Suntech faces higher financing costs
If China tightens regulations, borrowing costs could rise, pushing down solar companies' equity values.
However, the company's stock has now seen a decline because of concerns that changes to the Chinese banking lending system could increase the borrowing costs. Suntech and some of its competitors, such as Yingli Green Energy (YGE), have large amounts of debt on their balance sheets and enjoy low rates of financing from large banks.
We have a $3.54 price estimate for Suntech, which is at a 25% premium to its current market price.
China is planing to increase its non-bank lending to break the monopoly enjoyed by the country's large lenders. In case lending regulations are tightened for the large banks the cost of borrowing for solar companies could rise, pushing down their equity value.
Suntech already has more than $1 billion in debt, which is double its current market cap. Higher interest costs will increase the Weighted Cost of Capital (WACC) for the company, decreasing the overall value of equity. Suntech, like many other Chinese solar companies has expanded its facilities by borrowing from large banks, aided by generous credit lines from public banks in the country.
Suntech's shares dropped by almost 2% after Chinese Premier Wen Jiabao announced his plans to increase non-banking lending in the country. The dependence of Chinese solar companies on bank debt makes their valuation vulnerable to any changes in the lending policy.
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