http://www.wsj.com/articles/how-chinese-billionaire-li-hejuns-solar-bet-soured-1434925566

How Chinese Billionaire Li Hejun’s Solar Bet Soured; Hanergy founder, once China’s richest man, now faces company investigation after stock implosion

Hanergy Holding Group chairman Li Hejun became China’s richest man by some estimates when shares in his energy company’s subsidiary, Hanergy Thin Film Power Group, soared. The share price fell 47% on May 20 and trading has remained halted since then.

WAYNE MA, BRIAN SPEGELE and JACKY WONG

June 21, 2015 6:26 p.m. ET

Three months before the bottom fell out for Li Hejun, the Chinese billionaire threw a party for his employees. There was a laser show, acrobats and a Mercedes-Benz giveaway. But the highlight, those in attendance said, was when Mr. Li, chairman of Hanergy Holding Group Ltd., declared in a rousing speech that he was building Hanergy’s publicly traded solar subsidiary into a $100-billion company. There was reason to celebrate. The subsidiary, Hanergy Thin Film Power Group Ltd., in two years had catapulted to a multibillion-dollar valuation and was a Hong Kong stock-exchange star. By April, its market capitalization would exceed $40 billion—more than Sony Corp.’s—making 47-year-old Mr. Li China’s richest man by some estimates. Mr. Li touted tie-ups with IKEA Group, Tesla Motors Inc. and Aston Martin Lagonda Ltd. as steps in his dream of bringing solar power to the masses. He had announced solar-energy projects around the world, from Ghana to Japan to the U.S. Then, on May 20, the subsidiary’s shares plummeted 47%, erasing $18.6 billion in value—and almost half Mr. Li’s fortune—before trading was halted. Shortly after, Hong Kong securities regulators announced they had been investigating the subsidiary. Trading in its shares remains suspended.

The story of Hanergy’s rise and stumble—pieced together through interviews with current and former Hanergy employees, bankers and industry experts—is a reminder of the murkiness that surrounds some businesses in China, where visionary entrepreneurs can succeed wildly but where disclosure is often poor and stocks can show gut-wrenching volatility.

While China was spending heavily to support national solar companies, Mr. Li bet on a solar technology—called “thin film”—that promised exciting new uses because of its potential for lightness and flexibility. But thin film, which is less efficient than more-common panels based on crystalline silicon, hasn’t caught on. And the solar panels Mr. Li’s company made weren’t efficient enough to compete in many markets.

From 2013, Hanergy began to struggle for bank loans to fund its ambitious expansion plans, people familiar with its financing said. To raise funds, Mr. Li turned to personal loans from trust companies in China’s informal “shadow-banking” sector against revenue from Hanergy’s hydropower business, according to Chinese data provider Wind Information Co.

He used the borrowings to fund the solar business he believed in, said people familiar with the company.

And he continued to bet personally on his vision. Over the past two years, he borrowed money against his own shares in the Thin Film subsidiary, according to regulatory filings viewed by The Wall Street Journal. He used some of those borrowings to buy still more shares, filings show, and he continued to buy until just before the shares crashed.

A lot isn’t clear about Hanergy. As a closely held company, it doesn’t disclose results, although its listed subsidiary discloses revenue and profits.

Hanergy declined to make Mr. Li available or discuss the subsidiary’s stock. In a written response, it said it remained committed to developing thin-film technology. “The situation over the past several years in the development of the global and Chinese photovoltaic industry shows Hanergy’s judgment has been correct,” it said.

Precocious child

Mr. Li’s rise began in Guantang, his southern hometown of about 3,000 people where lush fields flank rows of farmhouses. Many villagers share his last name and consider him a symbol of hope in an area largely bypassed by economic development. Mr. Li has funded a village school, park and road repairs.

ENLARGE

As a child, villagers said, Mr. Li outperformed school peers. In the mid-1980s, he won a place at a Beijing university, rare for the poor area. But his parents struggled to support him, and he forwent a chance to study further in the U.S., said a senior village-council member, Li Weiqiang.

In Beijing, Mr. Li founded a small trading company. He returned to Guantang around 2000, aiming to transform the firm into a major clean-energy producer. He eventually renamed it Hanergy.

Guantang wanted a hydropower plant, and Mr. Li was eager to develop it. He had little track record in a sector dominated by state enterprises, but Guantang leaders feted him and granted him the project.

“Li Hejun didn’t have much money back then,” said Li Weiqiang, the council member, but he had one advantage: “He was a local.”

The 30-megawatt Mujing hydropower station went online in 2002 with Mr. Li’s company owning and operating it.

That year, Mr. Li began crafting a deal to build and run the Jin’anqiao hydropower project in Yunnan Province. Bigger than Hoover Dam, it was China’s largest privately owned hydropower project. “Some said I was crazy,” he wrote in a book published last year, describing how Hanergy sold smaller dams to raise the $3.2 billion investment. “The project was like a bottomless pit.”

With three gigawatts in capacity—enough, by some measures, to power roughly three million U.S. homes—Jin’anqiao helped boost cash flow from Hanergy’s hydropower projects to about $1 billion a year, Mr. Li said in a television interview this year.

In 2010, Mr. Li leapt at another opportunity from China’s industrial policy: solar power. Chinese leaders, aiming to move the economy toward high-tech goods and renewable energy, flooded its solar industry with subsidies and loans, spawning dozens of manufacturers.

Mr. Li became perhaps China’s most vocal solar advocate, arguing that the limitless power of the sun would eliminate war as humans turn to sharing energy rather than competing for fossil fuels. “People will have a more open and inclusive mind,” he wrote in his book, “believing that resources are only used but not owned by them, and advocating sharing rather than monopoly.”

Hanergy began to build factories across China in 2010 and appeared flush with cash after it announced a 30 billion yuan ($4.8 billion) credit line from China Development Bank. In a sign of official support, Xi Jinping, then China’s president-in-waiting, visited a Hanergy factory in 2011.

Inside his company, Mr. Li fostered a direct approach and an obsession with health, employees said. He once chastised employees in a company newsletter saying they weren’t brave enough to take personal responsibility for their work or make independent decisions. He banned smoking in Hanergy’s Beijing offices.

Thin-film bet

Hanergy’s factories primarily made solar panels using equipment bought from Hong Kong-listed Apollo Solar Energy Technologies Holdings Ltd. Hanergy began acquiring Apollo shares, eventually building a stake of at least 73% and renaming it Hanergy Thin Film. Mr. Li, who controls the parent company, effectively held a controlling interest in the publicly traded subsidiary.

The Thin Film subsidiary sold solar-panel-making equipment to Hanergy, whose factories used them to make panels. Both Hanergy and the subsidiary developed solar projects and sold panels.

ENLARGE

Hanergy’s Mr. Li bet on ‘thin film’ solar technology, building factories across China such this one producing solar panels in Huzhou. PHOTO:IMAGINECHINA/CORBIS

Unlike most Chinese solar-panel makers, Hanergy bet on thin film, which uses layers of photovoltaic material deposited on a surface such as plastic. Thin-film panels had potential to be lighter and more flexible than glass crystalline-silicon panels.

But thin film’s higher cost and lower efficiency meant it never gained much more than 10% of the global market, and Hanergy had a tiny fraction of that, said GTM Research analyst Shyam Mehta. What’s more, Hanergy’s panels degraded faster than the industry average and required 2 1/2 times the surface area of conventional panels in solar projects, two of the former Hanergy executives said.

“That technology, in my opinion, never had legs,” Mr. Mehta said, “and to some extent, that’s been proven by the fact that the technology isn’t really on the market anymore except for Hanergy’s claims.”

Hanergy said it has been improving its panel’s quality and that they meet industry standards for power generation and warranties.

Outwardly, Hanergy appeared to be doing well. Its Thin Film subsidiary’s revenue grew 8% in 2012 from 2011 and grew 19% in 2013. Its stock was one of the best performers in the Hong Kong stock exchange. Its shares nearly tripled from 2012 through 2013 while the broader market rose 26%.

In 2012, Hanergy unveiled a deal with IKEA to sell rooftop solar kits at the retailer’s U.K. stores that promised to halve typical household electricity bills. In 2013, it announced plans to open six global offices to develop utility-scale solar projects.

In 2014, it announced solar projects in countries including Ghana and Japan, and a deal with Tesla for some of its charging stations and with Aston Martin to build panels for some cars. Its branded products appeared in the Johnny Depp movie “Transcendence.”

Solar glut

But not all was well. The IKEA deal didn’t meet Hanergy’s expectations, said the former executives. IKEA said it doesn’t share sales information and can’t comment on supplier relationships.

A solar-panel glut in 2013 crushed some solar companies. Hanergy bought three struggling U.S. thin-film startups but was slow to mass produce panels based on their technologies, which performed better than Hanergy’s, analysts said. Hanergy said mass production of its acquired technologies is “progressing smoothly.”

Hanergy opened stores across China displaying thin film in uses like backpacks and tents that charge phones and run appliances. At a Shanghai branch recently, customers were few and many products weren’t available.

Hanergy’s attempts to develop utility-scale projects overseas mostly didn’t materialize, because Hanergy’s panels weren’t efficient enough or the company lacked funds to seal deals, former executives said.

In Pittsburg, Calif., Hanergy Thin Film said in 2013 it bought a 19-megawatt solar project from a company developing it. Hanergy couldn’t raise cash to further the project, said two of the former executives, and last year agreed to sell it at a loss to a buyer that stipulated Hanergy build it using crystalline-silicon panels from rival Hanwha Q Cells Co. A Hanwha spokesman declined to comment.

And Hanergy hit some financing troubles. Two people familiar with its China Development Bank credit line said the bank evaluated Hanergy’s projects case-by-case and didn’t provide many loans in 2013 and 2014 because it didn’t disclose adequate information about its panels.

Hanergy blamed its financing struggles on solar-panel oversupply. “We predict the financial environment of the photovoltaic industry will greatly improve,” it said.

By 2013, Mr. Li was using revenues from the Jin’anqiao dam project as loan collateral. He also pledged shares in Hanergy Thin Film he owned through companies in the British Virgin Islands to borrow money, doing so at least five more times in the next two years, regulatory filings show.

After each of four loans he took out, filings show, he bought shares in the subsidiary. One Hong Kong filing in 2013 stated that he used a loan backed by share pledges to buy shares.

The Thin Film subsidiary appeared to be a bright spot. Its revenues soared nearly threefold in 2014 to HK$9.6 billion from 2013.

But it had few buyers for its manufacturing equipment outside Hanergy, which was often slow to pay, regulatory filings show. Money yet to be paid by customers stood at HK$9.75 billion at the end of 2014, filings show. Hanergy said its purchases were 62% of the subsidiary’s 2014 revenue.

Trading in the subsidiary’s stock jumped after the Hong Kong and Shanghai stock exchanges in November 2014 introduced a service to give investors direct access to each other’s markets. Hanergy Thin Film’s stock would rise more than fourfold from then before it crashed.

Mr. Li continued a stream of announcements: plans to open 1,500 retail stores world-wide by 2017; a promise to unveil a solar car before year-end 2015.

At Hanergy’s February party, American singer-songwriter Bertie Higgins sang his 1980s hit “Casablanca.” Door prizes included iPad Minis, watches and the Mercedes.

Mr. Li was still buying shares moments before they plummeted May 20, regulatory filings show. A trading-data analysis shows a barrage of sell orders sank the price in less than a second. It isn’t known who made the trades.

Days later, Mr. Li gave upbeat media interviews, denying a Reuters report that the subsidiary was under regulatory investigation. Within hours, Hong Kong’s Securities and Futures Commission confirmed it was probing the company. The commission declined to comment.

Hanergy’s IKEA agreement expires in July; IKEA said it is assessing options. Tesla said it is no longer working with Hanergy, and the Aston Martin Partnership is limited, people familiar with the company said. Hanergy said it continues conversations with Tesla and ties with Aston Martin are ongoing.

This month, Hanergy Thin Film terminated a $585 million deal to sell equipment and technical services to Hanergy.

In Mr. Li’s boyhood village, residents puzzle over news of Hanergy’s problems and seem convinced they will pass.

“People here joke like this,” said Li Weiqiang, the village official. “Rain, wind or sunshine, Li Hejun will always make money.”