Analyst Sees Balance Sheets of Chinese Solar Cos. at Breaking Point; Says Recapitilizations Incoming (LDK) (STP)

Stocks in the Solar sector are holding up nicely Wednesday afternoon despite an extremely scathing report from long-time bear Aaron Chew of Maxim. While the Dow and S&P 500 are up 0.3 percent and down 0.2 percent, respectively, the Claymore/MAC Global Solar ETF (NYSE: TAN) is up more than 0.8 percent at last check.

Chew believes the balance sheets of many Chinese solar companies are "cracking at the seams with equity at risk of succumbing to insolvencies, recapitalizations, and takeunders." He noted the solar market within China "has largely sidestepped a major failure to date," unlike the US and Europe, given "deep support from the government and banks." Chew sees upcoming shifts in China's political and economic landscape amid "a new national government and gaping capital requirements..." as soon affecting this support, however. The analyst said backing of solar "at the provincial level—where it has been most prevalent—is at risk."

Chew sees bankruptcy for Chinese solar companies as "a less viable option," and instead is expecting "recapitalizations, in which banks swap debt for equity, enabling (1) banks to creatively avoid a writedown, (2) companies to eliminate interest expenses, and (3) provinces to maintain employment. The trade-off, though, is equity dilution that destroys value for current shareholders."

The Maxim analyst said LDK's (NYSE: LDK) cash needs may be too much to bear, pointing to $3.4 billion in debt and free cash flow drain of $1.2 billion over 2011. Chew believes a recent debt pay-down by Jiangxi of LDK's debt "may mark the beginning of an orderly wind-down of its liabilities." Chew sees LDK "on the cusp of failure or a major recapitalization."

Elsewhere in the Chinese solar sector, Chew believes Suntech's (NYSE: STP) $2.2 billion in debt leaves equity at risk. "With cash to cover three years of losses and $541m due March 2013, we believe STP is under pressure to recapitalize or find a white knight with deep pockets. Still, with capacity replacement value at $1.1b, we estimate this implies equity value of only $52m, half its market cap," according to Chew.

Maxim rates Suntech ($0.50 price target) and First Solar (Nasdaq: FSLR) ($9 price target) at Sell and rates shares of Trina Solar (NYSE: TSL) and Yingli (NYSE: YGE) at Hold. The analyst rates shares of STR Holdings (Nasdaq: STRI) a Buy ($10 target).

Shares of LDK are down 0.3 percent to $1.53 on the NYSE, while Suntech shares are up 1.3 percent to $1.57.

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