LDK Solar: The Soap Opera Continues 15 comments
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A lot has happened with LDK Solar (LDK)over the last 12 days, but suffice it to say it's been "high drama" on a level I haven't seen in years. On October 8th, LDK - a Chinese solar wafer maker - closed at 37.50 and dropped to the 33s in after hours trading. A novice Chinese analyst, Robert Hsu, of China Strategy, had warned all his subscribers to sell immediately. So they did. I know, I watched 'em do it, like a deer in the headlights at 5 in the morning.
And just when it looked like
this deer hunt was over and the venison was being loaded into the back
of some shorts' truck, LDK upped their revenue estimate for the quarter
(which was already 35% sequentially) and the stock jumped 16% in one
minute on a 350,000 share buy. The rest -as they say - is history.
Where there was once only sellers, now there were buyers. The stock
closed at $47 on October 9th with high volume. Yet six brief days
before the stock was in the 70s and soaring to new highs.
There's a lot to this story, and I'll preface my comments by
saying that I remain long LDK in all acounts (including all my own).
First of all, some sales
numbers and statistics (taken from the company's website). $1.55 BL in
long-term contracts. Profit margins of 33.42%, operating margins of
35.58%, and ROE (return on Equity) of 118.49%. They plan to quadruple
the amount of silicon wafers for production (to 1600 MW) within the
next two years (2009). In the last year (Jun 30, 2006 to Jun 30, 2007)
real sales have increased by a factor of 8 to1, gross profit 12 to 1;
net income 22 to 1. The overall picture of the company is one of
explosive growth.
Charley Situ's Complaint
Before the company's IPO earlier this year, a Mr. Charley Situ (Chinese-American citizen), a well qualified accountant with a lot of corporate experience (25 years) was placed with LDK to help them get ready for the initial public offering. He may have been placed there by the underwriters on the deal, but he never spent much time to visit the company or learn about their business. In fact, he was an employee for only about 7 months. There's a rumor that the same was true of his employent at his previous company, Grentech (GRRF); just a few months.
But his sentiments were mirrored by the company's auditors, KPMG, at the time of the IPO. In an independent Argus Research report on LDK - originally posted on August 23, 2007 (and updated October 9th) - Joseph Bonner CFA, writes:
Finally, while KPMG, the company's independent auditor, said that the information provided in the company's financial statements had been presented fairly, it nonetheless found a significant deficiency and other weaknesses in LDK's internal controls. In particular, KPMG noted that the company did not have enough personnel familiar with U.S. GAAP to produce timely status as a China-based startup that is facing allegations of accounting irregularities. We are thus cautious about the stock at current prices, and are maintaining our near-term HOLD rating.
Because of the improvements in process technology that are rapidly taking place in the industry, the management team made a strategic decision to keep all of its yet-unused piles of scrap silicon on their books to enhance the company's asset value before the IPO. This boosted their book value for its IPO trading value. Mr. Situ strongly disagreed, stating that they should "write off" what he considered questionable assets, and not count them as part of their inventory in order to start the IPO with a clean slate.
The VP of finance, Qiqiang Yao, countered with the argument that at a later date LDK's process technology might evolve to such a degree that LDK could effectively use this silicon and thus monetize the asset. Mr. Situ's opinion was ignored. Typically, LDK is able to take only about 7%+ virgin silicon and mix it with recycled silicon (purchased from castoffs from semiconductor fabs, etc) and reprocess the whole batch into high grade wafers.
Mr.Situ had been unsuccessful in plying his "accounting" point of view for several months with LDK, and his views were eventually over-ridden on a conference call in front of his colleagues in mid-September. Mr. Situ also was not part of the original development team that had built the company from scratch in just two short years, and was probably regarded as a pesky outsider. Much of his correspondence was from a distance, through email, from Hong Kong.
William Congreve said, "Hell hath no fury like a woman scorned", but I guess it could apply to a financial controller as well. So rather than go quietly, Mr. Situ went AWOL for 8 days, and during that time - with access to the company's records (and I am assuming logins/passwords) and unbeknownst to his superiors, sent copies of all his email correspondence with senior management - plus his Excel spreadsheets showing his version of the discrepancies - to the underwriters on the IPO, to KPMG (LDK's auditors), and to the SEC, saying he wouldn't be part of a stock fraud. Very powerful stuff.
How much ($) did Mr. Qiqiang Yao's decision not to listen to Mr. Situ cost the company thus far? $3.5 BILLION dollars in capitalization, or about 70 times the disputed amount of inventory. I could say "Stupid, stupid, stupid" but it wouldn't really matter at this point. The company never regarded Mr. Situ as a credible threat who would act in such a way that he could bring the company down; and in retrospect they should have. There's a saying in the Bible about that, "Agree with your adversary quickly, whiles thou art in the way with him; lest at any time the adversary deliver thee to the judge, and the judge to the officer..."
So now everything ELSE about the company has been cast into doubt. Gone from the investing mind are the $1.55 BL in new contracts attained in just the last six weeks. Gone the $1BL that LDK is paying Fluor (FLR) to build them a state of the art fab for silicon processing (that's not gremlins picking through mountains of scrap silicon, you know). Gone the spectacular growth rates and the real money the company is making from real customers who buy their real products and install them in real solar cell modules on real roofs all over the world. No, all that remains for the media is the story inside Wall Street's little Beltway below the Battery.
The inventory news (above) was publicly released on Thursday, October 4th. There was a rebound on Friday afternoon and it appeared the last bullet had been dodged; the company could once again trade on its fundamentals.
But Barrons Online - true to form - looking for a killer story (China's Solar Boom has Lost its Luster), obtained copies of all that email correspondence through their "friends" in the institutional world, and people with a vested interest in that information utilized the information handsomely on Friday, driving the stock downwith panic sells and short sales. The letters were so widely disseminated that it's probably impossible to find who leaked to who, but I think Barrons probably got it right on the source. Their derision of Jeffries is duly noted. Barrons got their killer article and the killers got their company. The story was released on Saturday, and hysteria set in (again) over the weekend. Another 26 ML shares traded on Monday, October 8th.
The Barron's article, written by senior editor Bill Alpert and released to the public on Saturday, is one of the most destructive, sensational, and venal pieces of attack journalism I've ever read. It's sole purpose was to frighten LDK shareholders and destroy the company's credibility, and Barrons updated it twice on Monday as the market went their way. It juxtaposes negative assumptions, cherry-picked information, adjectives, and descriptive vignettes in such a way as to terrorize anyone who owned this stock or might consider holding it. It's really over the top, and it probably reflects the panic-selling that occurred on both Thursday and Friday in the institutional world when this info was first leaked.
A consciously-applied
circumstantial and foreboding innuendo runs throughout the article. If
it's something you might be afraid of, the author has included it:
allusions to the fallen analyst Henry Blodget, a corrupt Chinese
government, a cartoon where the sun can't shine through the clouds
because LDK is in the way; a sidebar announcing the stock is sliding
towards zero. He pans the management as inexperienced businessmen in
over their heads; running a business model so easy anyone can reproduce
it - and yet when these same businessmen enter it they're automatically
disqualified because their business expertise is elsewhere. Since a few
dozen 270 KG ingot batches go bad (about 3-5 tonnes), Mr. Alpert
reasons that the other 997 metric tonnes (per thousand) in stock must
be bad too. He also implies the wafers are such poor quality that MEMC
had to appoint a quality control person to watch over the process at
the fab (the company denies that any MEMC employee is on site).
In response, the
company's CFO said the controller did not understand their business;
that they have agreed to aggressively pursue an independent audit that
will be out in days (not weeks) to clear up the matter; that they are
set to double revenues this year and next, and that all deliveries are
on time.
Whatever Mr. Situ's motives, they were surely based on anger and it seems incredibly unethical to take a company's trust (even if you disagree with them), abscond with their non-public information (company property) without permission and without prior notice from them, and release it in the way he did - whatever the truth was - which was then circulated throughout the Wall Street hedge fund community. Virtually all his complaints could have been resolved with tighter accounting controls and better process data sheets in the factory. This is the wave of fear that Barrons' manipulated. If they had that insider information, who else did? And they were all trading on it.
The Missing Element
LDK
serves a very valuable function in supplying multi-crystalline wafers
to the solar cell makers, and I don't hear about a significant
percentage of their wafers being returned. There's going to be some
waste, some wafers that will need to be reprocessed, but isn't that
normal in an industrial process? Also, as the cost of pure silicon
comes down next year - and it's a fact that multi-crystalline solar
wafer can be a combination of lesser grades of silicon yet still be
effective - some of the now-unusable inventory could be monetized when combined with purer sources to make
wafers at a later date. It's just lik
e the recycled aluminum that ends
up in cars, cans, etc. A person "close to the source" says that
sometimes their furnaces are idle? We're to believe it's all a mirage?
As stated above, they're growing their revenues 12 to 1, sales 18 to
one, by running three shifts a day and they're making money hand over
fist.
LDK's 3,500 employees are
working 24/7 to recycle various "grades" of scrap silicon from
semiconductor fabs all over the world. These incoming scraps all have
different grades of silicon purity and it's a fluid thing, sometimes
you can't determine ahead of time which can be monetized for how much
wafer product and which cannot. That's why the price they pay for
"scrap" varies from $30/kg to $300/kg depending on the
probability of yield. Think about Canadian Sands oil, for instance.
LDK is paying for a lot more than a few tonnes of silicon
in
inventory. They're paying for lead paint in toys, melamine in dog food,
and all the other industrial shortfalls that have made Chinese products
seem inferior and unreliable. What's happened the last 8 days is not
just company specific - it's also Chinese specific.
There's no doubt the young accounting superior should have
taken Mr.Situ seriously. But destroying a viable company over it? This
reminds me of the sub-prime meltdown fears two months ago.
I have a LOT of my own money tied up in LDK. . It's been my observation in the past that whenever Wall Street spies a good growth story, they become eager to arrest its image temporarily in order to gain more shares, and then chase it right back up again. I hope that is the case here. I have spent my investment life sorting through these situations and I've never found one where hysteria was the right answer.
Yet the tide may be turning for LDK. A look at the news bar and LDK signed another long term solar wafer contract valued at $133 ML on Wednesday, October 10th. That's $1.55 BL in contracts for solar wafers in 8 weeks.
This whole affair continues
to remind me more of the subprime mindset of August, 2007. Hysterical
fears yielded the 27% Barrons drop in LDK on Monday. If you look at the
websites of the law firms suing LDK, it's obvious that they are
ambulance chasers. They probably even have a shortwave radio in their
partners' offices.
And lastly, Robert Hsu, the Chinese stock maven who panned
the stock at its worst possible moment - what can be said? His anxious
"crash alert" on Monday afternoon got all his
subscribers out
at the very bottom. After his newsletter investors had finished selling
and the volume had dried up Tuesday morning, LDK released a new press
release about its raised revenues for this Q. The stock shot up 16% in
ONE MINUTE. Whew Hsu - what a haircut! If you want to look up the word
regret in Websters you might see see a woeful picture of Robert right
there in the illustration.
The Soap Opera Continues
Give Mr. Situ credit for
competing with the Energizer bunny, the one who keeps "going and going
and going".
On
Thursday afternoon, October 11th, he released another 6 MB of data to
the SEC and his "colleagues" on this side of the pond. And on Friday,
October 12th, Barrons is fanning the fears of flames anew with their
careful but contemptuous arrangement of the latest details and
assumptions. But it's the matter of the "going" and the "fanning" that
concerns me; for example, the press releases that come out just in time
to scare investors (again) over the weekend. He sends materials out to
the SEC; he sends them out to brokerages involved with the IPO, and
the
"others" who get the emails (by whatever means necessary) are of course
Barrons, the Wall Street Journal and anyone else he thinks he can get
an audience from. Hedge funds - they don't mind - all news is good news
as long as they get it before anyone else.
His latest correspondence
was
Thursday afternoon, right about the time the stock suddenly dropped
14%. Most investors thought LDK's drop was just sympathy with BIDU and
the Nasdaq's negative day. But what if it wasn't? On Friday LDK began
to rally 10% but went down for another $8 drop on
the "released" version of the news story in
the WSJ. Doesn't this seem a little bit orchestrated? Or is a couple of
billion dollars here and there just chicken feed? It looks like
front-running
to me.
I
have discovered a couple of things in the course of all this posting.
Mr. Situ is not an American citizen, nor does he have a green card; he
is a citizen of Hong Kong. As far as I know that makes Mr. Situ a
Chinese citizen. Mr. Situ seems bound and determined to destroy the
credibility of his former employers - a Chinese company - on his own
word - because he must do so to justify his
actions, or risk prosecution. The
company categorically denies his charges. If all this turns out to be
even remotely in error, I don't see how it looks good for him. Isn't he
playing with fire? The pendulum has swung so terrifically in this
instance - and with such force in one direction - what will happen on
the counter-swing? It's something to consider.
And who's going to "finish off" LDK on their own turf? Some Americans? It's located over there (in China), not here. LDK's in a city where they're a big employer, where the government likes them and honors them. The young CEO is the 6th richest man in China with no known track record of duplicity. Doesn't that curry some respect locally? Who's going to go in there - on their own turf - and disgrace them financially?
The way the stock is
trading, it appears that Mr. Situ is a one man army, beloved of anyone
in NY city privileged enough to be first in line to receive his emails.
From my limited viewpoint, this drama seems incredibly one-sided. A
theme of manipulation runs through it all - not necessarily coming from
Mr. Situ personally, but by the feedstock in the Wall Street meat pen
that benefits from him. The stock has days where it trades more than
its available float, more than all the shares owned by institutions and
retail investors combined. Where are all those extra shares coming
from? Naked Shorts? There's an attempt to force the SEC to play its
hand (or how the SEC is regarded by the investment community); the
trading moves mostly down on the heels of every new rumor. The
sensational news coverage implying guilt is more akin to the feverish
characteristics of a lynch mob. I don't know if you could even call it
trading on insider information anymore; more like insider accusations
within an ongoing circus show.
I have NEVER seen
hysteria get it right. And like many investors in this company, I'm
weary of this ridiculous saga. And this point I could care less if Mr.
Situ is right or wrong, I just want him to go away. The damage he's
done far exceeds the inventory in question - maybe by a factor of 50 to
1. And it's nothing that can't be remedied by better controls.
I continue to think that LDK's business is proceeding at a
white hot pace 24/7, and because of that there is a constant scramble
to reprocess recycled silicon of all variants at all times, including
inventory for other companies (contract work) that is not part of their
own inventory. There is a good chance the silicon on the controller's
inventory had already been processed and out the door, he just didn't
get the updates, or had partial updates, as CFO Jack Lai said. LDK
surely has the money to buy more silicon if needed; and it's quite
possible that at the pace of business they're running they didn't take
the time to count all the beans. This can happen in an upwardly mobile
young company. In other words, Mr. Situ's claims about poor financial
controls at LDK might indeed be correct, but for the wrong reasons -
business is so strong (judging by the contracts) that they can't keep
up with both the orders and the accounting simultaneously. As I stated
before, a little extra money for staff and some real-time accounting
software might easily remedy this.
Disclosure: Author has a long position in LDK
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This article has 15 comments:
the SEC should carefully look into this matter - especially the transactions by hedge funds, big wall street firms and barron's and the WSJ.
whatever this Mr. Situ and Barron's may have intended, one thing did they certainly accomplish: the small investor got maximum hurt. They did not protect him, they did anything to get him out of the stock at the lowest possible point without any real and hard facts justifying the price action of the stock
Charley W. Situ has served as our financial controller since February 2006. Mr. Situ is responsible for our compliance with U.S. GAAP and other internal control requirements under the U.S. securities laws. Mr. Situ has been a financial controller for several companies in the United States, China and Hong Kong and has over 15 years of experience in financial management. He received his bachelor degree in mathematics in 1983 and master degree in applied statistics in 1987 both from South China Normal University. He completed core courses at The University of Delaware and thereafter received his MBA degree from the University of Brighton in 1995. Mr. Situ is a member of American Institute of Certified Public Accountants, a member of Institute of Management Accountants and a member of The Institute of Internal Auditors.
Here are my questions:
Mr. Situ got his MBA ( I have some question about this degree) 12 years ago in 1995 before that he was trained as teacher and claimed to have over 15 years of experience in financial "management", that means he started his financial "management" job even before he got his degress (He must include the years of managing his own money)
Also, you did not have to keep that disclaimer, wasn't it pretty obvious that you are long on this stock.
American's wake up, stop giving you hard earned money to these Chinese scams. Mark my words, 60-75% of the Chinese companies trading here in the US with billions in market caps will perish and disappear with your money. You Americans will be the biggest joke in China.
----------------
Somewhere in scamland...
"Hello SOLF, LDK here, need to issue a press release to fool the Americans, we will supply you junk for $266 mil, will help your stock too..."
SOLF: "How will I be able to pay for this, I only have $60mil on the books."
LDK: "You kiddin me, you do not have to pay, the dumb Americans will pay..."
SOLF: "HA HA HA, Ok LDK, you got yourself a deal..."
...
...
"Hello Chinalight..., LDK here, we need to talk..."
----------------
Somewhere in fool's land...
"Oh LDK has signed another contract, wow, that makes it $1.5billion, jeez this company is exploding, I am going to be so rich..." is that right John..., just like the rest, you are so naive.
Oh well, I really hope you guys do not loose your pants on these Chinese scams (recent one STV, ATV, EJ).
As a disclaimer, I am neither long nor short on any of the China stocks. Would love to short, but do not have the stomach for it. I did short JOBS (was another chinese scam back then) once though at $50 for a nice $25 tank like LDK did. LDK, I twice tried to short 100sh at $72 and $79 but canceled the orders. I wish I had not.
BTW, I was so right about the XFML CFO, just check my comments before the IPO started trading...
seekingalpha.com/artic...
Hopefully, you will find me credible after reading my comments for XFML.
-jigs
holdings -- this chap's articles 2 days in a row are ridiculous.
Instead of burrowing into what is really happening with the company, he calls Robert Hsu a "novice" for recommending to clients to sell
LDK. And then he takes on Barron's for outlandish, lynch mob like
behaviour. I am sure he would be mad at Goldman Sachs too now for
initiating a sell rating on LDK because those folks on Broad St. clearly are yellow
journalists trying to sell copy or a firm operating somewhere on the margins of respectability.
I do not know Hsu and have never read any of his commentaries, but the
stock is below the price where he recommended to his clients to
sell... and to call him novice for recommending to get out of an
unstable situation is preposterous. I would say Hsu is smart here to recommend to clients to get out or, at the very least, be very sure to constantly check the volatility.
Anyone who has spent anytime looking at Chinese companies knows that
many of them do indeed have major transparency issues. My firm does a lot of
due diligence work for hedge funds and PE firms investing in China.
And many of the companies we look at have account records that simply are made up. We have seen companies book as revenue and profit in 2007 deals that a salesman supposedly had a verbal agreement with a potential client in 2003. No services or products were exchanged. No contracts signed. Nothing. Yet deals like this accounted for over 30% of a company's revenue that we look at.
I am NOT saying this is the case with LDK -- I have done no research into them. For all I know, they are completely legitimate and a great stock to buy.
BUt this author keeps on lying piles of it. He attacks Situ for only being around for 6
months at LDK. I do not know Situ either and I know nothing about LDK, but
the arguements against Situ's viewpoint in this article is ridiculous just because he has been around the company for 6 months. Why the heck does it matter if he is an American or a Chinese citizen or a HK one? Why does it matter if the company has won awards in China? Many companies do. Many bad actors do because they are trying to get a sheen of respectability or they bribe a local cadre to win some sort of award.
This article is total rubbish and the bazillion anonymous comments seem suspect. This guy is clearly trying to drive up his own stock. Real research might be about calling LDK's clients to see how much they are buying and under what satisfaction levels.
Instead of trying to prop up your own stock holdings, please be objective. Frankly, I think this poster should be banned from posting on Seeking Alpha.
S. Rein
Now you guys are worried about nacked shorting. This is not a new ,but now it is a problem.
You should fight for this problem with sec. for all the company, not only.LDK. PLEASE LOOK at , SSTR, DNDN ,cntf , locm , nacked shorting killing all small company.
thanxs.However seeking ALPHA is the best .I love seeking ALPHA