By Ben Sills
July 21 (Bloomberg) -- Investors are starting to doubt
profit estimates for China’s solar manufacturers as concerns
about accounting practices first spotted at a forestry company
spread nationwide.
Directors leading audit committees quit LDK Solar Co. on
July 18 and at its rival Trina Solar Ltd. on July 12. Moody’s
Investors Service on July 11 cited “accounting risks” at five
Chinese companies including LDK. Muddy Waters LLC, a Hong Kong
researcher, on June 2 accused Sino-Forest Corp. of inflating its
timber production.
Those events widened doubts about the solar industry, which
already was struggling with falling demand and prices, said
Shawn Kravetz, chief executive officer at Esplanade Capital.
Eight Chinese companies in the 17-member Bloomberg Large Solar
Index have declined 13 percent since the Muddy Waters note,
depressing share valuations to less than half the average Hong
Kong’s benchmark share index.
“There is a little bit of the Muddy Waters phenomenon
here, be careful of all Chinese companies,” Kravetz said by
phone from Boston. “Some multiples are so low because they are
mirages. If you get up close, the reason the earnings look so
cheap is because the earnings won’t be there.”
Multiples of stock prices to earnings forecast for this
year are 2.8 at LDK, 6 at Trina and 3.4 at Renesola Ltd. as of
July 19. That compares to 11.8 times on the Hang Seng index of
46 companies.

Prices Tumble

Prices for photovoltaic panels and their components tumbled
as much as 31 percent in June from the previous month as
manufacturers tried to shift their stock while demand declined
in Germany and Italy, according to Bloomberg New Energy Finance.
“You run through the spot pricing and they can’t make any
money,” said Gabelli & Co.’s John Segrich, who runs the best-
performing clean energy fund over the past year among 75 tracked
by Bloomberg. “There’s a real mismatch between reality and what
the estimates show you.”
The solar index has fallen 29 percent in the last three
months, leaving it at 8.5 times expected 2011 earnings for its
17 members. The S&P 500, which trades at 13.3 times, has gained
1.1 percent over the period. The Hang Seng lost 6.9 percent.
Renesola, a solar wafer maker whose sales more than doubled
last year, is down 33 percent in New York trading since June 2
when Muddy Waters founder Carson Block published his note on
Sino-Forest. Trina has fallen 14 percent and LDK by 9.2 percent.

Renesola’s Reply

Renesola Chief Executive Officer Li Xianshou said analysts’
profit forecasts for the company were inflated after Germany and
Japan pledged to shut nuclear plants after the Fukushima reactor
meltdown in March.
“We are more objective and realistic about the market,”
the Renesola executive said in a July 14 telephone interview.
Spokesmen for LDK and Trina didn’t respond to calls seeking
comment.
The Chinese companies are trading at lower multiples than
rivals in the U.S. and Europe. First Solar Inc. of Tempe,
Arizona, trades at 13.2 times estimated earnings, Solarworld AG,
based in Bonn, Germany, at 11.1 times and Solaria Energia y
Medio Ambiente SA of Madrid at 23.6 times.
Analysts expect Renesola of Jiashan, China, to post profit
of $137 million this year, 15 percent less than four weeks ago,
according to a Bloomberg survey. The forecast for LDK slipped
7.9 percent to $311 million and the outlook for Trina declined
5.5 percent to $239 million.

‘Accounting Risks’

Moody’s on July 11 named LDK, the world’s second-biggest
panel maker by sales, as one of the companies with “accounting
risks” about corporate governance. Trina, which makes solar
wafers and modules, plunged 8.5 percent the following day after
the head of its audit committee resigned.
LDK on July 18 said Louis Tung-jung Hsieh, an independent
director who led its audit committee, resigned and was replaced
by Bing Xiang. The shares have lost 36 percent this year.
Kravetz allowed the options he held on LDK shares to expire on
July 15, he said in an e-mail.
“The market conditions are very touchy, and anything like
that gets sold off very quickly without any questions,” said
David Li, the Hong Kong-based co-manager of the Impax Asian
Environmental Fund who helps manage about $3.5 billion and
avoids solar stocks because of their volatility. “The reaction
I feel is excessive.”

Registrations Revoked

The U.S. Securities and Exchange Commission has since
December revoked the registrations of eight Chinese companies
listed in the U.S., the strategy Sino-Forest used to raise
capital and also pursued by LDK, Trina and Renesola. More than
24 Chinese listings in New York have disclosed auditor
resignations or admitted accounting misstatements since March,
SEC Chairman Mary Schapiro wrote in an April 27 letter.
China’s solar companies have been booming even though the
rest of the industry is struggling. The nation has doubled solar
panel output in the past five years, helping increase global
capacity by 9.5 gigawatts this year to 41.5 gigawatts, according
to New Energy Finance.
Renesola this year is aiming to almost triple its output of
polysilicon even after a tumble in the price of the raw material
for solar cells.
Segrich, who manages $150 million of assets across the top-
ranked Gabelli SRI Green Fund and a hedge fund, said his biggest
short positions, anticipating price declines, are in polysilicon
makers including Wacker Chemie AG and OCI Co., which trade at
11.1 and 8.2 times expected earnings.

Falling Costs

He said those companies may suffer as falling costs for
finished goods drive further declines in the price of the raw
material. The polysilicon spot price fell 28 percent in June,
according to New Energy Finance.
Hedge funds including Segrich’s that helped push short
positions in Yingli Green Energy Holdings Co. and Trina to the
highest in a year over the past six weeks may regret their
decisions, said Jenny Chase, New Energy Finance’s lead solar
analyst. She expects lower panel prices to make more projects
profitable, pushing annual installations to about 24 gigawatts
this year compared with 18 gigawatts in 2010.

‘Strength of Upswing’

“People are going to be surprised by the strength of
upswing,” Chase said in an interview. “Module prices dropped
under a critical threshold in June where it starts to make sense
to install panels in Germany again.”
Germany, the biggest market for solar panels, installed 700
megawatts of capacity from March to May compared with a record
7,450 megawatts in the whole of 2010. The government has lowered
incentives to contain a boom in installations. Italy, the
second-biggest market with 5,500 megawatts installed last year,
started paring subsidies in May.
“A lot of these Chinese companies have extremely
unrealistic expectations,” Jon Sigurdsen, who runs about 250
million euros ($355 million) across long-short and long-only
funds at DnB NOR Kapitalforvaltning ASA in Oslo and avoids
Chinese solar stocks. “They might be more expensive than they
seem.”