Bottom line: A new second wave of consolidation is likely to occur in China’s solar panel sector later this year, with money-losing companies like Yingli and ReneSola as the most likely acquisition targets.
Looming signs of new trouble are brewing in the solar panel sector, with shares of Yingli Green Energy (NYSE: YGE) taking a bath after the company reported widening losses and slowing revenue growth. The 15 percent sell-off saw Yingli’s shares re-approach an all-time low from just 2 and a half years ago, as the company joined a small but growing club of US-listed solar panel makers whose shares now trade in the $1-2 range.
Yingli’s announcement makes it the last of China’s major solar panel makers to report their fourth-quarter results, painting a picture that hints of more consolidation on the way for a sector that has already undergone a painful restructuring over the last 2 years. Two camps are emerging: One that is profitable, including names like Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL); and one that is losing money, which includes Yingli and ReneSola (NYSE: SOL), which became the charter member of the $1 club when its shares sank below $2 last November.
The broader solar sector took a beating in the latest trading day on Wall Street, with Yingli and ReneSola leading the downward charge with the 15 percent and 7.5 percent declines, respectively. Shares of both companies are now near all-time lows. The profitable Canadian Solar and Trina were both also down, but by smaller amounts in the 3-4 percent range. Both of those companies’ stocks still trade well above their all-time lows, and don’t appear to be in danger of joining the $1 club anytime soon.
Investors were clearly spooked by the bottom line in Yingli’s latest results, as it reported a net loss of 609 million yuan ($100 million) for the quarter. (company announcement; English article) That figure was actually an improvement over the company’s 806 million yuan loss for the fourth quarter of 2013, but it also marked a 4-fold increase from its loss of 138 million yuan in the third quarter of last year.
All of China’s solar panel makers, and most of the global industry in general, fell sharply into the red at the height of a sector downturn that began in 2011 and didn’t really start to ease until 2013. Companies like Canadian Solar and Trina were some of the first to return to profitability, and the pair have just reported relatively solid profits in their latest quarterly results.
In terms of top line, all of the companies are reporting that revenue growth is slowing sharply as prices start to decline after a relatively long period of steady gains during the recent recovery. Yingli predicted its shipments in terms of production capacity would only grow 7-16 percent this year. But if prices fall, that means actual revenue could grow by much less or even start to fall. ReneSola has forecast similar anemic growth this year, while Trina and Canadian Solar have forecast much stronger gains.
All of this brings us back to the question of whether a new shake-out is looming for the industry, and whether money-losing companies like ReneSola and Yingli might become attractive takeover targets. The recent sell-off of both companies’ shares has made each a relative bargain for any interested buyers. ReneSola’s current market value stands at just $150 million, while Yingli’s is about twice that amount at $360 million.
The bigger question is whether anyone would want to buy these companies, since such money losers aren’t exactly that attractive. I suspect the answer to that question is “yes”, as Beijing and local governments could provide some incentives to spur more consolidation that is still needed to put the sector on a longer-term sustainable footing. Accordingly, I would expect to see at least 1 or 2 mid-sized players to disappear later this year, most likely through acquisitions, before the sector returns to more solid footing in 2016.