Suntech Power shares are up 55% this month.
Suntech's Chinese solar peer LDK Solar (LDK) is usually held up as the poster child for excessive debt and bankruptcy risk in solar, and Simko agrees, but thinks that it will be important to watch Suntech income in the coming quarters to monitor its balance sheet situation."Suntech is the second worst," Simko said. The Morningstar analyst said that there is widespread belief that the national prominence of Suntech's CEO Dr. Zhengrong Shi will keep the company in the good graces of the government. Something similar is said about LDK: that it has created so many jobs in China it can't be allowed to go bankrupt. While these arguments may be true, they don't ensure that the government and banks in China won't take over the companies and wipe out equity shareholders. It's impossible to assess that risk, so Simko says an investor has to focus on what Suntech has promised in regards to its balance sheet when it reports in 2012. The analyst noted that Suntech has talked up its ability to monetize its Global Solar Fund pipeline and reduce working capital and expenses, all of which could lead to $400 million or more in improved cash flow. If that's true, then no matter what happens in solar, Suntech net debt stabilizes, at least. "I'm skeptical that's how it plays out, but it will be a tell," Simko said. He added that Suntech could get an extension of credit facilities from existing Chinese bank partners if it's able to stabilize its balance sheet. Suntech had approximately $946 million in cash and $3 billion in debt as of its last quarterly earnings report in November.