Analysis: Solar share buybacks fail to soothe investors

Tue Oct 25, 2011 3:46pm EDT

(Reuters) - Chinese solar companies are snapping up their own shares amid a brutal selloff in the stock market, spending crucial resources on the effort rather than conserving cash or spending on new strategic projects.

The buyback programs come as the industry struggles to maintain profitability in the face of rapidly falling prices for solar panels that have driven many of the stocks to multi-year lows.

LDK Solar has already bought back $110 million worth of its shares this year. Yingli Green Energy, ReneSola and JA Solar Holdings plan to buy back up to $100 million each, while JinkoSolar Holding intends to repurchase $30 million.

The buybacks represent anywhere from 15 percent to about one-half of the companies' current market value.

Buybacks are common among companies that are cash-rich and seeking either to soak up extra shares they have issued under compensation plans or to convince investors that their shares are undervalued.

"Companies go for buybacks to reduce the float and increase their share price," said Peter Bible, partner-in-charge in the public companies group at accounting firm EisnerAmper.

"It's also a tax-efficient way to return money to shareholders."

Most of the companies have cited the long-term advantage of buying shares they consider undervalued, but investors and analysts point to fears about their swelling debt levels.

"The idea to increase your debt level by buying back shares does not make sense," said Thiemo Lang, a senior portfolio manager at Sustainable Asset Management, which owned Yingli, Canadian Solar and Trina Solar shares as of July.

"It's a bit strange to see companies who need all the cash to expand production buying back stock."

So why are so many solar companies embarking on buybacks at a time of financial instability? "They probably want to show to investors they are concerned about their stock price, and that's an issue for them, and they might try to protect it somehow," Lang said.

Shares of these companies lost all of their post-buyback announcement fizz within about three days of their announcements. (For a graphic of Chinese solar companies' share performance, click: link.reuters.com/pak54s )

HIGH DEBT

JA Solar, with a market capitalization of just over $300 million, had long-term debt of $5.3 billion as of June. Yingli's long-term debt stood at $4.6 billion, while LDK Solar's was $1.1 billion.

"Given solar's high rate of growth and capital intensity, these companies may risk weakening their balance sheets while they are under stress," said Kevin Landis, portfolio manager of Firsthand Alternative Energy Fund, which owns shares of Yingli, JA Solar and SunPower Corp.

Sustainable Asset's Lang said these companies' debt levels went up in the third quarter and have probably grown more in the current quarter.

Some market experts said these companies could fall back on billions of dollars in credit lines that state-owned Chinese banks have provided to China's solar manufacturers.

"China has transformed the global solar photovoltaic industry in a few short years by practicing state-sponsored capitalism that has benefited the end customers while it emasculated the industry with insidious and predatory practices," said Hari Chandra Polavarapu, a managing director at Auriga USA LLC.

Still, the buybacks may not be a prudent tactic in the current tough environment for solar makers that has seen some companies, including U.S.-based Solyndra, go bankrupt and sparked talk that others may follow.

"Conserve cash -- for survival," Polavarapu advised.

Analysts are also worried about the balance sheets of other top-tier Chinese companies such as Suntech Power Holdings, the world's largest solar cell maker by capacity.

"Suntech, like its peers, retains access to financing from Chinese state lenders," Raymond James analysts Pavel Molchanov and Cory Garcia wrote in a note dated October 11.

"So, we are not suggesting that it will suffer the fate of Solyndra, but within the context of obviously rough industry conditions into 2012, a strained balance sheet is a problem."

(Reporting by Krishna N Das in New York, editing by Matthew Lewis)

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Comments (3)
solarbull wrote:
“JA Solar, with a market capitalization of just over $300 million, had long-term debt of $5.3 billion as of June.” Where do you get your numbers?? I see around 880 million in debt, but maybe you know something I don’t.

Oct 25, 2011 5:05pm EDT  --  Report as abuse
lpc1998 wrote:
The shorts are annoyed.

Oct 25, 2011 10:55pm EDT  --  Report as abuse
Hansfalsch wrote:
Das is wrong, fails to add credit from the loan on the cash side. JASO got a 4.4B loan guarantee of which they used about 20%. Therefore, if one declares the whole amount as debt one must declare 3.4 billion as csh.
Hence, jASO has  3.6 billion in cash and 1.85 billion debt. Das kleine. ____ (to see the blank check publications by Walter Moers)

Oct 26, 2011 7:45am EDT  --  Report as abuse
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