LDK Solar Embraces Deficit-Spending Growth Model

Last Updated May 19, 2010 11:22 AM EDT

LDK Solar (LDK) revised upward revenue and shipment forecasts for full-year 2010 -- despite fears of spreading sovereign debt crises in key European markets and solar subsidy uncertainties. The vertically integrated solar cell maker looks attractively positioned to capture share, and could visibly improve its balance sheet health as it winds down a multi-year capital-spending spree. That LDK, the world's largest producer of multicrystalline solar wafers, kept up with most of its peers and blew past consensus sales and earnings estimates for first-quarter 2010 wasn't too much of a surprise. The anticipated reduction of Feed-in-Tariffs (FIT) in Germany come July prompted customers to accelerate photovoltaic (PV) installations before that solar subsidy became less financially attractive. Quarterly revenue rose 22.7 percent year-on-year to $347.6 million and reported net income was $7.2 million, or six cents a share, handily beating forecasts of $325.8 million and share-net of a penny, according to analysts surveyed by Thomson Reuters.

Until mid-March, a bearish sector outlook and conventional concerns -- even among the most respected of industry analysts, such as Vishal Shah of Barclays Capital -- centered on demand risks in the U.S. and China (oversupply and falling prices); muted sector profitability (from a sliding euro); and, ongoing fears that Europe's debt-riddled economies would be forced to slash public spending, forcing governments to further cut support for solar subsidies.

Channel checks by analysts last month, including those by Barclay's Shah, allayed winter blues: PV shipment and installation orders going forward from key growth markets like Canada, U.S., China, and even some European markets (such as France and Czech Republic) showed signs of strength. In fact, despite FiT changes -- or continued lack thereof in China -- consultant iSupply predicts solar installations will nearly double this year to 13.6 GW, principally driven by dramatic reductions in the cost of system installations (pull-through from falling solar panel prices in 2009). The previous iSupply forecast, released in February, called for 8.3 gigawatts (GW) worth of installations in 2010, up from 7.0 GW last year.

"The U.S., Italian, and Chinese home markets could account for 50 percent of the predicted growth in 2010," says Henning Wicht, principal photovoltaic systems analyst at iSuppli.

By geographic default, LDK is strategically positioned to capitalize on growth opportunities in these markets: U.S., European, and [operating base] Chinese sales accounted for 11.1 percent, 21.5 percent, and 41.8 percent of aggregate revenue, according to the company's first-quarter 2010 regulatory filing.

For fiscal 2010, chairman and CEO Xiaofeng Peng is forecasting total sales to be in the range of $1.6 to $1.7 billion, on wafer and module shipments of 1.7 GW to 1.8 GW and 200 megawatts (MW) to 300 MW. Prior consensus sales estimates had been approximately $1.4 billion, according to Thomson Reuters.

Average selling prices (ASP) of its wafer prices have declined precipitously over the last eight quarters -- from $2.18 per watt in fourth-quarter 2007 to $0.83 per watt at year-end 2009. Chief financial officer Jack Lai noted on the first-quarter 2010 earnings call that ASPs were finally trending higher, with wafer prices for the second quarter expected at around $0.85 to $0.90 per watt at the moment.

The cost side of the equation is sporting upbeat news of sorts too: recent polysilicon feedstock prices are reportedly below inventoried first-quarter costs of $65 per kilogram. Ergo, Lai opined that gross margins in the next few quarters could expand by as much as 300 basis points from the 15.7 percent posted in the first quarter. Since 2007, LDK has significantly grown its ingot and multi-crystalline solar wafer operations, with manufacturing output crossing the threshold of an annualized rate of 2-GW last month (with in-house polysilicon name-plate production of 6,000 metric tons). However, chasing after longer-term savings opportunities (economies of scale) have weighed the company down with costly near-term liabilities: At March 31, debt of $2.2 billion cast a long shadow over shareholder equity of $869.6 million -- and represented almost 72 percent of LDK's capital structure!

With the company having spent almost $24 million in the last quarter just to scratch the interest itch on this monstrous hemorrhoid -- which also consumed nearly 72 percent of the reported $32.9 million in quarterly operating profits -- one would think it might make economic and fiduciary sense for LDK to scale back a little, after repeatedly promising to do so in quarters' past.

LDK is going "to work diligently to improve its liquidity and strengthen its financial position," chairman Peng chatters nearly every quarter.

And that delusional affirmation has recently been followed by this confidence-booster: "we will continue to work with our China-based banks to replace short-term loans with long-term loans." By the way, LDK has about $1.1 billion in debt scheduled to mature within the next 12-months.

With the thoughts you'll be thinkin' you could be another Lincoln If you only had a brain. ~ Scarecrow (1939 movie classic The Wizard of Oz)
Funny thing with many a mainland-based Chinese company -- their definition of transparency usually conflicts with mine:
Although People's Republic of China (PRC) commercial banks have made short-term financings generally available to us, it is almost impossible to secure long-term financings from them for our projects without the project approval of NDRC in China. ~ [source: LDK 2008 annual report]
The NDRC is the PRC acronym for The National Development and Reform Commission, Red China's equivalent of the cold-war era, Soviet-style "central planning committee." Yes, China's NDRC even comes replete with five-year plans.

With management already talking enthusiastically about dealing for solar farms in China and doubling module capacity to 1.5 GW -- totally foreign and relatively new businesses, respectively -- by the end of 2010, it is probable that the company will not use this expected sector recovery to reduce its own ballooning Keynesian-like deficits.


Image Source: LDK Solar, Polysilicon Production Plant ~ Xinyu City, China
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.