LDK Solar and the Seven Samurai

Kurosawa's famous film epic, The Seven Samurai, follows the plight of a defenseless farming village living in constant fear of marauding bandits in feudal Japan. Whenever their crops are harvested, the thugs attack anew. So the village council goes to town in hopes of employing some samurai to fight for them. Along with the villagers, these samurai successfully defend the village by launching a preemptive strike against the bandits, culminating in a rain-washed victory for the little guys.

Kurosawa's plot kind of reminds me of LDK Solar's (LDK) current saga, except the bandits here are my "Fella Americuns" lurking along the corridors of Broad and Wall, going in for the kill on a defenseless Chinese IPO.

But wait. Who's that on the horizon with the shiny swords? Seven contracts strutting into town, banging on war chests.

• August 16th - Chuan Yi Investment Company - $516 ML
• August 29th - Taiwan NeoSolar Power - $495 ML
• September 27th - Taiwan Mosel Vitelic - $190 ML
• October 3rd - Taiwan Solartech - $224 ML
• October 9th - LDK Raises sequential guidance (Q2 to Q3) an additional 21%
• October 10th - ChinaLight Solar - $133 ML
• October 16th - SolarFun (SOLF) - $266 ML

$1.824 BL in new contracts in 8 weeks. Maybe Bill Alpert from Barrons and his sister-ilk at the WSJ can ignore these guys. But I'm not gonna. I know new business when I see it.

The lampooning of LDK through the Wall Street press has continued almost effortlessly since Charley Situ -a 6 month part-time controller (previously of China Grentech as a 6 month part-time controller) - released a one-man book-cooking allegation juggernaut against his former employer. Mr. Situ and Barrons would have you believe that LDK is a mom and pop dotcom cookie shop who got it lucky under the radar in the Chinese bubble of 2007. Nothing could be further from the truth (the purpose of this article). Maybe when I'm done, even Ted Williams frozen head will give it a look.

Not bad for a Mom and Pop location

LDK is situated in Xinyu, China; at the foot of a mountain range with some of the richest ore deposits in all of China. There are proven and probable mineral resources estimated at 20 ML tonnes for high-grade quartz ore (yielding a 99.5% silica content) in the Yichun - Pingxiang area. That's less than two hours from LDK's fab in Xinyu City - abundant mineral resources to supply its silicon photovoltaic industry. Xinyu is also one of the smelting centers of China, a process which LDK uses in the recycling of silicon into wafers.

Xinyu is at the center of an iron and coal belt, rich in mineral resources. The main metal deposits are iron, lead, zinc, copper, molybdnum, gold, silver and manganese. The area boasts more than ten non-metal deposits, including coal, serpentine, oliven pyroxene, cement pyroxenite, porcelain clay and diopside. The nearby Xinyu Steel Corp produces more than 4.1 million tons of iron, 4.5 million tons of steel and 4 million tons of semi finished steel per year.

The city's at the crossroads of major rail lines and near the district's 3-million-ton freight railway station. It takes only 8 hours to go to Guangzhou or Shanghai by Expressway. Xinyu city has a complete industrial system, including metallurgical, electrical, machine-building, chemical, building-material, and light textile, and foodstuff industries. Many of its products are exported abroad.

The city is considered an economic miracle in China. In just seven short years, this small (pop. 1ML) city's GDP has increased mid-double digits year over year, and financial revenues 25%. Per capita GDP and financial revenues are the highest in the province. Ten major industrial projects are under construction. The city's goal is to obtain a 50+-billion RMB industrial income in three years.

Xinyu is also one of the technological centers of the "New China", focusing on science and technology in its schools. It was the first city to establish a wireless and wireline Internet backbone throughout its environs. It trains thousands of blue collar technicians in vocational schools each year. It is also one of the safest cities in China and has received an award for security for 12 consecutive years. People want to live and work in Xinyu. The city has won 353 scientific and technical progress awards, including 2 national spark awards, 10 provincial spark awards, and 32 technical progress awards at the provincial and ministry level.

The View from Here

My description of Xinyu City is a segue into the fervent context within which LDK began its business model two years ago. The company turned a profit as soon as it drew revenue revenue in 2Q'2006. LDK is entering the polysilicon business next year. It has signed deals with CDI and Fluor (FLR) to help design and build the world's largest (and newest) polysilicon facility. This fab will cover 13,000 acres of land and will be powered by the city's newly constructed power plants. Xinyu city has an abundance of new power, generating billions of KW hours in electricity per year. It is the biggest power load center in western Jiangxi province.

Some analysts have said that LDK's goals are too ambitious. Not likely to be achieved they say (CIBC - the same guys that cut them to underperform recently). But take a second look at the industrial "context of belief" within which they are working. It reminds me of the U.S. aircraft industry in 1941-45. With little experience, and utilizing unskilled help (many workers were women), the U.S. aircraft industry developed into a powerhouse that could turn out fighter planes and bombers (containing as many as a million parts each) at the rate of one a minute.

I think betting against LDK in the current book-cooking allegation spat is the wrong bet. And like I have said in previous posts, the trading looks highly manipulated. Yesterday, I spoke with Josh Hong of InsiderScoop.com. Josh follows transaction data for institutional holdings, and tracks insider trades of holders who have a 5+% position in a stock. Including the IPO, he can only count 20 ML LDK shares available to trade. The CEO owns 72ML shares, yes, but he's still in the IPO lockup phase. How then are we getting these 25ML-30+ML trade days? And from whence come the tens of thousands of shares I'm seeing fly across my screen as the stock suddenly swoons downward? Over 3,500 people have read my research on LDK this week, and judging from the comments, they were ALL longs.

If there are naked shorts raiding LDK, and if they're short-selling (cumulatively) with millions of vaporware shares that don't really exist, the new SHO rule requires institutional short sales to be covered by REAL stock buys within 13 days. So the clock is ticking. And $1.824 BL in new contracts has a lot to say about possible momentum. LDK moves $5 the way most stocks move a nickel. If October's allegations prove to be baked into the current price, the term "shooting fish in a barrel" could get new meaning after a short squeeze. They gotta buy those shares from somewhere, and they're not getting them from me.

As a postscript, LDK was added to the Naked Short Threshold List early this morning. "With 17.38 million shares outstanding and 1.66 million shares declared short as of September 2007, there is a failure to deliver in shares of LDK." (From Buyins.net 9:31 AM, October 17th).

That means there's 13 days before these short shares HAVE to find REAL stock to borrow. There's a saying in trading, that when the room's full of only one side of a trade, the first one out the door starts the stampede.

See also:

• Xinyu, China
• Investor's Business Daily: With Supplies Short, Chinese Solar Firm To Manufacture Own Silicon, Friday, September 14, 7:00 pm ET, by Amy Reeves

Comments

[alpha24seven:]

I'm not buying it. "$1.824 BL in new contracts in 8 weeks". While I wouldn't fault your outlook for Chinese solar companies in general, if you want us to believe that these are smoking buys it would be nice if you'd quantify the contracts who-what-wheres.

The solar industry has a long established reputation of announcing massive new contracts which move the stock. When you look at the details of the contracts including the parties involved, terms and other ancillary (critically important) info you begin to realize the ramifications. Witness one US based solar company that released a "contract PR" for many millions of dollars. Upon further review the company that they signed the contract with consisted of four people with out the necessary subsidies to execute the contract nor the geographic footprint to complete the deal. The stock moved up on the contract. Witness all the internal deal points like "take or pay" or far reaching multi year delivery schedules that basically make many of these contracts porous as Swiss cheese. They still move the stock higher on announcement.

Quantify the contracts and we shall see.

2007 Oct 17 08:41 AM

[tem3811:]

Thanks John for the very convincing analysis. I have found some intersting information about Mr. Situ. From all of the official documents, Mr. Situ's highest degree is a "MBA". However, in a conference held in Hong Kong in 2005, Mr. Situ called himself Dr. Situ and had a Ph.D. in Economics. It seems to me he was lie. My question is if he can lie to the public in a conference without shame, how can we trust what he say when he is behind screen? Here is the link:
www.bic.cityu.edu.hk/c...

2007 Oct 18 02:28 AM

[LukeHappy:]

Are you planning to pump this company everyday?

2007 Oct 18 01:38 PM

[jpmrwb:]

My only comment would be the glib comment about Robert Hsu. I find Mr. Hsu to not be a Novice Analyst. I use to belong to his China Profit Strategy Newsletter and I can tell you I made a good return on my money with his stock picks. Not only does he travel to China numerous times per year but he has many people working for him on the ground in China. He knows the right people there and only makes stock recommendations after extensive study. As for LDK, he recommended the stock and when the news came out on the inventory issue he attempted to get an explanation from the LDK CEO but was unsuccessful. Since that happened he had no choice but to let his subscribers know to sell. I would rather be cautious than hoping everything is all right. I think the author of this article has money involved and is not thinking clearly. If you are going to call someone a "Novice" please be specific why you think that way. I am now suspicious of the author of this article. I think he is to close to the subject at hand. Nothing wrong while waiting to find out who is really telling the truth. We all have are risk levels when we invest in stocks. Mind right now is wait and see. Oh, by the way Mr. Hsu still has recommendations for two solar plays, STP and TRl. Good investing.

2007 Oct 18 04:23 PM

[delrayjay:]

I actually agree with your points on LDK... and recommended the company on my blog (greeninvestments.blogs...) shortly after their post-IPO bottom. We stopped out when LDK pulled back violently... but we reserve the right to re-enter the position... especially as the polysilicon plant comes online... and the global demand for solar continues to build. Great piece.

2007 Oct 18 04:58 PM