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SunPower Corporation (SPWR), First Solar, Inc. (FSLR): Can Chinese Solar Companies Make a Profit?

First Solar, Inc. (NASDAQ:FSLR)

Longtime readers of my solar analysis know I haven’t been positive about Chinese solar stocks for over two years now. Instead, I think U.S. companies will be the best way to invest in the industry. Considering the profit First Solar, Inc. (NASDAQ:FSLR) is already making, and the consistent improvement at SunPower Corporation (NASDAQ:SPWR) over the past year, that is what appears to be playing out.

But Chinese solar stocks have had a good run over the past few months and there’s speculation that profits will follow, leading to even higher stock prices. So, why am I not buying into the Chinese solar story? Let me put some numbers together that highlight the problem the industry faces making a long-term profit.

Making money with a mountain of debt
The Chinese solar industry is clearly improving and gross margins will likely rise in the second quarter. But can any of these companies make a profit given their debt loads? Below I’ve calculated the annualized operating and interest expenses based on the most recent quarter and calculated how much gross margin each company would have to make, on every watt it has the capacity to make, just to break even.

Manufacturing Capacity Debt Annual Operating Expense Annual Interest Expense Break-Even Gross Margin Per Watt
Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) 2.45 GW $2.50 billion $280.4 million $142.8 million 17.3 cents
LDK Solar Co., Ltd (NYSE:LDK) 2.0 GW $2.92 billion $135.0 million $231.3 million 18.3 cents
Trina Solar Limited (ADR) (NYSE:TSL) 2.4 GW $1.31 billion $178.0 million $58.4 million 9.9 cents
Canadian Solar Inc. (NASDAQ:CSIQ) 2.4 GW $1.66 billion $154.0 million* $58.5 million 8.9 cents
ReneSola Ltd. (ADR) (NYSE:SOL) 2.0 GW $958.6 million $111.2 million $52.5 million 8.2 cents
JinkoSolar Holding Co., Ltd. (NYSE:JKS) 1.2 GW $916.95 million $105.6 million $35.6 million 11.8 cents

* Canadian Solar Inc. (NASDAQ:CSIQ) had abnormal operating expenses the last two quarters; the estimate is based on a Q1 2012 basis. ReneSola Ltd. (ADR) (NYSE:SOL) plans to outsource some manufacturing, and shipments will be higher than capacity in 2013.

Now, consider that the selling price for solar modules from China is around $0.65 per watt and falling. So, even the best projection above from ReneSola Ltd. (ADR) (NYSE:SOL) would require gross margins to double from what they’re expecting in Q2 to about 13%. Leaders Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) would have to make a 27% gross margin and Trina Solar Limited (ADR) (NYSE:TSL) would have to generate a 15% gross margin just to break even.

This calculation doesn’t take into account price reductions that will likely come in the next few years. Greentechmedia recently projected that solar costs could reach $0.36 per watt by 2017, which is great if selling prices stay flat, but price reductions have become a staple and will likely continue.

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