China solar: New Yingli fund evokes shades of suntech failings

I wrote earlier this week about troublesome signs for the solar panel sector’s fledgling recovery after a revenue warning from Trina (NYSE: TSL), and now we’re seeing another worrisome signal with news that Yingli (NYSE: YGE) is launching a new fund to build solar power plants.

This kind of scheme looks eerily similar to one that kicked off the downfall of former industry leader Suntech (NYSE: STPFQ), though there are also a few differences. Still, Yingli’s latest move signals that the industry may not have learned its lesson from the Suntech debacle.

Yingli’s decision to launch this new scheme also suggests that the hoped-for explosion of new solar plant construction in China isn’t coming as quickly as many had hoped, forcing panel makers to bridge the gap by helping to finance and build new projects. Most major players have used this kind of process before, building new plants using their own resources for eventual sale to long-term buyers.

But in most of those cases, probable buyers were already in place before plant construction began. This new plan by Yingli seems to depart from that model, and looks like it will involve the speculative construction of new solar plants first, and then identification of potential buyers later.

All that said, let’s look more closely at Yingli’s new scheme that has it teaming up with Chinese private equity firm Shanghai Sailing Capital to launch a renewable energy fund. The fund will initially have 1 billion yuan ($160 million) in capital, with Yingli holding a majority 51 percent and Sailing holding the remainder. Yingli will provide its roughly $80 million contribution in installments rather than immediately, reflecting the difficulty it faces in raising even this kind of modest amount of cash.

Not surprisingly, the fund will mostly build solar power plants in China using panels supplied by Yingli. If any industry watchers are getting a sense of deja vu after reading all this, it’s because the now-bankrupt Suntech did something quite similar back when it was still an industry leader.

In that instance, Suntech set up the Global Solar Fund (GSF), which became a major building of solar power plants, mostly in Italy. Like Yingli, Suntech was the controlling shareholder in GSF, and the fund used Suntech-supplied panels for most of its projects. That arrangement allowed Suntech to post billions of dollars in sales, even though others would later argue it was effectively selling its panels to itself.

Solar historians will know that Suntech ultimately had to publicly discuss its cozy relationship with GSF when the partnership soured over a financial issue. That disclosure, which came at the height of the solar sector’s recent downturn, set Suntech on a downward spiral that ultimately ended with its bankruptcy declaration last year and its current liquidation.

So, what, if anything, is different with this current Yingli scheme? From what I can see, the biggest difference is that the Yingli fund is far smaller than GSF, meaning its financial impact on Yingli’s sales could be much more limited. The other big difference is that Yingli’s fund is based in China, which has embarked on an aggressive plan to build new solar plants under a directive from Beijing.

That means that the new Yingli solar fund could find plenty of potential buyers for its plants in the form of state-run companies eager to help Beijing meet its ambitious solar plant construction goals. It’s probably still too early to get too worried about this new plan from Yingli, and we’ll have to see how it develops. But if I were an investor, I would certainly keep a watchful eye on this fund, which has the potential to create major headaches for the company down the road.

http://www.renewableenergyworld.com/rea/blog/post/2014/04/china-solar-new-yingli-fund-evokes-shades-of-suntech-failings