Note: This article was provided to subscribers of Envoy Global Research on June 12, 2008, and posted on Seeking Alpha today. If anyone here has any special knowledge in this industry, and can add any comments/discussion, please email me (ilene@philstockworld.com) and I’ll post your thoughts here. I don’t think we can post comments through the Phil’s Favorites section yet. – Ilene 
Will Some Solar Companies Face a Cash Crunch?
Please visit Seeking Alpha for the full report. Here are a few excerpts:
Introduction
This post is devoted to some thoughts on companies in the solar industry, particularly the Chinese polysilicon-based solar module manufacturers. The basic issue I address here is the risk for a serious cash crunch at some of these module manufacturers given their working capital deficits and their capital expenditure requirements.
Moreover, despite seemingly positive accounting earnings reports from many of these companies, a more careful perusal of these companies balance sheets raises serious questions as to the viability of their businesses, given the continued cash outflows. Importantly, this post does not address thin-film solar manufacturers, and my basic points do not apply to these businesses given the different economics of the thin-film segment of the solar panel industry.
Accounting Operating Metrics Are Misleading
Wall Street’s propensity to value Chinese solar companies off of accounting earnings, MW produced, and other non-cash metrics, completely obfuscates the significant cash-flow problems that many of these companies currently face. The cash-flow issues are caused by significant working capital needs, and it’s hard to imagine how the working capital situation can be improved any time soon, even in the event that polysilicon prices ease. There is simply too much competition in the industry and therefore suppliers, as well as customers, will continue to squeeze these companies on payment terms and cycles.
In the meantime, these companies are only able to keep their doors open due to a continued influx of cash in the form of loans, dilutive equity offerings, and other financial vehicles that Wall Street investment banks arrange. At issue, though, is how these companies would fare, should financing become more difficult. The businesses continue to burn thru so much cash, that it seems very likely that without financing many of these companies would go bankrupt very quickly.
Additionally, since few investors are paying attention to cash-flow, and most reports on these companies focus on accounting earnings and sales, there is a very strong incentive on the part of these companies to engage in questionable sales practices and revenue recognition policies…
Conclusion
In conclusion, as is spelled out in the risk portions of polysilicon-based PV suppliers, and as is evident from annual and quarterly financials, working capital cash-flow deficiencies are a serious financial drain on many of these companies. As such, valuing these companies off of earnings is misleading and vastly overstates the underlying economic value of the companies.
Moreover, considering the tremendous amount of capital expenditures still needed by these companies to ramp up production to meet demand, it should be obvious that polysilicon-based suppliers are starving for cash. However, since the industry is currently oversupplied and suppliers have little differentiation, it seems clear that there is a significant risk that these companies could face a cash crunch should investors grow tired of financing these companies…
