There are some very bullish bets being made by insiders in Chinese solar firms right now, making me wonder if they know something we don’t. Last week JA Solar (Nasdaq:JASO) announced a US$100 million share repurchase program, an incredibly bold bet from a company with a gross margin of 0.5%, US$851.7 million in debt (offset by US$676 million in cash), and a market cap of just US$225 million.
Today, Hanwha SolarOne (Nasdaq: HSOL) announced that three members of senior management bought a total of 301,928 shares of the company’s stock for their own accounts. In the most recent quarter, Hanwha had a -9.4% gross margin, US$664.7 million in debt, and just US$303.1 million in cash.
Neither of these companies are models for operational effectiveness, and the bets have me wondering if management knows something about their future that we don’t.
Chinese banks propping up solar
I’ve argued in the past that Chinese banks are at a crossroads and need to begin letting solar manufacturers fail or risk watching losses continue to grow along with competition. At the end of last quarter, JA Solar had a relatively modest US$153.8 million in short-term borrowings but Hanwha was sitting on US$334.0 million in short-term bank borrowings, meaning the company could go under in a heartbeat if that funding were pulled.
So why would you risk company capital or personal capital if your company’s balance sheet is walking a tightrope that would result in insolvency in any other country? You must know that funding won’t dry up and have extreme confidence that the business will improve.
LDK Solar (NYSE: LDK), Suntech Power (NYSE: STP), and Yingli Green Energy (NYSE: YGE) are in even more extreme positions, sitting on a lot of short-term debt, giving similar risks to investors. But if JA Solar and Hanwha SolarOne are confident in their funding, should these companies be too? Maybe. It’s possible that management knows the short-term funding will last for the foreseeable future and a turnaround in operations is a bet worth making.
Something doesn’t smell right
I’m not sure exactly why such bullish bets were made on these two relatively weakly positioned solar companies, but it just doesn’t smell right to me. Margins are terrible, losses are mounting, and their stock prices are continuing to crater. The information we’ve seen doesn’t indicate this is a good bet, yet management seems to be going all-in.
If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
- 6 stocks that rose more than 14% last week
- Paypal gives banks a run for their money
- Lessons form an investment legend: Costs matter
The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Travis Hoium, originally appeared on fool.com