LDK Solar: A Tremendous Buying Opportunity

| About: LDK Solar (LDK)
LDK Solar (NYSE:LDK) shares have dropped sharply for the past 10 days, along with the solar sector. Most of the drop appears to be over fresh concerns on its debt, since LDK recently announced it postponed a recent bond offering which you can read about here. This appears to be more of a perceived debt problem rather than a real one, as I will explain.
The drop has also been exacerbated by aggressive short selling, and probably margin calls and stop limits. There is no reasonable logic in this big decline, with LDK shares now trading at about $7. I believe the debt concerns and the stock price decline are extremely exaggerated for several reasons. First of all, LDK remains profitable and has stated it has sufficient liquidity even without the bond offering. Also, LDK has access to a massive line of credit in the amount of nearly $9 billion. It also has plans for a $1.3 billion IPO in Hong Kong later this year, which will allow it to pay off debt and give it a very solid balance sheet.
The market will often give you a chance to give your shares away at very low prices, just when you should be buying more, and that is exactly what I believe is going on with LDK. I have used this opportunity to roughly double my position in LDK, as prices have not been this low for quite awhile. LDK is being priced as if it had no growth potential, negative earnings and no upcoming catalysts, and this is absolutely not the case. LDK has incredible growth potential and will likely be the lowest cost and largest solar company in China and probably the world, in the not-too-distant future.
I would not be surprised to see LDK receive a major investment or buyout offer from another firm. For example, Total (NYSE:TOT) of France recently offered to buy Sunpower (SPWRA) at about $23 per share, which sent the shares soaring and put shorts in a panic to cover a major short interest in Sunpower shares. A company like Petrochina (OTCPK:PCCYF) could take a partial stake or make an offer to buy all of LDK Solar, especially with the shares trading so low. Even the president and COO of LDK recently said investors are way too pessimistic on the solar industry.
Another huge positive development is news that the China Development Bank has received approval to purchase a stake in LDK Solar. While we don't yet know exactly how much it will invest, chances are it will be very significant. We may not know how much it plans to purchase in advance as it would likely cause the shares to rise significantly if it disclosed the total amount before completing the transaction.
It is significant that the China Development Bank is already approved to purchase a stake, because this bank has focused primarily on private equity and direct investments in companies like LDK. Recently it announced plans to buy a minority stake in TPG Holdings, a private equity fund based in San Francisco.
This bank could announce a deal suddenly whereby it directly purchases shares from LDK, in which case the shares could jump when announced, especially if they are sold at a premium, or it could buy shares on the open market, which would likely drive the share price higher. Also, according to this statement, China Development Bank "... is one of the three policy banks of the PRC, primarily responsible for raising funding for large infrastructure projects, including most of the funding for the Three Gorges Dam and Shanghai Pudong International Airport. The bank was established by the Policy Banks Law of 1994. Debts issued by CDB are fully guaranteed by the central government of the People's Republic of China. CDB is one of the biggest issuers of bonds in the PRC."
This is significant because it implies Chinese government support for the solar industry and in particular for LDK Solar. It also could mean that CDB could (in addition to investming directly in LDK) provide bond financing that might basically be backed by the People's Republic of China. The Chinese government has set clear goals to lead the world in solar power and other green industries, and this investment clearly shows government support for LDK Solar. This should put serious doubts in the theory by some shorts that LDK is just going to wither away with some short term liquidity issue. There appears to be zero chance that LDK will have any short term liquidity issues, as many shorts have so successfully planted in the minds of other investors as well as their own.
Many U.S.-based investors just don't get it; the world is not our oyster going forward, as certain Chinese companies will provide some of the best wealth creation. LDK could be one of the great growth stories for the next 10 to 20 years. Solar power is still in the very early stages, and by the time most investors take this industry seriously, the PE ratios on solar stocks like LDK will no longer be two or three times earnings or selling for less than book value, like they are now. (LDK shares are trading below book value, which is currently $7.67 per share.)
There is even more recent good news for solar and LDK. Japan just announced the "Sunrise Plan," which sets a policy of extending solar panel installations to all of Japan's rooftops for both homes and commercial buildings by 2030. You can read more about that here.
Hanwha Solar (HSOL) reported earnings just days ago which resulted in a quick 20% gain in the share price. I expect LDK to jump from deeply oversold levels after it reports earnings on June 7 and possibly gives investors more clarity on the timing of the upcoming IPO.
The CEO owns about half of this company, and with his stake currently worth hundreds of millions of dollars, I am willing to bet that he is confident and has taken precautions to ensure that LDK has no liquidity issues going forward. In contrast, shorts have about 24 million shares short, which gives a total position value of about $130 million. I'll bet on one man who owns roughly 75 million shares, and the China Development Bank vs. the shorts who don't know the business nearly as well as Peng and who collectively have a short interest worth not more than 1/3rd of Peng's stake alone.
Analysts at Trefis put a $12.26 price target on the shares and give a very detailed view of the risks and opportunities in LDK, which you can read here. I agree with the analysis that short term factors have weighed heavily on the stock, but that the long term potential remains incredibly strong for solar and LDK in general.
This is probably the best buying opportunity we will see in LDK Solar before the poly-IPO in Hong Kong, and I expect many will regret not loading up now for the long term.
Disclosure: I am long LDK.