LDK Solar Still Stumbling With Move Into Module Sales
LDK Solar reported impressive second-quarter numbers. Despite firming prices and record sales, however, the world's biggest wafer manufacturer has yet to demonstrate it can profitably grow its recently acquired solar module business.
LDK posted sales and wafer shipments of $565 million and 511 megawatts (MW), up more than 147 percent and 120 percent, respectively, from last year. Wafer selling margins improved more than 200 basis points to 21.8 percent, as average selling prices increased (two cents) for the first time in more than six months to 85 cents.
Total module shipments for the company's new module business more than doubled from last quarter to 74 MW. However, chief financial officer Jack Lai has yet to deliver on his promise that moving downstream into module production would position the company to improve profitability across the solar supply chain. Despite an average selling price increase of 3 cents sequentially to $1.77, selling margins fell 70 basis points quarter-to-quarter to 7.6 percent, mostly due to increases in non-production costs.
Management continues to believe operating margins for its module sector will improve through the benefits of expanded scale (capacity), stable (or lower) silicon and other material costs, and improving photovoltaic conversion efficiencies. By bringing all module production in-house, CFO Lai forecasts module processing cost reductions of approximately 17 percent by year-ending 2011.
Unfortunately, the struggle for module profitability could become more difficult in coming quarters, IMS Research predicts a cloudy outlook next year for solar panel sales:
Module shipments have risen six consecutive quarters, but be prepared for a sharp decline in the first quarter of 2011 as clamor over FiT cuts subsides and seasonal patterns reestablish.
Exacerbating a slowdown in demand will be a supply glut, as LDK's other Chinese-based competitors continue to aggressively ramp up production capacity.A sharp slowdown in module shipments starting in fourth-quarter 2010 will have a damaging effect on module prices, too, predicts IMS analyst Sam Wilkinson.IMS predicts prices will drop sharply in the first-half 2011 -- by eight percent in the first quarter of 2011 alone.
Despite new supply contracts, LDK is anticipating an even greater year-to-year decline -- in the 10 percent to 15 percent range. Module prices are calculated to be somewhere in the $1.60 (per watt) to $1.65 range for 2011, CFO Lai told analysts on the company's second-quarter 2010 earnings call.
Defying financial logic, LDK keeps piling on debt to pay for its never-ending expansion story. At June 30, current liabilities expanded 27 percent in six months to $2.8 billion -- almost three times total equity value.
In an increasingly competitive business, the need to control each node of the manufacturing value chain makes strategic sense. However, LDK has yet to demonstrate how it can profitably execute on its decision to sell solar modules to customers while simultaneously reducing its debt-burdened balance sheet -- especially with the recovery in prices looks to be so short-lived.
Solar power image via Flickr user The Sierra Club, CC 2.0
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