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Is Hanergy Thin Film China’s Enron?

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Hanergy Thin Film Power, a solar panel equipment firm, has been on a roller coaster lately. After soaring more than 2000% over the last three years and change, Hanergy Thin Film collapsed last Wednesday when it lost 47% of its value in a single day’s trading.

The suddenness of the plunge in the stock on no apparent news sent analysts to take a close look, and they have tuned up a number of irregularities with Hanergy, including a very consistent unusual trading pattern and the fact that Chairman Li Hejun increased his large short position in his own company just days before it tumbled.

Hanergy Thin Film as the Chinese Enron

As Matt O’Brien of the Washington Post notes: “It looks like Hanergy might be China’s Enron: an Energy Company of the Future™ whose stock price could only go up as long as it was borrowing money and could only borrow money as long as its stock price was going up.”

Keep in mind that Hanergy is divided into two corporate entities: privately owned parent corporation Hanergy Group, and the publicly traded subsidiary Hanergy Thin Film Power (HFT).

The first notable anomaly here is that nearly all of HFT’s sales are to its parent company, and all at a net profit margin of 50%. Furthermore, it turns out the Hanergy Group has not actually paid for most of the solar panel equipment it bought from HFT. Only 35% of the debts between the two firms had been finalized as of the end of 2013.

Why have these debt not been paid? It looks like maybe Hanergy doesn’t have the cash to pay. The Hanergy Group borrowed a lot at high interest rates several years ago, but can’t generate much cash as its factories are producing so few products due to low demand. A number of analysts have pointed it is very likely that Hanergy is losing money.

So when Hanergy Group realized it has more debt than it can pay back, it decided to keep investors from finding out by moving money back and forth between its parent and subsidiary to make it appear there were actual revenues.

Stock pyramid scheme

O’Brien suggested one possibility was that in essence Hanergy and Li Hejun were running a stock pyramid scheme. The firm wasn’t making enough money to pay off its debts other than by borrowing from new lenders to pay off the old (borrowing from Peter to pay Paul).

Suppose Hanergy was getting these new loans by putting up holding company HFT’s shares as collateral. That meant that those shares needed to keep going up if the firm was going to continue receiving the loans it needed, so the company used whatever funds were available to buy more and keep the stock price moving higher and higher. However, once Hejun bumped up against the 75% legal limit of HFT he could own, he was stuck as he couldn’t move the price up anymore. That meant Hanergy wouldn’t be able to borrow, and therefore couldn’t be able to pay back what it owes. The firm must have defaulted, and the lenders began selling  the collateralized HFT shares to try to recover their losses, leading to the massive 47% sell off in HFT on Friday when everyone was trying to beat everyone else out the exit last Wednesday.

Analysts also point out the fact that Hanergy Thin Film’s stock went up in the late afternoon almost every day for several months is very unusual and likely indicative of manipulation.

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