The Haves and Have-Nots of Solar


Last week we heard from nearly all of China's biggest solar manufacturers and the news wasn't good, but that's pretty much what we expected. LDK Solar (NYS: LDK) and JA Solar (NAS: JASO) showed that suppliers and low-tier module manufacturers had been hit hardest when they both reported negative gross margins.

But the news hasn't been all bad with SunPower, First Solar (NAS: FSLR) , Trina Solar (NYS: TSL) , and Suntech Power (NYS: STP) all reporting double-digit gross margins despite a terrible solar market, solidifying their positions as solar leaders. And midweek, Yingli Green Energy (NYS: YGE) firmly took its place as a top-tier Chinese supplier with a surprisingly strong earnings report.

Yingli flexes its muscles
Unlike most manufacturers, Yingli's shipments were actually up 21.9% from the second quarter to a record high. Net revenue was $667.7 million and gross profit was $71.9 million, a respectable 10.8% margin.

Cost per watt also dropped, partly due to dramatically falling prices from suppliers. Excluding an inventory charge, Yingli's cost per watt was $1.03, just a penny higher than Trina Solar in the Chinese market.

Yingli's balance sheet is also one of the better balance sheets in solar -- $929 million of cash offsets $1.77 billion in debt, still a large load but less than many competitors.

If consolidation takes place in the industry over the next year, as many predict, Trina Solar and Yingli are two of the most likely buyers of assets. Their strong businesses and more flexible balance sheets definitely put them in the driver's seat when consolidation begins.

More low-tier manufacturers fall behind
But the news wasn't as strong at Hanwha SolarOne (NAS: HSOL) or ReneSola (NYS: SOL) .

Hanwha reported a 20.1% decrease in revenue and a net loss of $0.55 per share. Gross margins were an ugly -10.8% and the income statement only got worse from there.

But I was most concerned about management's comments about the market, making me think they don't understand that the solar market is entering a new phase in its development. Management said it had "obtained the necessary funding primarily through bank borrowings to support us through this downturn." As if the downturn is going to turn around and sales prices are going to increase soon.

Hanwha doesn't need a bank loan; it is in trouble because its blended cost per watt (excluding the inventory writedown) was $1.20 and internal cost per watt was $1.13. That's $0.10 higher than leading competitors, a gap that no amount of financing can fix.

Things were arguably worse at ReneSola where revenue fell 24.1% from the second quarter to $189.1 million and gross margins were a negative 4%. To make matters worse, the company is adding polysilicon supply to a market that's stuffed full of polysilicon and practically giving it away.

The company has a smaller balance sheet than many other competitors, but with $450.3 million in cash, $822.2 million in debt, and losses mounting, the company's financial position doesn't look good.

Perception vs. reality
Maybe the biggest problem is that low-tier manufacturers such as Hanwha SolarOne and ReneSola view themselves differently than the market does. They see themselves as big players in a growing global market that's just going through a rough patch.

The reality is that customers can now demand top-tier modules from Yingli, Trina, SunPower, and First Solar at more attractive prices and get the backing of more solid companies with a stronger track record. With higher costs, less brand recognition, and questionable finances, Hanwha SolarOne and ReneSola are just falling further behind.

Foolish bottom line
We've seen the leaders in solar manufacturing extend their lead this quarter and lower-tier manufacturers fall further behind. You can see in the difference among Yingli, Hanwha SolarOne, and Renesola just how wide that gap is getting.

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At the time thisarticle was published Fool contributor Travis Hoium owns shares of First Solar and SunPower. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of First Solar. Motley Fool newsletter services have recommended buying shares of First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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