Analysis: SEC probe casts shadows over solar companies

Analysis: SEC probe casts shadows over solar companies

In early June, Chinese solar-cell maker Canadian Solar said its board had launched a probe following a subpoena from the U.S. Securities Exchange Commission (SEC) requesting documents relating to some sales transactions, "among other things," sending its shares plunging 22 percent.

Canadian Solar's alleged accounting issues were the latest in a series of similar incidents from solar firms such as SunPower Corp that have caused an overhang on the sector. Solar stocks fell about 6 percent on average in the week after the news from Canadian Solar.

"This sector, in particular, is under a lot of pressure to show growth and most of them are always trying to raise money too," Wedbush analyst Christine Hersey said. "Those circumstances may force more of them to book revenues aggressively."

"I expect it to get worse," she said. "The more they move downstream and build their own projects, the more revenues they book that are going to be more complicated, the more difficult it'll be to untangle what's going on."

Although accounting irregularities have surfaced at U.S. solar firms, analysts say the situation is further complicated by the fact that Chinese solar firms make up the bulk of the sector and disclosures are especially limited amongst these overseas firms.

The SEC deems them incorporated outside of the United States. The companies' quarterly income statements and balance sheets are less detailed than the U.S. firms, and cashflow statements are only issued once a year.

"Maybe the whole sector still needs to do some improvements about how to handle revenues in order satisfy international accounting standards," said Thiemo Lang, who manages a $700 million renewable energy fund in Zurich and holds more than 5 percent of Canadian Solar.

"There might be some sort of learning curve for the sector," said Lang, whose top three picks in the sector are Yingli Green Energy, Trina Solar and Canadian Solar.

AGGRESSIVE ACCOUNTING

Firms that account for revenues too aggressively do it to boost their operating results, but cashflows could fall if they fail to collect on their revenues, hitting future earnings.

The accounting issues come at a time when the firms, which have made Europe a dominant market, are struggling with foreign currency exchange losses due to the weak euro, and the prospect of falling prices amid overcapacity.

Canadian Solar's accounting woes set off a wave of downgrades by brokerages recently. Three brokerages have cut their recommendations, with four reducing their target prices following the news.

Officials at Canadian Solar declined to comment due to the sensitivity of the matter.

Its stock fell 18 percent in the week the firm said it will restate previous earnings.

U.S.-based SunPower Corp announced in March it had to restate its prior financial statements after concluding an internal review of its Philippines manufacturing operations.

SunPower officials were not available for a response despite repeated attempts to contact them.

U.S. law firms said in June they were investigating "certain officers and directors" at U.S.-based Akeena Solar for allegedly "false and misleading" statements about the firm's financial condition.

Jose Tengco, Akeena Solar's director of public relations and government affairs, told Reuters that "there have been no allegations of accounting irregularities or errors against Akeena."

He said the company's motion to dismiss the federal class action has been granted to all allegations, except for those related to two disclosures: its bank line in 2007 and its 2008 announcement of the Suntech license agreement.

"While it's our policy not to comment on the specifics of any pending litigation, Akeena Solar believes these lawsuits are without merit and will vigorously defend against these unsubstantiated allegations," Tengco said.

In February, Chinese solar wafer maker LDK Solar agreed to pay $16 million to settle shareholder lawsuits claiming the company overstated inventory and inflated earnings in 2007.

LDK's former financial controller alleged in 2007 that the firm misstated its inventory, sending its stock down more than 40 percent. LDK's own inventory investigation cleared the firm.

LDK Solar could not be reached for a response despite several attempts to contact the company.

"There's always been some concern on behalf of American investors in the accounting for some of these Chinese companies because they have fewer accounting requirements," said Wedbush's Hersey, adding that her top pick was Trina Solar for its transparency and simple business model.

Analysts are also concerned about third-party transactions such as the one by Suntech Power, China's largest solar panel maker, and "Global Solar Fund" (GSF), in which Suntech has a more than an 80 percent stake in.

Receivables remain outstanding from the fund, which accounted for more than 30 percent of Suntech's first-quarter sales in 2009, even though Suntech said it expects to collect soon.

Some analysts such as Gordon Johnson of Hapoalim Securities have voiced concerns that Suntech is selling inventory to a unit in which it owned a majority stake.

Suntech moved to dismiss such worries, saying that the company is a limited partner in the fund and has no control over the fund's operations, including procurement decisions which are based on an independent bidding process.

"Suntech won the tender to supply 40 megawatt of modules to GSF in 2009, though it is not necessarily the case that we will win future tenders," the company's spokesman Rory Macpherson said. "The panels were sold at the prevailing market price for Suntech panels."

"It'll be worthwhile if the company can write it down and just get this thing over with, instead of continually telling people that it's the next quarter when they'll get paid," said Oppenheimer analyst Gary Hsueh.

"At some point, I would believe the auditors will say: 'Look, we should probably write this thing down.'" (Editing by Valerie Lee)