NEW ENERGY: Solar Blows Hot, Cold With New Mega-Project, Looming Default

Bottom line: Solar products maker Tianwei is likely to get a government bailout before it defaults on an upcoming bond payment, while a massive 2 GW solar farm being built by a new private equity fund is likely to get completed.

Tianwei struggles under huge debt

Two solar news items are drawing attention to both the opportunities and challenges facing this increasingly schizophrenic sector in China. A new mega-project is spotlighting the huge opportunities for new construction in the space, with word that a recently launched private equity fund plans to build a massive solar farm with a whopping 2 gigawatts of capacity. But big challenges are also apparent in another story, which says mid-sized player Baoding Tianwei is on the cusp of defaulting on a bond interest payment as it faces a cash crunch due to falling prices.

These 2 phenomena aren’t completely separate or contradictory, and in some ways even have their roots in a common origin. That origin dates back a decade ago when China embarked on a campaign to build up its solar panel manufacturing sector, in a bid to move up the value chain from its traditional strength in lower-tech products like textiles. But it created a huge oversupply of production capacity as a result of that push, and is now trying to absorb some of the excess output through a campaign to build new solar farms at home.

The massive overbuilding of manufacturing capacity sent the sector into a downturn that has dragged on for much of the last 3 years, and is directly responsible for the crisis now facing Baoding Tianwei, a maker of traditional transformers that more recently moved into the solar business. According to the latest reports, Tianwei has announced that due to huge losses from its solar business, it may not be able to make an interest payment that comes due this Tuesday on corporate debt issued in 2011. (Chinese article)

The company reported a massive loss of 10.14 billion yuan ($1.6 billion) last year, which makes it understandable why it might have other priorities besides making this particular interest payment. Its total debt at the end of last year stood at 21 billion yuan, far higher than its total assets of 13 billion yuan.

Companies like Tianwei flocked to solar manufacturing after Beijing made development of the sector a priority, and are now paying the price in the form of massive debt from big investments they made at that time. Another solar company, Chaori Solar, looked set to become the first solar player that might default on debt last year, but was bailed out at the last minute by state-run entities, almost certainly acting under government orders. (previous post)

Media are speculating that the government may be tiring of bailing out a growing number of debt-burden companies, and that Tianwei could stand at the forefront of a new wave of defaults for China’s corporate debt market. It may be too early yet to forecast such a default wave, and I expect we’ll probably see another bail-out for Tianwei even if it initially misses the interest payment. But eventually the debt load will become too much for Beijing to bail out, and we may see many of these mid-tier companies default.

Meantime, another media report is saying that China Minsheng Investment Corp (CMIC), a recently formed private equity firm backed by the entrepreneurial Minsheng Bank (HKEx: 1988; Shanghai: 600016), is preparing to build a massive 2 gigawatt solar farm with an investment of 15 billion yuan. (Chinese article) To put that in perspective, China was on track to build about 10 gigawatts of capacity last year, and was aiming to have 35 gigawatts by the end of this year — a goal that looks nearly impossible to reach.

If the project is really built, it would be the world’s largest solar farm in a single location, according to the reports. The plant would be built in interior Ningxia province, in a massive area being developed specifically for solar farms. CMIC was officially launched last August with initial capital of 50 billion yuan, and said at the time that solar power was going to be one of its main focuses. (previous post)

I have quite a bit of respect for CMIC, as many of its executives are entrepreneurs with strong track records and good financial sense. What’s more, this project is being built in an area specifically being developed for solar farms, meaning logistical issues like grid connections shouldn’t present major problems. Accordingly, I do expect this project will probably get built, though it’s unlikely to provide enough support to save struggling companies like Tianwei.

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