Canadian Solar Cleared, Suntech Suppliers Burned

Canadian Solar wins court victory

It wouldn’t be a proper week if I didn’t write at least one commentary on the problems plaguing the solar panel sector, so I’ll end this final work day before the Chinese Tomb Sweeping holiday with some of the latest headlines that reflect the turbulent state of affairs. In the positive news column, Canadian Solar (Nasdaq: CSIQ), one of the healthier players, has announced that a shareholder lawsuit against it has been dismissed, removing the danger of a potentially costly court battle and an even costlier penalty. Meanwhile, suppliers of Suntech (NYSE: STP) are discovering the perils of doing business in the sector, as many begin to write down debts owed by the bankrupt former superstar.Let’s start our solar roundup with Canadian Solar, which has just announced that a US judge dismissed a class action lawsuit against it for allegedly filing misleading information in financial reports issued during 2009 and 2010. (company announcement) The announcement doesn’t get any more specific, but the period in the lawsuit appears to predate the solar sector’s downward spiral that dates back to early 2011.

Canadian Solar shares did take a big dip in the first half of 2010, and I suspect that this lawsuit was related to that. I personally believe that not only Canadian Solar but also many of its peers probably engaged in dubious accounting and sales practices during the sector’s heyday, as they tried to portray rapidly rising growth fueled by the strong potential of solar energy.

Suntech itself became a poster child for such deceptive practices last year, when it revealed that a big portion of its revenues in Europe came from sales to a company it controlled. Some of my sector friends have told me of other similar practices that saw companies set up fake entities to buy their panels, assuming those entities could resell the same panels for a profit when prices were rising. But when prices started to tank many, of those fake entities were left holding products they had to either sell at a loss or simply write-off.

Canadian Solar shareholders didn’t seem too excited by the company’s minor victory in the courtroom, with shares down 1.8 percent the day the news came out. In this case, I suspect that shareholders are more worried about the sector’s broader malaise rather than this minor victory. What’s more, I do suspect that if and when the industry ever gets back on more solid financial footing, we could see a wave of new shareholder lawsuits filed against Canadian Solar and its peers for deceptive accounting that ultimately cost the companies millions of dollars and shaved hundreds of millions of dollars from their market values.

From Canadian Solar, let’s move quickly to Suntech, which was in the headlines for most of the latter half of March after it defaulted on more than $500 million in debt and was forced into bankruptcy. (previous post) The latest twist to the Suntech collapse hardly comes as a surprise, with Chinese media reporting the company’s suppliers are starting to write-off debts that will probably never be repaid. (English article)

One report mentions several names, all of them in China, including Tianjin Zhonghuan Semiconductor, which is owed about 176 million yuan ($28 million), and Longi Silicon Materials, which also has major unpaid debts. Suntech’s lawyers are saying that these and other creditors will get at least some compensation after the bankruptcy process, though I would expect the payment rates could be 20 cents or less on the dollar.

Meantime, many of these smaller suppliers probably counted Suntech as one of their major customers, and may be forced to close completely if they can’t quickly find other buyers for their products. I do suspect that Suntech will eventually emerge from its bankruptcy as a healthier company with less debt and many new state-owned shareholders. But smaller firms like Zhonghuan and Longji could quietly be allowed to go out of business as part of the ongoing government-led sector consolidation.

Bottom line: Canadian Solar’s victory in a shareholder lawsuit looks like an insignificant  triumph, while many of Suntech’s smaller cash-strapped suppliers are likely to go out of business.

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