LDK Solar Co., Ltd (ADR) (LDK), Trina Solar Limited (ADR) (TSL): Are Chinese Solar Stocks Still Worth Buying?

Trina Solar Limited (ADR) (NYSE:TSL) is one of the leaders in the Chinese solar industry, but now it looks like it’s following the downward path of Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP) and LDK Solar Co., Ltd (ADR) (NYSE:LDK) who have both defaulted on loans. Trina Solar Limited (ADR) (NYSE:TSL) updated first-quarter guidance yesterday and said it shipped between 390 MW and 400 MW versus a previous guidance of 420 MW and 430 MW, anothlier sign that Chinese solar is slowly going out of favor.

If Chinese manufacturers experience lower shipments it will translate to lower margins, which is their core financial problem right now. Trina Solar Limited (ADR) (NYSE:TSL) expects gross margin to be between 1% and 3%, which is about in line with expectations for low-single digits. But this level of gross margin isn’t enough to make a profit or pay for billions of dollars in debt. The debt-fueled expansion of Chinese solar is being squeezed financially and more companies will have to fall if this continues.

Shipment and margin trends aren’t usually isolated to one Chinese solar manufacturer so it’s easy to assume that other companies will see disappointing numbers in the first quarter. The first two to watch are Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) and Canadian Solar Inc. (NASDAQ:CSIQ), who round out the top three Chinese solar module suppliers with Trina Solar Limited (ADR) (NYSE:TSL). All three have high debt, low margins, and massive losses.

Squeezing China
U.S. regulators put import tariffs on Chinese modules last year in an effort to fight subsidies and product dumping. European officials are considering similar measures and may implement tariffs so onerous that China is priced out of the market. The Wall Street Journal is reporting that tariffs of between 48% and 68% will be announced in June, which would make even cheap Chinese panels uncompetitive in the market. Trina Solar Limited (ADR) (NYSE:TSL), Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE), Canadian Solar Inc. (NASDAQ:CSIQ), and most Chinese competitors count on Europe for a large percentage of their demand, so if they’re squeezed it would only exacerbate low shipments and unsustainable margins.

Contrast to U.S. suppliers
Take Trina Solar Limited (ADR) (NYSE:TSL)’s numbers and contrast them with recent reports from First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR). Both stocks have jumped in 2013 because they’re reporting higher profits than expected as their end markets stabilize. This is a stark contrast to what we’re seeing in China.

I’ve been down on Chinese solar stocks for a long time now and this is only the latest reason why. The U.S. and Europe are trying to squeeze them out, margins remain unsustainably low, and debt levels continue to pile up. Eventually the Chinese government will have to let some of these companies fail and liquidate their assets. That’s why I would stay away from all Chinese solar stocks right now.

The article Another Sign That Chinese Solar Is Dead originally appeared on Fool.com.

Motley Fool contributor Travis Hoium manages an account that owns shares of SunPower. Travis Hoium also personally owns shares of SunPower and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, Long Jan 2015 $15 Calls on SunPower, and Long Jan 2015 $25 Calls on SunPower. The Motley Fool has no position in any of the stocks mentioned.

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