GCL project development business has $1.6bn current liabilities deficit

The debt mountain being accumulated by GCL-Poly has been well publicized but, at first glance, the group’s project development business appears to be in reasonably good shape, judging by today’s first-half figures.

GCL in June announced its intent to become a pure play solar manufacturer by selling off its 62.3% stake in the Hong Kong-listed GCL New Energy solar project development business to a Chinese state-owned body.

Reporting positive comparisons for revenue, profits, installed capacity and the volume of solar electricity sold is no mean feat considering the period to the end of June last year included five months operating in a booming Chinese market.

Since then the world’s biggest solar marketplace has been hamstrung by PV policy uncertainty, at least until a couple of months ago, but that does not appear to have held back GCL New Energy, which posted net profits of RMB571 million ($80.7 million) in the first half of this year, on the back of revenue of RMB3.17 billion and with 22% more solar power sold from a portfolio with a total installed generation capacity of 7,128 MW.

Capital intensive

So far, so impressive, to the extent that it appears the acquisition of at least 51% of the company’s shares by China Hua Neng Group Hong Kong Ltd – takeover rules may compel a full acquisition – could shape up to be a sound investment by the state-owned entity, rather than a public bail-out.

The first-half results make mention of the capital-intensive nature of solar infrastructure development but point out the sale of an 80% stake in a 160 MW project portfolio to CGN Solar Energy Development Co Ltd in October, and of the equity held by GCL New Energy in a 140 MW solar estate to China Three Gorges New Energy Co Ltd in December, brought windfalls of RMB306 million and RMB251 million, respectively. More importantly, the removal of loans associated with those solar facilities from GCL New Energy’s books added up to a further RMB1.83 billion benefit for the developer.

With the company set to complete the sale of a 70% holding in a 19-project, 977 MW portfolio to Shanghai Rongyao New Energy Co Ltd by the end of the year, a further cash windfall of RMB2.06 billion and the removal of RMB7.86 billion of debts is in the offing.

With such headline figures, the fact profit margin came in 1% to 68% on a year-on-year comparison, and that financing costs soared 34% on the same basis seem minor concerns.

The devil in the detail

The amount of solar power generated in China during the first half of last year and in the corresponding period of 2019 rose 11.2% against a rise in all electricity generation of just 3.3%, GCL New Energy told us today. With solar still only contributing 2.5% of the nation’s energy generation, the ample opportunity in the market is obvious.

“With the support of local governments, the advent of grid parity is unstoppable,” yelled the latest update, adding: “The arrival of grid parity will be a momentous transition to the entire solar power industry.”

Judging by GCL New Energy’s balance sheet, that certainly needs to be the case.

The developer that China Hua Neng’s Hong Kong unit is running the rule over has current liabilities that outweigh its equivalent assets by RMB11.3 billion. Of that figure, RMB1.96 billion relates to loans parent company and would-be guarantor GCL-Poly was unable to fulfill a covenant for, triggering cross defaults. GCL New Energy said it has secured a waiver from the lender in question to cancel its immediate repayment option, which would reduce the current liability deficit to RMB9.34 billion. However, phrases like “cross defaults” do not fill investors with confidence.

Onerous debts

New Energy’s total net debts stand at RMB39.3 billion. Some RMB3.46 billion comes from loans from “related companies” but RMB33.6 billion is owed to banks – with RMB9.9 billion classed as ‘current’ – RMB3.97 billion is due to bond and noteholders (RMB564 million current) and RMB1.26 billion is tied up in lease obligations (RMB84 million current).

That adds up to gross debt of RMB42.3 billion for a company which had only RMB959 million in the bank at the end of June. With only RMB3.45 billion of borrowing facilities left, it is small wonder the business is pursuing an “asset-light” model, as well as considering issuing another RMB6 billion of notes and bonds.

There is even the remarkable admission that the company “has not purchased any foreign currency derivatives or related hedging instruments to hedge for foreign currency loans”. That smacks of neglect in the midst of a trade war with President Trump.

Maybe that hoped-for sale by GCL-Poly of the business should be marked down as a bail-out after all.

On that front, China Hua Neng will presumably have noted a three-year, $75 million loan – with an additional $75 million facility – that was taken out on the day China put the brakes on solar subsidies last year, would be repayable in the event of new owners taking over GCL New Energy. It never rains but it pours.