ReneSola Ltd (NYSE:SOL)

When I am negative a particular industry or sector, I try to look for the worst players within that industry to red thumb. While this might seem like an obvious tactic, more often than not, I find good investors going negative on an entire industry rather than selectively playing the high-debt / low margin / weakest players within that industry. I have personally been able to increase my gains by being more selective as many times my timing for down thumbs is not perfect or the industry recovers over a period of time.

Solar is one I have been negative on for quite some time. I have gone over the reasons for my negativity on several other pitches so I don’t want to spend a bunch of time rehashing. In summary, I think the efficiencies of solar are rather poor and I think carbon based energy, which is very cheap right now, is very attractive to those who are more cost conscious. In addition, the margins for solar power are incredibly thin, and if not for the subsidies in the US, I don’t believe there’d be much of a market for solar power.

This company is in a weak industry and its one of the worst from a financial and execution perspective. Revenues have been declining for the past few years and gross margins are very thin. It’s also a Chinese firm which gives me less hope that they have shareholders’ interests in mind, especially US ADR holders. The risk factors in the most recent 20-F seem to put additional pressure on this firm’s already precarious position. One interesting section:

“Our financial leverage may hamper our ability to expand and may materially affect our results of operations. Our borrowing levels and the tightening of credit generally in the industry in the PRC may adversely impact our ability to obtain new financing. We have relied on short-term and long-term borrowings and capital markets financing to fund a portion of our capital requirements and expect to continue to do so in the future. We have significant borrowings from commercial banks in China, which consist primarily of short-term borrowings. As of December 31, 2015, we had short-term borrowings of $668.8 million, of which $415.8 million was attributable to trade financing. As of December 31, 2015, we also had long-term borrowings of $38.8 million. Our working capital deficit was $477.3 million and $466.1 million as of December 31, 2014, and 2015, respectively.”

I’d be way less concerned if this borrowing was long term debt. It scares me to no end that this company has to reborrow money every 12 month or so to cover its debt. Further,

As of December 31, 2015, several factors have raised substantial doubts about our ability to continue as a going concern for the foreseeable future, including: (i) we incurred a net loss of $5.1 million for the year ended December 31, 2015, (ii) as of December 31, 2015, our current liabilities exceeded our current assets by $466.1 million, and (iii) there was a put option held by the convertible bond holders, whereby on March 15, 2016 they could require us to repurchase for cash all or any portion of their notes at a price equal to 100% of the principle amount plus any accrued and unpaid interest. As of December 31, 2015, the convertible notes payable balance was $26.1 million. We subsequently repurchased all of the outstanding convertible notes in the first quarter of 2016. These factors could adversely affect our ability to meet our ongoing financing needs as well as to obtain third party financing, which is subject to a number of uncertainties, including our future financial condition, operations and reputation, general market conditions in our industry and economic, political and other conditions in China and elsewhere. For example, weakening global economic conditions and macroeconomic factors in the PRC, such as credit tightening policies implemented by the Chinese government, may negatively impact our ability to obtain financing in a timely manner or on commercially acceptable terms.”

Good grief. Current liabilities exceed current assets by $466MM!!!! That is crazy. Anyone who owns shares here has a death wish. Any changes to their ability to receive financing in the PRC, and this company will be toast. Remember that they have most of their debt in short term notes, which is incredibly dangerous. Also, the rights of the ADR holders here are very limited, so if you are trading or holding shares long here, I would be very careful.

likely to drop in price