Suntech Power Holdings (NYSE:STP) has agreed to sell its primary manufacturing subsidiary, Wuxi Suntech, to Shunfeng Photovoltaic International Ltd, a mid-sized Chinese solar manufacturer for about 3 billion yuan ($492 million). Wuxi Suntech, which is located in China, holds several key assets including intellectual property, Suntech Power’s core manufacturing assets and the company’s research and development unit.  According to court documents reviewed by the Wall Street Journal, Suntech Power intends to become a distributor of solar products rather than a manufacturer following the sale of Wuxi Suntech and reorganization of its operations.  While we believe that the asset sales should allow Suntech Power to cut down its debt load to a certain extent, a turnaround of the business following a reorganization will remain an uphill task.
Wuxi Suntech Sale
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Wuxi Suntech’s manufacturing assets comprise three factories with cell and module manufacturing capacity to the tune of 2.4 gigawatts (GW). A significant portion of the cell manufacturing capacity is obsolete and is unlikely to return to production, while some of the remaining cell and module manufacturing capacity has also been idled.  Wuxi Suntech is currently undergoing bankruptcy proceeding in China after Suntech Power defaulted on $541 million in U.S. convertible bonds earlier this year, triggering cross-defaults on Wuxi Suntech’s Chinese debt. The subsidiary holds around $1.75 billion in debt, which amounts to around 75% of Suntech’s total debt. 
The sale would need approval from Shunfeng’s shareholders as well as approval of Shunfeng’s restructuring proposal by the Wuxi Intermediate People’s Court and Wuxi Suntech’s creditors.  According to the administrator of Wuxi Suntech’s bankruptcy proceedings, the proceeds from the sale would be used to pay the bankruptcy costs as well as pay back Wuxi Suntech’s creditors.
What’s Next For Suntech Power
Following the sale, Suntech Power’s assets will include a sales-and-distribution business in the U.S. and Europe, an investment company that controls around 140 megawatts (MW) of solar farms located in Italy as well as some smaller manufacturing subsidiaries located in China. The divestment of Wuxi Suntech would leave Suntech Power bereft of any significant production infrastructure and the company plans to transform itself into a distributor of solar products going forward. The company will likely source panels from the Chinese market and sell them through its distribution network and will also focus on its panel-installation service. Suntech has a strong brand image particularly in markets such as Europe, and this could be of significant value to the company following the reorganization. While a shift to being a distributor could be a good move from a liquidity standpoint, given that this business is likely to be less cash intensive compared to manufacturing, it will still likely be an arduous task for the distribution business to generate sufficient cash flow to pay down debt and turn around the fortunes of the company.
Suntech’s cash position remained precarious at around $4.3 million as of June 2013. However, the Wuxi Guolian Development Group Co., a company controlled by the local government of Wuxi, recently pledged to make an equity investment of around $150 million into the company. While this could help fund the company’s distribution operations and pay down some debt, it is also likely to be significantly dilutive to Suntech’s existing shareholders.
We are maintaining our price estimate for Suntech Power at around $0.20 per share given the uncertainties relating to the company’s debt load and the success of its reorganization plans. We note that our price estimate could change substantially based on future developments.Notes: