Shunfeng’s steadily rising revenue cannot distract from its debt worries

The solar world is likely to have been somewhat taken aback as troubled manufacturer Yingli revealed the extent of its groaning debt pile to the U.S. Securities and Exchange Commission on Wednesday.

When it came to the publishing of the 2018 annual accounts of fellow Chinese major Shunfeng today, the Hong Kong-listed entity took a somewhat more traditional approach to keeping its shareholders up to date.

Chairman Zhang Fubo’s summary painted a picture of a solar manufacturer and project developer making steady progress after reacting to last year’s decision to reduce Chinese PV subsidies by wisely diversifying into overseas markets.

There were rises in revenue across all four sectors of the business at Shunfeng International Clean Energy, explained Zhang, with solar raw materials revenue up 2.3% year on year to RMB8.43 billion (US$1.25 billion); solar power generation returns rising 4.8% to RMB1.38 billion; the income from solar plant operations and maintenance services up 7.5% to RMB137 million; and Shunfeng’s LED unit seeing a 4.5% improvement to RMB334.5 million.

Success in overseas markets

That all added up, said an apparently contented chairman, to an overall rise in revenue of 2.7% on the 2017 figures as Shunfeng raked in RMB10.29 billion, with the company owning 1.5 GW of installed PV capacity and having generated 1.76 TWh of solar power last year.

“Success is not final and challenge is not fatal,” purred Mr Zhang, sagely.

The verdict of the management board was similarly positive, with the volume of module exports up 33.4% on 2017, to 3.3GWh, for a 17% year on year revenue rise to RMB6.92 billion despite an average selling price (ASP) 12.5% lower, at RMB2.1 per watt. Admittedly cell revenue tumbled 41.6% to RMB1.17 billion on the back of a 12.9% fall in shipment volumes and an ASP one-third lower at RMB1/W, and wafer income was down 13.2% to RMB19 million on a 9.3% reduction in shipment levels but look at the progress made in selling products outside China.

Some 74.9% of Shunfeng’s sales were to Chinese customers in 2017 but that figure had come down to 53.7% in just a year to prove that when it comes to the emerging markets, Shunfeng walks the walk, even if the change drove up distribution and selling expenses 74.1% to RMB1.85 billion during the period.

Even with those reverses, Shunfeng reported gross profits of RMB1.85 billion, up 17.2% on 2017. Happy days! So why was there not only no dividend but a “loss for the year” figure of RMB1.7 billion, up 104.6% from 2017, to leave Shunfeng “group in a negative net cash position”?

And now the bad news…

And therein lies the rub. Dive down into the blue pages of the 241-page annual report – the section prepared by auditors Deloitte – and the story is a familiar one as steady progress is replaced by talk of “material uncertainty” and measures being drawn up to keep creditors at bay.

According to the auditor, Shunfeng’s liabilities at the end of last year exceeded its assets by more than RMB7.58 billion, with a further RMB420 million of commitments made on top.

A HK$2.5 billion (US$318 million) chunk of those borrowings is owed to Sino Alliance Capital Ltd and was due to mature at the end of March. However, settlement is now dependent on Shunfeng completing the sale of its Jiangsu Shunfeng Photovoltaic Technology Co Ltd unit to the Asia Pacific Resources Development Ltd business owned by one of its significant shareholders, Cheng Kin Ming, by the end of June.

Shunfeng was due to have settled HK$600 million of that debt at the end of March – although there is no confirmation that took place in the 2018 figures – and will have to find a further HK$700 million by the end of June. The balance of the debt, provided the sale completes, will then be taken on by Cheng, who will also pay Shunfeng RMB1.94 billion in cash and wipe out monies he is owed under one of the two Shunfeng corporate bonds he holds.

If that deal goes through, is Shunfeng out of the woods? Not quite, as the solar manufacturer would then have to settle the HK$980 million it owes China Minsheng Banking Corp, the deadline for which has been extended, but only until August. There are also further short term borrowings of RMB3 billion, RMB145 million of which have already matured and had their payment deadline extended. And let’s not forget a further RMB1.09 billion of other loans for which “certain financial covenants” have been broken, permitting lenders to call in instant payment, if they so wish.

Failed shares subscription

Plus there is a three-year corporate bond worth RMB550 million which has had its maturity date extended until November 9, not to mention the RMB284 million bond which was due to mature on March 22 and for which no mention of the outcome was made in the accounts.

Shunfeng’s stated optimism that it can persuade its Chinese backers to have patience with its turnaround plans is undoubtedly well placed, especially given Beijing’s recent demand that lenders do everything in their power to encourage PV development. And that proposed disposal of Jiangsu Shunfeng would ease matters.

However, shareholders will be fully aware a proposed HK$1.62 billion shares subscription by the CAM SPC fund that materialized in December – and would most likely have prompted a full takeover offer – came to nothing. More alarming is the fact that proposed subscription, which lapsed at the end of March, is still listed as one of the two central planks in the Shunfeng board’s strategy to pay down its crippling debts – the other being the Jiangsu Shunfeng disposal.

Plan B, said the board, would involve a sale of PV plants and subsidiaries and persuading lenders to continue rolling over portions of a debt pile that adds up to RMB13.6 billion.

Challenge may not be fatal, but a gearing position of 77.9% just might be.