Suntech’s Outlook Dims Following Subsidiary’s Bankruptcy

The bankruptcy of Wuxi Suntech has raised several questions about Suntech Power‘s (NYSE:STP) future prospects and even its survival. Wuxi Suntech is Suntech’s primary operating unit and accounts for around two-thirds of the firm’s total manufacturing capacity. While the unit’s operations are expected to continue as it restructures its debt obligations, we believe that the outlook for Suntech as a company is quite bleak considering it’s over-leveraged balance sheet, the difficult pricing environment in the solar industry, weaning financial support from China’s central government and the possibility that the firm’s brand could take a hit following the bankruptcy.

In light of this, we have revised our price estimate for the company to $0.21, which is around 40% below the current market price. The key changes to our model include an increase in the discount rate to account for the firm’s higher risk and also a decrease in the firm’s panel shipments through the end of the Trefis forecast period. We note that any estimate with respect to Suntech should be taken with extreme caution given the highly distressed nature of this company’s operations.

Common Shareholders Could Lose, Even If Government Steps In

Suntech needs funds to continue its operations and service its debt load (over $2 billion as of Q1 2012) and it looks increasingly unlikely that the firm will be able to do anything on its own to get back on track considering its negative cash flows and operating margins. It will need to count on the government for support and we believe that even if there is support, it wouldn’t mean much for the firm’s common shareholders.

Central Government Unlikely To Help: Although China passed its new bankruptcy laws in 2007, they have been rarely put to use since the government usually negotiates with creditors behind the scenes to avoid the procedure. Cases such as Suntech’s are a rarity in China and definitely sends a stern message that the government won’t be supporting money-losing firms. China’s government-backed banks have significant exposure (over $1 billion) to Suntech, and it seems highly unlikely that they would provide more funding.

Wuxi Government Support Possible, But Wont Mean Much To Common shareholder: The Wuxi Suntech unit employs around half of Suntech’s 20,000 employees and the unit is very important to the local economy. Considering this, the government of Wuxi may play a larger role in the firm’s affairs either directly or indirectly. If the regional government infuses cash or takes over the firm, common shareholders would be almost entirely wiped out. On the other hand, if there is no support from the government, the firm will have to liquidate assets to raise cash and pay off debt, leaving nothing much for  common shareholders.

Brand Image Could Take A Hit

Suntech built a strong brand in the U.S. and Europe as it rose to become the world’s largest panel manufacturer at one point. However, we believe that the bankruptcy filing could hurt the firm’s image and also impact the confidence of customers, especially large scale project developers who count on the firm to supply panels to large scale solar farms. Another issue could be warranties. While Suntech has said that it was committed maintaining the warranty obligations on its products following the bankruptcy, we are unsure if customers will be willing to take a risk considering the firm’s faltering financial.

Stock Could Be Delisted From NYSE: The New York Stock Exchange has said that it was reviewing the Suntech’s stock listing on the exchange following the bankruptcy. ^[1]  Although it is unclear whether this has to do with the stock price (now under $0.50) following the bankruptcy, the NYSE does have a condition that any stock that trades below $1 for 30 consecutive days could be delisted. ^[2]

1. Economic Times [↩]
2. Forbes [↩]