First Solar (FSLR), Suntech Power (STP): Consolidation in Chinese Solar Is Here

What this means for Chinese solar
Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) and LDK Solar should be watching the Suntech saga closely because with $2 billion and $3.3 billion of net debt, respectively, they could be heading for a similar fate. Neither company has the ability to pay back loans and if Suntech can go down so will they.

The balance sheet problems are bad, but there are also strategic implications. As the cost of solar panels has fallen, the less tangible qualities have become more important. Quality, service, warranty, etc. are now considered by installers just as much as cost. If these companies are effectively insolvent why would I trust a warranty? Why would I choose Yingli over a manufacturer with less debt that may be there to service my products in five years? LDK is a supplier to solar manufacturers and its challenge may be even harder.

I’ve singled out these two companies because of their debt loads but all of Chinese solar is going through a major transition period. Companies with either high debt or weak cost structures will have to begin looking for alternatives before the hammer drops on them as well.

How to invest in solar now
This doesn’t change my investment thesis in solar, in fact, it only bolsters it. U.S. companies with strong balance sheets and differentiated products are what investors should be putting their money in. SunPower Corporation (NASDAQ:SPWR) is still my top pick and, with the stock up 4.5% today, it looks like the market is seeing the upside as well. First Solar, Inc. (NASDAQ:FSLR) isn’t as strong on the module side but a good balance sheet gives it the ability to be flexible and there’s no company that does utility scale solar better.

If you’re interested investing in solar, these two companies are currently at the top of the list. Meanwhile, I would stay away from everything in China.

The article Consolidation in Chinese Solar Is Here originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of SunPower. He owns shares of SunPower and has the following options: long Jan. 2015 $7 calls, long Jan. 2015 $5 calls, and long Jan. 2015 $15 calls. The Motley Fool has no position in any of the stocks mentioned.

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