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STR Holdings (STRI): Still A Developing Story

|Includes: STR Holdings, Inc. (STRI)

STRI's Q2 results were again unimpressive and the story still remains developing, with little evidence that the company has been able to make any progress towards renewed growth and profitability.

A couple of notes:

1. The company's balance sheet remains clean, with more than sufficient cash to stay in business, while management attempts to execute on the new business plans with Zhenfa. However, a clean balance sheet is meaningless, if you don't have a viable long-term business.

2. The encapsulant business opportunity for STRI remains enormous, as the company is a known brand in the $1 billion encapsulant market. The issue, of course, is being able to close sales that are profitable and get paid for those sales. Right now, only 25% of STRI's capacity is being utilized, so there is no prospect of profitability on a small increase in sales. However, if the company can hit it's target of $100 million sales target (10% of the market), which is not inconceivable, then I would expect a significant increase in the profits which would easily send the stock back to the highs.

3. The company apparently has difficulty getting paid in China, which is not a surprise, but this tempers my enthusiasm for the shares. This quarter, the company once again, entered into a module-for-encapsulant transaction to turn AR into cash. However, these types of swaps don't pass the smell test. Basically STRI accepts modules from a customer as payment, and then Zhenfa pays STRI for the modules. This seems to be more like a shell game, then a viable method of monetizing receivables. I'm surprised why nobody has asked STRI, why Zhenfa can't just pay for the modules directly to the supplier? Why does the supplier first transfer modules to STRI, before Zhenfa pays for the modules? If Zhenfa wants the modules, it should pay the supplier as usual, and then the supplier would pay STRI. So unfortunately, these swap transactions don't make any sense to me, and there clearly must be something else going on here. Perhaps there are tax benefits for Zhenfa and the supplier in pursuing the transaction in this roundabout manner. STRI should address these issues in future calls.

4. The company is considering getting into the downstream solar business in the US. This is exciting news, that could eventually generate demand for the shares, given investor excitement over downstream solar. However, I'm not quite sure this is a smart move by management. The fact is that downstream investments appear overpriced right now, given the large amount of capital chasing too few good opportunities. Furthermore, STRI does not have the capital or size to compete effectively for the top projects, so it's hard to see how a downstream strategy will actually create value, if STRI will be left with scouring the bad opportunities. Fundamentally, it would appear that STRI is chasing a hot investment theme du jour, which is generally a recipe for disaster.

Taking all of the above into consideration, my impression remains that Zhenfa will attempt to use STRI has some sort of vehicle to benefit Zhenfa, whether simply some tax related scheme, or an actual growth business plan, remains unclear. The move into the downstream US solar market certainly provides some clues as to Zhenfa's ultimate intentions, but again the issue is whether the benefits to Zhenfa will accrue to STRI shareholders or will Zhenfa just use STRI as some sort of conduit. I remain open minded here, as to date, management at STRI has been quite transparent and conservative vis a vis the balance sheet, so they do seem to be genuinely interested in shareholder value.

Disclosure: I am/we are long STRI.