Chinese Solar Message Is Set: Just Say Shipments Better

NEW YORK ( TheStreet) -- The message that Chinese solar companies need for an earnings season rally seems firmly established: highlight the increased shipments in the fourth quarter and hope that is deemed more important than weak margins -- i.e. a profitless shipment increase -- and impairment charges.

Better shipment guidance has been a rally maker as long as weak margins aren't weaker than already expected. But if shipments are down quarter over quarter, the solar trading yo-yo may send shares down.

Last Friday, Suntech Power ( STP) was the first Chinese solar company to pre-report earnings, guiding to better shipments in the fourth quarter and margins within its targeted range, a range that means the company isn't making a profit.

Suntech shares rallied strong last Friday and continued up on Tuesday, though it is important to note that a big part of the positive turn in Suntech sentiment was related to an improved balance sheet. The company has one of the worst balance sheets in the sector.

Suntech announced impairment charges, but these were much smaller than the amount of working capital that the company was able to reduce in the fourth quarter and a reduction of net debt to $200 million, a significant debt reduction for Suntech.

After the close on Tuesday, Canadian Solar ( CSIQ) announced better-than-expected shipments and margins expected to be in the 5% to 8% range, which were its target.

However, Yingli Green Energy ( YGE) guided shipments lower than previously forecast, and said gross margin would come in at 3%, below its target of 10%. While the lower shipments for Yingli come after a third-quarter shipment level that was better than most peers, and the gross margin would have been within its target if not for inventory charges, Yingli shares declined by close to 8% on Wednesday morning while Canadian Solar shares rallied by 8%.

It's somewhat ironic that the Chinese solar companies are in a rush to put out releases about the fourth quarter since they are never in a rush to report earnings: Chinese solar companies tend to report earnings later than any other public companies in the market, and generally at a date when the current quarter is two-thirds over. Suntech, for example, which pre-reported last week, reports its results on March 8.

Yingli will report earnings next Wednesday, though it's not hard to understand the need to front-run earnings by a week when the company is doing the proverbial "kitchen sinking" of bad news.

The kitchen-sink theory dictates that a company's chief financial officer should find every bad charge he can think of and record it in a quarter that is going to be terrible anyway so future quarterly earnings aren't marred. That is more or less what Yingli did: It announced impairment charges of $361 million related to its polysilicon company, Fine Silicon, inventory charges of $43 million -- which hit gross margins -- and said it expects future charges of $135 million on its long-term polysilicon supply contracts as a result of continuing decline in the polysilicon purchase price.

"The impairment of long-lived assets of Fine Silicon was to reflect the less than expected profit-generating ability of Fine Silicon's assets due to a sharp decline in the spot market price of polysilicon," Yingli said in a release. Previous to this quarter, Yingli's attempts to ramp its polysilicon operations have been an earnings headwind, for at least two years now, in fact.

There's another frustrating element of the Fine Silicon story, now that the company is taking a $361 impairment charge related to it: It was controlled by the solar company's chairman and acquired at the expense of public shareholders. The deal has always stood as one of the most glaring examples of Chinese solar companies buying affiliates that are as good a deal for their chairman as for shareholders, which has been too common an occurrence in this sector.

Trading in these beaten up stocks is volatile day to day and the rallies on shipment guidance seems, at least to some analysts, curious given that profitability for these companies isn't inherent in the higher shipments. Additionally, the fact that German, U.K. and U.S. demand spiked in the fourth quarter is already very old news in the solar sector. These rallies seem to be dominated by retail interest in thinly traded stocks, too, as most long-only institutions remain in a wait-and-see mode with solar bets.

There was a article in a German financial newspaper on Wednesday reporting that April feed-in tariff cuts in Germany had been set at 20% for rooftop and 30% for ground-mounted systems. Any news out of Germany about reductions in solar subsidies is a headline to sell stocks on.

Solar stocks are cheap, though, and any good news is a reason to bid shares up but probably within a tight range. The better shipment levels in the fourth quarter are a backward-looking reason to be positive on solar, but in a twisted way Yingli's bad results might have been more more important than Canadian Solar's positive results because kitchen-sinking it now means that Yingli's future results may look better. The fourth quarter, especially a fourth quarter that didn't turn a profit, should be less important now than the 2012 outlook, but Chinese solar companies aren't providing 2012 guidance, just fourth-quarter shipment levels and margins, and all the impairment charges.

It all makes trading so short-sighted in solar at the moment it's almost futile, or in the words of Maxim Group analyst Aaron Chew, "It's uncertain and volatile for these stocks within the ranges where they are now trading and almost seems not worth it."

-- Written by Eric Rosenbaum from New York.

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