Investing in China

Investing in China has never been an easy proposition whether it is public market investors or private equity investors. Massive frauds have been exposed in China which has led to billions of dollars of losses for investors. For Chinese and other developing market investors (like India), frauds and losses come with the territory of equity investments in their domestic markets. The rule of the law is not very strong and rights of minority investors is not great. Sino-Forest was a gargantuan fraud and many similar smaller ones have been exposed in the last few years, leading to a valuation degradation of all Chinese companies listed in the European markets. The promoters of companies in these countries wield tremendous power and can easily escape due to their wealth and connections. India’s Satyam’s promoter Ramalinga Raju who brought one of the icons of Indian IT industry to its knees, roams freely as inept prosecutors and compromised investigators let crooked promoters off the hook.

Besides outright scams, corporate mis-governance is rife in these countries. Many of the Chinese solar companies have suffered from accusations and issues related to their governance. If not illegal, many of their actions have been found to be highly unethical and detrimental to minority investors. JA Solar had acquired a company owned by its promoter for a high price which had led to allegations of favoritism. Now GCL Poly is going down the same path selling one of the core components of its business for unknown reasons. GCL Poly announced that it would sell its solar wafer operations to investors, who might sell it to its promoters Golden Concord. There seems to be no sane reason for the company to sell its core wafer operations. GCL Poly is by far the worlds’ largest solar wafer manufacturer and seller with very low costs. The highly profitable wafer operations builds on its polysilicon manufacturing and both of them constitute a solid solar upstream business.

The transaction will mainly benefit its promoters who are buying bankrupt solar cell and module player Chaori Solar, which defaulted on the bond market. The owners are buying Chaori Solar and they want to sell wafer operations to Chaori to make it profitable. While GCL Poly has become profitable this year, the company is saddled with large debt as the previous years have been very bad for the solar industry leading to big losses for almost everybody. GCL Poly has been doing tremendously well in 2014, even as other listed solar companies have fallen by almost 50%. This has been due to its dominant position as a wafer supplier to most solar companies around the world.