LDK Solar (NYSE:LDK) announced that it would release its Q2 results on August 29th along with revised guidance that will probably echo industry peers that reported an exceptionally weak quarter. The company lowered its guidance estimates for shipments in 2011 to 1.8 – 2.0 gigawatts (GW) from its May guidance of between 2.7-2.9 GW.  Module manufacturers have been hit by falling demand from Europe and have struggled to cope with the declines in pricing. LDK competes with other solar manufacturers such as First Solar (NASDAQ:FSLR), SunPower (SPWRA) and Suntech Power (NYSE:STP).
We have revised our price estimate for LDK to $10.60 in light of adjusting our estimates to the new guidance provided by the company.
Storm Clouds Gather Over LDK
LDK is the world’s largest producer of solar modules in terms of the industry’s most pressing problem – production capacity. Solar firms ramped up their facilities anticipating a heavy growth in demand over the next few years only to find new orders fall in Europe which was the largest market for solar energy. Companies like LDK and Suntech Power have a high degree of leverage (the ratio of their debt to cash flows) which puts pressure on the companies to maintain strong cash flows to service their debt – the inability to service debt can push a company into bankruptcy.
Analysts expected to see some players in the module industry file for bankruptcy in this tough quarter and this hunch proved correct with the recent bankruptcy of Evergreen Solar. (See Evergreen Solar Illustrates Risks of Debt & Falling Solar Prices) LDK’s high debt load could become troublesome in the absence of significant cash flow growth.
Low margins will have to offset by higher production
Over the short term, solar module prices are expected to remain low. LDK’s low costs, high production volumes and vertically integrated approach can provide it with a slight advantage in a competitive pricing environment. However in the short term the company expects margins to compress and its guidance for 2011 gross margins has fallen from 22-26% to 15-20%, primarily due to the weak Q2 in which margins are expected to be as low as 1.5-2.5%.
(Chart created by using Trefis' app)
Over the long term we expect LDK’s cost advantage and vertically integrated structure to work to its advantage. However in the short term it will have to keep an eye on its liquidity position.
- LDK Solar Revises Second Quarter and Fiscal 2011 Guidance and Announces Date for Reporting Second Quarter 2011 Results, LDK Solar
Disclosure: No position