The solar industry is doing fairly well around the world this year. Recent data shows that U.S. installations were up 33% in the first quarter, Japan is growing rapidly, and China is investing billions to grow domestic demand.
But all of these positives couldn’t help LDK Solar Co., Ltd (NYSE:LDK) post decent numbers, and the company continues to slip closer and closer to bankruptcy. First-quarter sales were just $104.3 million, which isn’t even double the quarterly interest expense of $58 million, and net loss was $187.1 million.
Management also announced that it is in talks with lenders to refinance $2.9 billion worth of debt after partially defaulting on a $24 million bond earlier this year. If this were the U.S., debtors would have pushed the company into bankruptcy by now, but Chinese state-run banks hold most of the debt, so a solution is very difficult for investors to predict.
What is known is that LDK Solar Co., Ltd (NYSE:LDK) is nowhere near profitability and won’t be for a long time. Debt has a stranglehold on the company, and without a bailout from China, there’s no way the company survives. That means this stock is hands off to investors.
Stick with quality
LDK Solar Co., Ltd (NYSE:LDK) and Suntech Power Holdings Co., Ltd. (NYSE:STP) have already defaulted on debt, and the most leveraged Chinese manufacturers may follow others into full on bankruptcy (Suntech’s subsidiary is already bankrupt, but the parent company isn’t). Betting on leverage and hope for a recovery in China is a dangerous game, and investors should stick with high-quality manufacturers.
In China, Canadian Solar Inc. (NASDAQ:CSIQ) is doing a better job transitioning to Japan and project development than most, and it would be a much better pick than most. But still, there are risks, and this Fool’s choice is to stick with high-quality U.S. companies for which you don’t have to depend on government banks for survival.