Sunday, March 30, 2014

China Sunergy?

This writeup about China Sunergy was left in the comments section of a post this week:

You all should evaluate buying China Sunergy put options.

CSUN is a smaller, younger Suntech which is in a similar situation: $458 million notes payable and $132 million long-term debt against $500 million of assets, of which $31 million is cash as of the most recent quarter.

CSUN revenue halved as a result of EU tariffs and it has operated at a loss in all but one year since it's NASDAQ listing in 2007.

Given declining margins and production capability utilization over the past few years, management decided it would be a best to (drum roll) issue debt to build a new plant in Turkey.

The CSUN strategy is simply to reduce the cost of producing solar panels and roll-forward short term bank debt by drawing down and re-extending credit facilities.

Like many other Chinese solar manufacturers, there are many reasons as to why CSUN will now get "a cold shoulder from banks in the form of smaller and costlier loans:".

The only reason banks extended fully utilized credit facilities is because they were guaranteed (in 2011) by assets of the chairman, two of his asset management companies, and the Bank of Nanjing, a city located in the same debt-ridden providence as Wuxi.

CSUN has been operating with a significant working capital deficit and desperately needs cash, as it today announced that it would transfer an idle plant to the chairman's privately-owned competitor, CEEG, for $13 million cash and $25 million of debt relief.

Additionally, CSUN has stated that it is "in need of additional funding to sustain our business as a going concern" numerous times each year for the past few years.

You can find a liquidity plan in the last (2012) annual report for what will happen when the company cannot roll-forward it's bank debt or breaches long-term debt covenants.

The 2013 annual is due on 4/4 next week so we will get an update on the financial position of the company.

The bank borrowings have 6-12 month terms that mature at various times throughout the year, while the short-term credit facilities are subject to annual renewal.

Given the outstanding debt, the issuance of equity is really the only card left for CSUN aside from undergoing a restructuring.

Therefore, the June and September puts may be better options than the shorter-term ones, but all will rise in value due to the severe working capital shortfall and CSUN's debt burdens.
I haven't looked at it yet, but in case anyone wants another China short.

1 comment:

Anonymous said...

Csun is on life support. How much long CEEG can keep it alive? See exhibits 4.62 to 4.69.