point looks to me like a realization by Beijing that many of the new plants being constructed in this new solar buildup may face difficulty getting connected to China's central power grid. That's because many are in remote areas of western China, including recent mega projects announced by Trina (NYSE:TSL) and Canadian Solar (NASDAQ:CSIQ). These areas are well suited to solar power generation because of their desert conditions and abundance of undeveloped land. But that remoteness also makes connection to China's central power grid difficult, meaning many of these plants could end up as white elephants.

Meantime, let's look quickly at the latest news from the bankrupt Suntech, which has just announced the resignation of its interim President, CEO and CFO Zhou Weiping. (company announcement) The announcement cites health reasons for the resignation of Zhou, who only assumed the CEO and CFO roles in September, and says the board is looking for replacements even as the company is in the process of liquidating.

To me, this announcement looks like Zhou is jumping off the fast-sinking ship called Suntech, as the end draws near. Suntech is close to executing a final liquidation plan that will sell off most of its assets and use the cash to pay its creditors, and I expect we'll see a final announcement in the next month or two. After that, the former solar superstar and its New York-listed shares will cease to exist.

Lastly there's LDK, the other major solar panel maker likely to go extinct as the sector consolidates. The company has been negotiating since August to restructure some of its bonds, after it missed an interest payment. It extended those talks once late last year after a deadline passed with no resolution, and now has announced another 15 day extension through January 23. (company announcement)

The shortness of the extension probably means that bondholders' patience is wearing thin and they want to bring this matter to a close. That means we're likely to see either a final reorganization plan, or perhaps even a bankruptcy declaration for LDK by the end of this month.

Bottom line: New signals from Beijing point to central government concerns that many of China's new solar power plants under construction could end up as white elephants.

Disclosure: None