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Cash Starvation, anotherSolar Industry Killer
Author: Source:SolarPVInvestor Editor: Publish at Beijing Time: 2012-10-14 09:48:45

Author: Robert Dydo

Here we are again. After the holiday, new low pricing crept on the horizon.  Polysilicon is being quoted down to 125RMB, or $16.8/kg, with multi wafer quotes approaching $0.80 per wafer, and mono being quoted for a $1. The US had finalized its anti-dumping and countervailing duties, shutting the front door on small and some big Mainland tier-2 and 3 companies. Those listed in the US still hold a desire for this promising market, but it means that China’s own solar market will remain overpopulated. Relationships with Taiwanese cell manufactures, and in some case Koreans, have been revived to work around the tariff, but with the agenda toturn inventory into cash dominating the landscape, Q3 turned out to be a disappointment for Taiwan.

On average, Taiwan Q3 cell revenue has gone down by 25% versus Q2, based on data from the three largest producers. Neo Solar Power sat at a 28% drop and Gintech was at a 21% revenue decrease. Motech ended down by 25%. The environment is so surreal that profit no longer is an objective for anyone, and principally inthe Mainland the price is no longer a sole concern. The only strategy left is to persist long enough, while everyone else around shrivels to extinction. For the longest time SPVI was under the impression that ASP became a weaponized tool for thosewho hadlarge capacity. In China, this concept also hurt even big companies.  While ASP is still deadly, lack of cash is becoming another destroyer.  Now it is clear why almost all US-listed companies seem to be amassing cash in the last 12 months.

The payment cycles and terms are becoming a massive problem for the PV industry. Mostly a benefit to those with scale to remain as a potential client, it is literally a method to circumventcash use, while remaining operational. 

With the help of our China-based sources we had an opportunity to review recent purchasing terms for raw materials by the premium players.   GCL-Poly Energy Holdings Limited.(HKG: 3800)has a six months payable cycle and six months “Bank Accepted Bill” or Bank Bills (BB). Suntech Power Holdings Co., Ltd. (ADR)(NYSE:STP), Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE: YGE) and Trina Solar Limited (NYSE: TSL) all have three months and six months for the similar terms. Others, mostly tier-2 and 3, have only one month and six months.  Many can only buy with cash.  One specific example is of LDK Solar Co., Ltd (ADR)(NYSE:LDK), who approached vendors for raw materials. Pricing was with the trend, but the terms were pushed to one year of the payable cycle with BB payable at maturity date.  Some vendors got attracted to this despite the terms, due to the large volume offered; there are quite few still believing that LDK will pull through despite its financial turmoil, obviously contrary to the few vendors who are suing the company for lack of payments. 

BB is a domestic counterpart of Letter of Credit (L/C) in international deals.  Its written value cannot be fully recognized before its maturity date.  If the BB bearer wants to cash it early, he has to pay the interest covering the time till maturity date. In the case of six months, at least 3% is charged by a bank (Chinese banks’ annual interest rate is 6%). Very rarely, vendors will cash their bank accepted bills early, simply due to loss of the face value, but also because banks are reluctant to cash them.  In addition, first line suppliers will back-endorse them to secondary material vendors, pushing away the burden of the collection. 

Bank bills had been always present in the Chinese PV industry. In the good old days banks made them available with little or no deposits. Now banks are cutting off their support to small and mid-size companies. The cash for tier-ones is still available, as we had shown in our Q2 debt analysis, but overall it is becoming rare to use cash.  The terms offered to suppliers have atendency to increase the payable cycles with industry conditions becoming worse.

With a severe amount of overcapacity in all aspects of the industry, suppliers are faced with a buyers’ market and follow directions on terms from that side of the negotiating table. At the risk of losing a deal on early signs of hesitation, the deals are made with the losses builtin for a supplier.  Those grave conditions are best illustrated by PV equipment manufacturers. This segment of China’s PV industrybecame very active in financial markets in recent years, with large amount of IPO. Now, the whole group is faced with a sudden drop in orders, due to halted capacity expansions. Recent deals on furnacesare beyond “rewarding” to the buyer. They havea full year of payable cyclewithan additional ten months to pay it off.   The BBs are accepted at every installment. In addition, prices are at 40% of those in 2011. 

The piling BBs are causing concern for banks.  Not even a proper amount of deposit guarantees issuance of bank bills, of course depending on who you are in the industry, leaving others unable to operate.  More and more deals are paid for with excess product as a payment. 

Longer credit terms are being keenly observed by the international buyers of PV products. Some of the module sales are made with six months payable cycle and letters of credits maturing after 16 months.  Bankruptcies have included many EPC companies, so there is a serious concern that the $45M loss published recently by Trina is apotentially small tip of a large iceberg when summing up figures sitting in accounts receivables.  However, the desperate module makers may be left with only one choice, and that is to get more desperate by dealing with even longer terms at the risk of not seeing any money at all. To compound this, we were told that China Reinsurance Group, a SOEoffering insurance to Chinese exporters, had stopped insuring the PV sector in 2011, after a tremendous range of potential legal issues. 

In a similar fashion, Chinese customers are very specific about payment terms and not as much about pricing when buying on the international markets.  Global vendors are being faced with the choice of losing a client or going into cashless arrangements. The second choice places them with a bunch of domestic vendors, who are also learning that the end of the cycle does not necessarily result in a payment.  Judging by the ever-growing length of payable days’ cycle, companies are renegotiating payment terms. Frustrated, vendors have taken their best customers to court, frankly because they cannot offer another losing deal due to their own insolvency and lack of cash.

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