Suntech Power (NYSE: STP), one of the world’s largest solar equipment manufacturers, released its preliminary third quarter results on Friday, reporting an 18% sequential decline in revenues to $387 million. Gross profits improved to around 5% thanks to a reversal in the provision relating to US tariffs.  While the information provided in the press release was quite limited, it remains evident that the firm continues to face challenging industry conditions brought about by trade barriers, subsidy cutbacks and the chronic panel oversupply environment.
Financials Restatement And Balance Sheet Position
Suntech has not released full earnings for the last two quarters as it undertook an investigation into the fraud relating to a securities investment that it had made in Italy. The firm has now confirmed that it had indeed been a victim of fraud and would be restating its financial statements for 2010, 2011 and Q1 of 2012 which will be published during Q1 2013. The firm expects its 2010 earnings to be reduced by between $60 million and $80 million as a result of the fraud.
While the firm did not disclose balance sheet figures in the press release, it’s reasonable to assume that things haven’t changed for the better since the first quarter. In Q1, the firm had a net debt of about $1.6 billion, which included $541 million in convertible notes maturing in March. While the firm has taken initiatives to restructure debt, we are quite skeptical of the firm’s options given the high debt load and the precarious cash flow situation. (See Also: Suntech Cuts Capacity & Costs; Hires UBS To Advise On Convertible Notes) However, the firm has enjoyed the backing of the Chinese government and the regional government and could benefit from the relationship yet again. In September, Suntech secured an emergency funding package of about $31 million from the regional government of Wuxi.
Manufacturing Restructuring And Growing Japanese Shipments
On a positive note, the firm reported shipment growth in China and Japan, two promising solar markets. The Chinese government has been providing investment subsides and feed-in-tariffs in a bid to shore up demand for domestic solar products. Solar installations in Japan are gaining impetus as the country looks to phase out nuclear capacity, replacing it with other forms of energy including natural gas and solar energy. Growth in these markets can help the firm offset its declining sales in European markets.
Suntech has taken steps to restructure its manufacturing operations and reduce its operating costs. The firm recently downsized its US manufacturing operations and reduced its Chinese cell manufacturing capacity to 1.8 GW, operating only the more efficient production lines. These moves should help the firm improve its capacity utilization levels and better manage its cost base given the relatively high fixed costs involved in solar cell manufacturing.
Following the preliminary earnings, we have updated our model to account for the decline in average module selling prices to about $0.97.  We have also revised the firm’s module shipments for the year, in-line with the revised guidance to about 1.8 GW. Gross margins have been increased towards the end of the forecast period to reflect better utilization levels and cost control. Our revised price estimate stands at around $0.91, a slight premium to the current market price. We note that any material change in the company’s financial health due to a restatement of its financials in relation to the fraud claims could meaningfully change our estimates.Notes: