JIASHAN, China (
filed on Tuesday for a secondary offering of up to $200 million, and Wells Fargo Securities analyst Sam Dubinsky says it's a capital markets raise needed to shore up the Chinese solar stock's balance sheet, but the timing could mean major share dilution of as much as 45%.
Coming into 2010, it was expected to be a big year of capital raises from the solar sector -- in particular, many of the Chinese solar stocks that have weaker balance sheets and high debt burdens.
Back in mid-March, when Trina Solar beat the rest of the solar sector to be first out with a secondary equity offering, some questioned the timing. However, now it looks like a stroke of genius, as the solar sector has been crippled by the euro freefall, even amid good earnings and unprecedented demand.
The timing of Trina's deal, versus trying to time solar secondary offerings now that the stocks in the solar sector have come down so dramatically, is the question that the Wells Fargo analyst poses in calculating dilution of as much as 45% in ReneSola shares, if a deal were priced today, and executed in full.
Trina Solar, for comparison purposes, saw its share price drop from over $23 to $20 the day after it announced a secondary, a drop of roughly 13%. Analysts said Trina Solar may have opted to be first out with a secondary, and "take its pain" first, to beat the rush.
Now, the critical questions are: Who is rushing to buy solar shares; and, can solar stocks afford mass dilution of shares after taking such a beating over the past few months?
The conundrum faced by solar stocks like ReneSola was spelled out by Wells Fargo's Dubinsky, writing on Tuesday, "We view this news as a mixed bag."
The analyst concedes that ReneSola could use a bigger cash cushion. As of the first quarter 2010, ReneSola had roughly $150 million in cash and equivalents and roughly $580 million in debt.
A $200 million raise, combined with an estimated $100 million to $150 million in free cash flow generation in 2010, would put ReneSola in a better position headed out of 2010 if pricing the wafer market softens, the Wells Fargo analyst wrote on Tuesday.
Solar wafer pricing has remained strong given the unprecedented level of demand in solar, but there are fears of an oversupply situation quickly catching up with solar in 2011, not only due to feed-in tariff reductions in Europe, but due to concerns about the macroeconomic clouds in Europe.
Wells Fargo estimates that its ReneSola 2011 earnings per share estimate of 87 cents had, in fact, assumed a secondary raise -- however, it assumed a less dilutive deal toward the end of 2010, of $100 million towards the end of the year.
Wells Fargo now estimates that 17 cents would have to be shaved off that 2011 earnings estimate based on the news Tuesday from ReneSola about the secondary.
On April 30, ReneSola hit a 52-week high of $8.75. On Monday, ReneSola shares closed at $5.37. On Tuesday, after the secondary was filed by the Chinese solar company, its shares were down another 2%, though on relatively light trading -- less than half of its average daily volume of shares.
On the day after Trina Solar announced its secondary in mid-March, more than triple its average volume of shares were traded.
With the Intersolar conference in Munich next week, among a huge plate of questions for solar companies will be analysts asking ReneSola to explaining the timing and size of this secondary offering.
This issue isn't going away either, and it's not just related to Chinese solar stocks. Embattled U.S. solar company
, which has slipped to successive 52-week lows under the $1 mark in recent trading -- on Tuesday Evergreen shares were worth 78 cents -- needs to shore up its balance sheet as it tries to finish a transition to lower cost manufacturing in China. Evergreen has said it won't tap the capital markets again any time soon, but it is being closely watched by analysts, as it is a race between Evergreen's ability to get up and running in China on a cost-effective basis without burning through its remaining cash.
The entire solar sector continued down on Tuesday for the second consecutive day as the situation in Europe showed no sign of loosening its grip of fear on the markets. Even as the euro turned positive against the dollar on Tuesday, it had finally slipped below the $1.20 threshold on Monday.
-- Reported by Eric Rosenbaum in New York.
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