Solar giant GCL to sell 51pc of unit for US$1.9 billion as Beijing’s curbs on sector prove too hot to handle

Shanghai Electric Group to pay for stake in Jiangsu Zhongneng Polysilicon Technology Development half in cash and half through A-share issuance

PUBLISHED : Thursday, 07 June, 2018, 7:01am
UPDATED : Thursday, 07 June, 2018, 10:41pm

GCL Poly Energy, the world’s largest maker of solar panel materials polysilicon and solar wafer, has agreed to sell just over half of its principal subsidiary for up to 12.75 billion yuan (US$1.99 billion) to shore up its finances, as the industry braces for its biggest challenge in years after Beijing made a major cut back on the pace of expansion and subsidy support for solar farms.

The Jiangsu province-based company, which is controlled by businessman Zhu Gongshan and his family, has struck a “framework agreement” to sell 51 per cent of Jiangsu Zhongneng Polysilicon Technology Development to state-backed Shanghai Electric Group, one of China’s big three power generation equipment makers.

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“Following the recent indication by [Beijing] to introduce measures aimed at promoting sustainable development of the photovoltaic industry, enhancing development quality and speeding up reduction of subsidies, the directors consider that it is important to find a strategic partner in order to continue the group’s initiative for grid parity,” GCL said in a filing to Hong Kong Exchanges and Clearing late on Wednesday.

“The directors consider the potential formation of a strategic alliance with Shanghai Electric can support the growth and development of Jiangsu Zhongneng and unlock [its] value, which will be beneficial to [GCL’s] shareholders.”

The directors consider the potential formation of a strategic alliance with Shanghai Electric can support the growth and development of Jiangsu Zhongneng
GCL Poly Energy

The sale will value the entire subsidiary at up to 25 billion yuan, which means the stake could be sold for 12.75 billion yuan. The final selling price is subject to a valuation report by a valuation company, which will be engaged by Shanghai Electric and approved by GCL.

GCL bought 100 per cent of Jiangsu Zhongneng from the Zhu family for HK$26.35 billion (US$3.36 billion) in 2009.

The purchase will be settled half in cash and half with the issuance by Shanghai Electric of Shanghai-listed A shares, and will be subject to approval by GCL shareholders in a general meeting.

Beijing said on Friday it was suspending the allocation of quotas for new projects from June 1 until further notice, and that tariffs on electricity generated from solar energy would be lowered by 0.05 yuan per kilowatt hour, a cut of 6.7 to 9 per cent depending on the region.

It also capped the subsidised installation volume for so-called distributed solar farms – rooftop panels at factories, fish farms and buildings whose owners can sell volumes in excess of their own consumption to grid operators. Such projects formed the bulk of installations so far this year.

Beijing also stipulated solar farm development rights would be subject to competitive bidding, which analysts said would see power tariffs fall and squeeze profit margins.

These measures prompted some analysts to slash their forecast for solar power installation in China to 30-35 gigawatts from 45GW this year. Installation rose to a record 53GW in 2017. China is the world’s largest solar farms market.

These measures are aimed at keeping in check the more than 100 billion yuan deficit in a state-run renewable energy fund, which is financed by a surcharge on power users’ bills.

The shortfall could have widened to more than 250 billion yuan by 2020 if capacity expansion had been left unchecked, energy and commodities consultancy Wood Mackenzie said in a note. It noted discussions in the industry have suggested some players might idle some production lines and downsize to prepare for the “disruption”, adding that the market could consolidate further to push out small players.

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GCL’s recurring net profit dropped by 23 per cent to 2.28 billion yuan last year from 2016, and missed the consensus estimate by 7 per cent, according to a Daiwa Capital Markets report.

Operating profit at its solar materials business plunged by 46 per cent to 1.26 billion yuan amid a price war with Longi Solar, a leader adopting a different technology, offsetting strong gains by its solar farms operations, the report said.

GCL’s net borrowings-to-shareholders’ equity ratio stood at an elevated level of 174 per cent at the end of last year. Its shares have fallen by 46 per cent so far this year, and closed at HK$0.76 on Tuesday before trading was halted pending the announcement.