Insiders Making Big Bets on Chinese Solar
Jun 18th 2012 3:17PM
Updated Jun 18th 2012 3:18PM
There are some very bullish bets being made by insiders in Chinese solar firms right now, making me wonder if they know something we don't. Last week JA Solar (NAS: JASO) announced a $100 million share repurchase program, an incredibly bold bet from a company with a gross margin of 0.5%, $851.7 million in debt (offset by $676 million in cash), and a market cap of just $225 million.
Today, Hanwha SolarOne (NAS: HSOL) announced that three members of senior management bought a total of 301,928 shares of the company's stock for their own accounts. In the most recent quarter, Hanwha had a -9.4% gross margin, $664.7 million in debt, and just $303.1 million in cash.
Neither of these companies are models for operational effectiveness, and the bets have me wondering if management knows something about their future that we don't.
Chinese banks propping up solar
I've argued in the past that Chinese banks are at a crossroads and need to begin letting solar manufacturers fail or risk watching losses continue to grow along with competition. At the end of last quarter, JA Solar had a relatively modest $153.8 million in short-term borrowings but Hanwha was sitting on $334.0 million in short-term bank borrowings, meaning the company could go under in a heartbeat if that funding were pulled.
So why would you risk company capital or personal capital if your company's balance sheet is walking a tightrope that would result in insolvency in any other country? You must know that funding won't dry up and have extreme confidence that the business will improve.
LDK Solar (NYS: LDK) , Suntech Power (NYS: STP) , and Yingli Green Energy (NYS: YGE) are in even more extreme positions, sitting on a lot of short-term debt, giving similar risks to investors. But if JA Solar and Hanwha SolarOne are confident in their funding, should these companies be too? Maybe. It's possible that management knows the short-term funding will last for the foreseeable future and a turnaround in operations is a bet worth making.
Something doesn't smell right
I'm not sure exactly why such bullish bets were made on these two relatively weakly positioned solar companies, but it just doesn't smell right to me. Margins are terrible, losses are mounting, and their stock prices are continuing to crater. The information we've seen doesn't indicate this is a good bet, yet management seems to be going all-in. What do you think? Leave your thoughts in our comments section below.
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At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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