Bottom line: A new report spotlighting suspicious sales by BYD (OTCPK:BYDDY) shows that last year's EV explosion in China was fueled by people seeking to pocket government subsidies, while Yingli (NYSE:YGE) looks set to receive a government bailout from Beijing.
A couple of stories from China's new energy sector, one from the car space and the other from solar panels, are shining a spotlight on the challenges companies are facing after becoming too reliant on government support. One recounts a twisted tale involving electric car maker BYD and shows how its boom in sales last year may have been largely due to big government rebates for buyers. The other has Beijing telling one of the nation's biggest policy lenders to provide money for struggling solar panel maker Yingli before it defaults on a bond payment due next month.
Let's begin with BYD which has experienced a rocky road over the last few years as its dream of a future filled with new energy vehicles failed to take off. That seemed to change last year as new energy vehicle sales suddenly exploded at the company backed by billionaire investor Warren Buffett. BYD and industry boosters said the sales explosion showed that Beijing's years of support for the sector was finally bearing fruit.
But lately a much darker story has emerged, showing that much of the explosion was fueled by opportunists simply looking to pocket some of the big government rebates being offered to new energy car buyers. Now a new report from the respected Caixin is spotlighting one such case involving 3,000 electric cars that were purchased between 2013 and 2014 to become taxis in the city of Nanjing (Chinese article).
I'll admit I've read the story several times and I'm still not sure what exactly happened in this convoluted tale. But the bottom line seems to be that many of these cars never got put into use, and some 240 remain in BYD's Shenzhen warehouses to this day even though they were ready for delivery back in 2014.
The case seems to center on a BYD dealer who later killed himself and left behind a note that detailed a large amount of unpaid bills related to the Nanjing order. BYD last month said that it was owed 30 million yuan ($50 million) related to the case, which obviously isn't huge and won't have a huge impact on the company. But the case hints at the kinds of fake buying that was taking place more broadly to get the government subsidies. That kind of fraud has prompted Beijing and local governments to sharply reduce or even eliminate many of those incentives this year.
Government Rescue Talks
Next let's look at Yingli, which just last week said it was in desperate negotiations with two groups of creditors, including one holding 1.4 billion yuan ($220 million) worth of bonds set to mature next month (previous post). The other group is owed another 1 billion yuan related to an Yingli bond that came due last year, meaning Yingli needs to find a total 2.4 billion yuan in new money before next month to avoid a massive default.
I previously said the wording in Yingli's statement implied it was negotiating for a broader government rescue, and now the latest media report from Reuters is saying such a rescue loan could be coming soon. The report says China's banking regulator has asked China Development Bank to guarantee 7.5 billion yuan in loans to Yingli to pay off debts and engineer a broader company reorganization (English article).
Such a sum does look like enough to pay off all of the short-term creditors and also conduct a major overhaul of the company, which is currently losing massive money. While that might look good for Yingli, it looks far less positive for China Development Bank, which could easily lose billions of yuan if Yingli ultimately fails to repay this big new loan. But then again, Yingli's rise was largely fueled by government subsidies, so now it's not that surprising to see the government stepping in to prop up the company one more time.
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