Can Chinese Solar Companies Make a Profit?

Longtime readers of my solar analysis know I haven't been positive about Chinese solar stocks for over two years now. Instead, I think U.S. companies will be the best way to invest in the industry. Considering the profit First Solar is already making, and the consistent improvement at SunPower over the past year, that is what appears to be playing out.

But Chinese solar stocks have had a good run over the past few months and there's speculation that profits will follow, leading to even higher stock prices. So, why am I not buying into the Chinese solar story? Let me put some numbers together that highlight the problem the industry faces making a long-term profit.

Making money with a mountain of debt
The Chinese solar industry is clearly improving and gross margins will likely rise in the second quarter. But can any of these companies make a profit given their debt loads? Below I've calculated the annualized operating and interest expenses based on the most recent quarter and calculated how much gross margin each company would have to make, on every watt it has the capacity to make, just to break even.

 

Manufacturing Capacity

Debt

Annual Operating Expense

Annual Interest Expense

Break-Even Gross Margin Per Watt

Yingli Green Energy

2.45 GW 

$2.50 billion 

$280.4 million

$142.8 million 

17.3 cents

LDK Solar

2.0 GW 

$2.92 billion 

$135.0 million

$231.3 million

18.3 cents

Trina Solar

2.4 GW 

$1.31 billion 

$178.0 million

$58.4 million

9.9 cents

Canadian Solar

2.4 GW 

$1.66 billion 

$154.0 million*

$58.5 million

8.9 cents

Renesola

2.0 GW 

$958.6 million 

$111.2 million

$52.5 million

8.2 cents

JinkoSolar

1.2 GW 

$916.95 million

$105.6 million

$35.6 million

11.8 cents


* Canadian Solar had abnormal operating expenses the last two quarters; the estimate is based on a Q1 2012 basis. Renesola plans to outsource some manufacturing, and shipments will be higher than capacity in 2013.

Now, consider that the selling price for solar modules from China is around $0.65 per watt and falling. So, even the best projection above from Renesola would require gross margins to double from what they're expecting in Q2 to about 13%. Leaders Yingli Green Energy would have to make a 27% gross margin and Trina Solar would have to generate a 15% gross margin just to break even. 

This calculation doesn't take into account price reductions that will likely come in the next few years. Greentechmedia recently projected that solar costs could reach $0.36 per watt by 2017, which is great if selling prices stay flat, but price reductions have become a staple and will likely continue.  

The challenge for Chinese solar
Owning Chinese solar stocks is risky because they hold a lot of debt and compete primarily on price. That's not a recipe for the high margins necessary to break even or the ability to pay back debt in the future.

To make matters more challenging, China is no longer funneling unlimited funds to the solar industry, so these companies don't have money to expand and drive the next generation of solar investment.

At the very least, you can see that it's a harder road for companies with massive debt loads than for those without. Yingli, LDK, and Suntech have an incredibly steep climb ahead of them, and I'm not sure equity holders will be left with anything at the end of the day. After all, Suntech and LDK have already defaulted on loans, which is usually the first step to bankruptcy (Suntech's subsidiary is actually bankrupt but the parent company is not).

The energy revolution is all around us and this little-known stock holds the key to the explosive profit power of the coming industry transformation. Luckily, there's still time for you to get on board if you act quickly. All the details are inside an exclusive report from The Motley Fool. Click here for the full story!

The article Can Chinese Solar Companies Make a Profit? originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $7 calls on SunPower, long January 2015 $5 calls on SunPower, long January 2015 $15 calls on SunPower, and long January 2015 $25 calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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