Solarfun CEO Powers Up Own Bank Account

Last Updated Jul 10, 2008 7:57 PM EDT

  • SolarFun LogoThe Company: Solarfun Power Holdings is a vertically integrated manufacturer of silicon ingots and photovoltaic (PV) modules located in Shanghai, China.
  • The Filing: A registration statement filed with the SEC on June 27.
  • The Finding: The prospectus, which allows for original security-holders of $175 million in 3.50% convertible notes to resell them, sheds light on the potential danger of doing business in China, where individuals with controlling interests in a company can leverage their personal knowledge and political connections to enrich themselves.
The Upshot: Solarfun's recent purchase of ingot manufacturer Yangguang Solar will strain its capital resources, for the company will need to invest more than $75 million to install production lines and ramp up its capacity in 2008.

Nonetheless, founder Yonghua Lu, who owns a 15.9 percent stake, profits from financing and other arrangements with Solarfun through a Byzantine maze of companies. But Lu's interests may not be aligned with those of other shareholders.

Power-meter maker Jiangsu Linyang Electronics owns 18 percent of Yangguang Solar, and Lu owns 70 percent of Linyang Electronics.

Substantially all of the company's $143 million in short-term bank loans are guaranteed by Linyang Electronics. Taking advantage of Solarfun's hungry need for money, Linyang Electronics earns a guarantee fee of two percent, or $2.86 million, raising the company's cost of capital to a high 8.375 percent.

Lu has a history of profiting at the expense of other stakeholders. For example, Solarfun allocated certain of its December 2006 IPO shares to Lu at an 85.8 percent discount to its fair market price of $12.50 per share, according to the initial registration statement filed on December 11, 2006 with the SEC.

The lack of transparency is troubling -- all the more so because of the knowledge of who Lu (via Linyang Electronics) is doing business with.

Linyang Electronics, located in Jiangsu province, supplies about one-third of the power-meter market in China. GCL Silicon, which supplies solar wafers to Solarfun, has a manufacturing plant in Jiangsu province, too. It is highly improbable that Linyang has no business dealings with GCL Silicon -- yet none are publicly known.

The Question: Let's play a game. Can any readers disclose for us other Chinese companies listed on U.S. exchanges whose major shareholders milk their companies like cash cows?
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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