Investors are starting to doubt profit estimates for China’s solar manufacturers as concerns about accounting practices first spotted at a forestry company spread nationwide.
Directors leading audit committees quit LDK Solar Co. on July 18 and at its rival Trina Solar Ltd. (TSL) on July 12. Moody’s Investors Service on July 11 cited “accounting risks” at five Chinese companies including LDK. Muddy Waters LLC, a Hong Kong researcher, on June 2 accused Sino-Forest Corp. (TRE) of inflating its timber production.
Those events widened doubts about the solar industry, which already was struggling with falling demand and prices, said Shawn Kravetz, chief executive officer at Esplanade Capital. Eight Chinese companies in the 17-member Bloomberg Large Solar Index have declined 13 percent since the Muddy Waters note, depressing share valuations to less than half the average Hong Kong’s benchmark share index.
“There is a little bit of the Muddy Waters phenomenon here, be careful of all Chinese companies,” Kravetz said by phone from Boston. “Some multiples are so low because they are mirages. If you get up close, the reason the earnings look so cheap is because the earnings won’t be there.”
Multiples of stock prices to earnings forecast for this year are 2.8 at LDK, 6 at Trina and 3.4 at Renesola Ltd. (SOLA) as of July 19. That compares to 11.8 times on the Hang Seng index of 46 companies.
Prices tumble
Prices for photovoltaic panels and their components tumbled as much as 31 percent in June from the previous month as manufacturers tried to shift their stock while demand declined in Germany and Italy, according to Bloomberg New Energy Finance.
“You run through the spot pricing and they can’t make any money,” said Gabelli & Co.’s John Segrich, who runs the best- performing clean energy fund over the past year among 75 tracked by Bloomberg. “There’s a real mismatch between reality and what the estimates show you.”
The solar index has fallen 29 percent in the last three months, leaving it at 8.5 times expected 2011 earnings for its 17 members. The S&P 500, which trades at 13.3 times, has gained 1.1 percent over the period. The Hang Seng lost 6.9 percent.
Renesola, a solar wafer maker whose sales more than doubled last year, is down 33 percent in New York trading since June 2 when Muddy Waters founder Carson Block published his note on Sino-Forest. Trina has fallen 14 percent and LDK by 9.2 percent.
Renesola’s reply
Renesola Chief Executive Officer Li Xianshou said analysts’ profit forecasts for the company were inflated after Germany and Japan pledged to shut nuclear plants after the Fukushima reactor meltdown in March.
“We are more objective and realistic about the market,” the Renesola executive said in a July 14 telephone interview. Spokesmen for LDK and Trina didn’t respond to calls seeking comment.
The Chinese companies are trading at lower multiples than rivals in the U.S. and Europe. First Solar Inc. (FSLR) of Tempe, Arizona, trades at 13.2 times estimated earnings, Solarworld AG (SWV), based in Bonn, Germany, at 11.1 times and Solaria Energia y Medio Ambiente SA (SLR) of Madrid at 23.6 times.
Analysts expect Renesola of Jiashan, China, to post profit of $137 million this year, 15 percent less than four weeks ago, according to a Bloomberg survey. The forecast for LDK slipped 7.9 percent to $311 million and the outlook for Trina declined 5.5 percent to $239 million.
‘Accounting risks’
Moody’s on July 11 named LDK, the world’s second-biggest panel maker by sales, as one of the companies with “accounting risks” about corporate governance. Trina, which makes solar wafers and modules, plunged 8.5 percent the following day after the head of its audit committee resigned.
LDK on July 18 said Louis Tung-jung Hsieh, an independent director who led its audit committee, resigned and was replaced by Bing Xiang. LDK’s shares have lost 36 percent this year.
“The market conditions are very touchy, and anything like that gets sold off very quickly without any questions,” said David Li, the Hong Kong-based co-manager of the Impax Asian Environmental Fund who helps manage about $3.5 billion and avoids solar stocks because of their volatility. “The reaction I feel is excessive.”
China’s solar companies have been booming even though the rest of the industry is struggling. The nation has doubled solar panel output in the past five years, helping increase global capacity by 9.5 gigawatts this year to 41.5 gigawatts, according to New Energy Finance.
Renesola this year is aiming to almost triple its output of polysilicon even after a tumble in the price of the raw material for solar cells.
Short positions
Segrich, who manages $150 million of assets across the top- ranked Gabelli SRI Green Fund and a hedge fund, said his biggest short positions, anticipating price declines, are in polysilicon makers including Wacker Chemie AG (WCH) and OCI Co., which trade at 11.1 and 8.2 times expected earnings.
He said those companies may suffer as falling costs for finished goods drive further declines in the price of the raw material. The polysilicon spot price fell 28 percent in June, according to New Energy Finance.
Hedge funds including Segrich’s that helped push short positions in Yingli Green Energy Holdings Co. and Trina to the highest in a year over the past six weeks may regret their decisions, said Jenny Chase, New Energy Finance’s lead solar analyst. She expects lower panel prices to make more projects profitable, pushing annual installations to about 24 gigawatts this year compared with 18 gigawatts in 2010.
‘Upswing’
“People are going to be surprised by the strength of upswing,” Chase said in an interview. “Module prices dropped under a critical threshold in June where it starts to make sense to install panels in Germany again.”
Germany, the biggest market for solar panels, installed 700 megawatts of capacity from March to May compared with a record 7,450 megawatts in the whole of 2010. The government has lowered incentives to contain a boom in installations. Italy, the second-biggest market with 5,500 megawatts installed last year, started paring subsidies in May.
“A lot of these Chinese companies have extremely unrealistic expectations,” Jon Sigurdsen, who runs about 250 million euros ($355 million) across long-short and long-only funds at DnB NOR Kapitalforvaltning ASA in Oslo and avoids Chinese solar stocks. “They might be more expensive than they seem.”
