August 13, 2018

Breakingviews: China’s Solar Stress Could Burn More Dealmakers

by Breakingviews.

China’s solar stress could burn more dealmakers. The industry faces a glut of raw materials and panels after the Chinese government slashed support for the heavily indebted sector. The first victim of the switch is industry giant GCL-Poly Energy, which scrapped plans to flog assets to state-backed Shanghai Electric. It won’t be the last.

The loss of official support has cast a shadow over the business. After Beijing in June limited the number of new projects and cut tariffs it pays to solar generators, analysts lowered their forecasts for new installations of solar capacity this year by as much as a third. That signals dark days ahead, as new projects drive growth for both power plant operators and manufacturers.

The industry’s dependence on hefty leverage – a legacy of hasty expansion and delayed subsidy payouts – makes its position more precarious. Some solar companies, such as Panda Green Energy, were already struggling with net borrowing of more than 10 times EBITDA.

The squeeze is especially hard on manufacturers of solar materials and equipment, which must splash cash on research to stay competitive. Meanwhile, overcapacity has depressed prices: Chinese solar modules now trade at a 15 percent discount to the global average, according to Macquarie.

Distress should spur consolidation. The Solactive China Solar Index has fallen nearly 20 percent since the policy shift. As valuations sink, less indebted players like LONGi Green Energy Technology can go bargain-hunting.

But GCL-Poly’s doomed deal shows how hard it is for two sides to agree a sensible financial transaction. Selling a 51 percent stake in a key subsidiary for around $1 billion cash and another $1 billion in Shanghai Electric shares would have lowered the company’s net debt, which was 4.5 times EBITDA at the end of 2017. For its part, Shanghai Electric would have gained a foothold in alternative energy at a time when policymakers are keen to move on from fossil fuels.

The deal’s failure suggests more merger muddles ahead. The prospect of grid parity – the day when electricity from solar energy costs as little as the coal-powered variety – could embolden optimists to try for higher valuations. Ambitious tycoons like GCL-Poly’s Chairman Zhu Gongshan are another volatile variable. For dealmakers, the risk of sunburn is high.


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