Shi Zhengrong once said he was less interested in profits than “solving the problems of mankind”. Right now, he’s probably more interested in sorting out a few things closer to home, namely with his company Suntech Power Holdings.
The New York-listed firm is the world’s largest solar panel manufacturer. When it listed in 2005 Shi was briefly China’s richest man. But more recently, Suntech has been plagued with problems, and has seen its stock fall 54% this year.
Chinese firms now make 68% of the world’s solar panels but thanks to their easy access to credit they ramped up supply just at a time when many European governments were withdrawing solar subsidies. The ensuing supply-demand gap has seen panel prices collapse to a point where production is barely profitable. Making matters worse the US government imposed punitive anti-dumping tariffs on Chinese manufacturers earlier this year. The EU is threatening to follow suit.
Indications of their growing troubles began to emerge last month at Suntech’s rival LDK Solar. The firm – lossmaking and facing a Rmb20 billion debt crisis – enlisted the aid of its local government in Jiangxi. Local officials told banks to extend their existing loans, as well as instructing them to lend still more.
Over the past week it has been Suntech’s turn to reveal its own cash problems. Getting most headlines was its announcement that it may take a €560 million hit on a loan guarantee it gave to an investment vehicle named Global Solar Fund. That has spooked investors and led to questions about management oversight.
Possibly in view of these concerns, Suntech’s founder announced his decision to step down as CEO last week. He will be replaced by David King, a Chinese-American who only joined the firm last year as CFO. Shi will remain as chairman, the firm stated.
Some analysts see this as a first step towards another local government bailout or even a delisting in the US, reports the Wall Street Journal. Certainly it is a landmark moment for Shi and the firm he founded in 2001. An expert in solar power – Shi started registering patents while studying under Professor Martin Green in Australia – he was the entrepreneurial visionary who built Suntech into the industry leader it is today.
Much of that reputational lustre now seems to be wearing thin. Not surprisingly the Chinese press has been looking closely at Suntech’s relationship with the Global Solar Fund, which the company alleges to have behaved fraudulently. What makes this harder to comprehend is that the fund is majority-controlled by Suntech itself.
The fund was created in 2008 and Suntech became an investor later that year. Its mandate was to invest in solar power projects. This suited Suntech which stood to gain from selling the projects its panels, and then profit from investment gains at the fund when the power plants were sold to third parties. In 2010, for example, Suntech booked a $250 million investment gain from the fund, which kept it in the black that year. The alleged fraud occurred when Suntech offered a loan guarantee worth €560 million to help finance a plant in Italy. The company says the guarantee was supposed to be offset by a portfolio of German government bonds. But now it doesn’t appear that it was, leaving a big hole in Suntech’s balance sheet.
Investors are understandably bemused that Suntech doesn’t seem to have known what its own fund was doing. Global Entrepreneur, a magazine, reports that the market now worries that the fund is a “black box” that could wreak more financial havoc on Suntech. It cites an industry analyst as saying the firm needs to make $1.6 billion of profit this year to meet its debt obligations, which he deems “almost impossible”. Suntech lost $133 million in its first fiscal quarter. It currently has $1.575 billion of debt and in March next year faces $511 million of maturing convertible bonds.
No wonder that National Business Daily is reporting that officials in Suntech’s home city of Wuxi have begun talking to banks about extending loans. The newspaper speculates that Shi’s firm could become a “second LDK”, reliant on local government support for its survival.
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