Suntech Power (NYSE: STP), the world’s largest manufacturer of photovoltaic solar panels, announced a strategy which it hopes will help shore up its financial health as well as operations. The company is among the several Chinese solar firms that have been suffering over the last two years due to weak demand, falling panel prices, burgeoning debt, and chronic manufacturing overcapacity. In the press release, management also announced that it is seeking UBS’ help to “evaluate alternatives” to address its convertible notes due in March 2013. ((Suntech Announces Strategy To Solidify Market Leadership))
Capacity Reduction And Cost Cutting
Suntech has temporarily reduced its PV cell capacity to 1.8 GW and will maintain module and wafer capacity at 1.6 GW and 2.4 GW, respectively. Costs are expected to reduce as manufacturing will now occur only at the company’s highest efficiency manufacturing facilities. Capacity downsizing has for long been required in the solar industry for rationalizing output and improving utilization levels.
The company stated that it will continue to streamline operations to achieve 20% reduction in operating costs. Suntech, which posted negative gross margins in the previous quarter, is determined to set its manufacturing operations straight. It has undertaken measures to reduce its module non-silicon costs by 30% by the end of the year.  Companies typically have better control over the non-silicon costs of module manufacturing as they are relatively independent of polysilicon and wafer prices.
Debt Restructuring Efforts Seem Questionable
The press release provided no details as to how Suntech intends to restructure its convertible notes, and analysts for their part remain skeptical about the options available to the company to pull it off. Suntech’s net borrowing at the end of the first quarter was $1.6 billion, and convertible notes maturing in March amounted to $541 million. According to an analyst with Raymond James & Associates Inc., equity conversion is not a viable option as it would be enormously dilutive – the value of the maturing convertible notes is three times the company’s market cap. 
Although Suntech’s plans for a turnaround are a positive step forward, their effectiveness remain to be seen given the gravity of the company’s problems.
We have a price estimate of $1.17 for Suntech Power, which is about 28% ahead of its current market price.Notes: