Suntech Follows Restructuring Plans

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Suntech Power Holdings Company Ltd. (STP) has announced its plans to improve processes while strengthening its global industry leadership. The company intends to exercise its new plans to reduce imbalance between demand and supply, and improve trade protectionism, which will subsequently decrease the level of competition and generate higher profitability.

Suntech’s current strategy includes 5 important facets, such as technology and customer-service, right-sizing of production capacity, drive down cost, streamline its operating structure and improve its financial position.

As a part of this initiative, Suntech will carry on its existing technological innovations along with concentrating toward offering excellent products and services to its solar industry partners.

Secondly, Suntech’s operational solar cell capacity will be temporarily reduced to 1.8 gigawatt (“GW”). The module capacity and wafer capacity will remain at 2.4GW and 1.6GW, respectively. The company will leverage its strength on global supply chain to manage volatile demand and trade protectionism. At the same time, this consolidation process will affect approximately 1,500 employees in China. However, the company is planning to offer positions to majority of its employees at other production facilities.

Thirdly, Suntech will continue to estimate performance against best-in-class benchmarks, assess cost inputs and retain a highly competitive cost structure, without negotiating on the existing quality and performance.

Fourthly, Suntech intends to reduce its operating expenses by 20% year over year. In addition, the company targets to create a sustainable business model and return to positive operating cash flow in 2013. The company currently assesses the impairment charges related to the closure of facilities, severance payments and other related expenses. Suntech plans to reveal those expenses during its third-quarter 2012 earnings results.

Lastly, Suntech also plans to strengthen its financial position, which includes extension of the maturity of credit facilities, while continuing to reduce total debt and related interest expenses. 

The requirement to adopt this type of strategy comes in light of the preliminary U.S. anti-dumping tariff, the European anti-dumping investigation, and oversupply of solar modules. Suntech tries to right-size its production capacity and continues to make best use of the resources. In addition, the company aims to make its manufacturing base small in order to lower the cost of production, increase utilization rates and improve product performance. Moreover, Suntech expects to improve panel cost as the production will be made at the company’s lowest cost manufacturing facilities with highest efficiency.

We believe that the restructuring initiatives taken up by Suntech will enable to reduce its expenses, resulting in improvement of profits. However, we are skeptical about rising competition, weak module demand in Europe and financial instability of its customers.

Suntech Power Holdings Company Ltd. currently has a short-term Zacks #3 Rank (Hold rating).

Wuxi, China-based Suntech Power Holdings Company Ltd. is a solar energy company that designs, develops, manufactures and markets a variety of photovoltaic (“PV”) products, including a broad range of value-added building-integrated photovoltaic (“BIPV”) products. The company manufactures silicon wafers and ingots used in manufacturing its PV cells and modules. Some of its main competitors are First Solar Inc. (FSLR) and SunPower Corporation (SPWR).

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