Why Lazard is Wrong About LDK

Lazard Capital initiated LDK Solar (LDK) with a "sell" rating yesterday. Here are the comments made by Lazard:

As mentioned at 7:09 Lazard initiated LDK with a Sell and a $25 tgt saying they have concerns regarding LDK's long-term competitive advantage and the potential for consensus estimates to prove highly optimistic, despite the co's ability to ramp capacity rapidly and secure long-term contracts. The firm says their concerns extend beyond recent allegations regarding financial controls, which could continue to weigh on the shares until there is some clarity, potentially impacting LDK's ability to access additional capital to meet an already aggressive schedule to produce polysilicon in-house.

Now for my two cents.

In my professional career as a trader/investor, I have not used Wall Street analysts' recommendations as the basis for a trade/investment. The years I've spent in the market (since 1994) have proven time and time again, that the analysts are biased, have exceptionally poor timing, and are self-serving to the needs of their employers.

Having said that, I do not blindly ignore what the analysts say, but rather, take their comments and review them against my own due diligence. Following is my discussion of the Lazard comments:

1) Competitive Advantage - Long Term vs Short Term:

A question of the "short term" competitiveness of LDK is valid as LDK does need to be a "low-cost" producer, and they are currently doing this by using a combination of scrap/recycled polysilicon and virgin polysilicon. So, indeed, if their process cost of material goes up due to less than usable materials, then they do lose some of their competitive advantage.

However, Lazard, said "long term" competitiveness is a question - this is not true, due to the complete vertical integration plan of LDK that will, in fact, assure "long term" competitiveness for LDK. Under LDK's polysilicon production plan, by the end of 2008, they will be a leading producer of virgin polysilicon, and a dominate world leader by the end of 2009.

2) Meeting Consensus Estimates:

No one has a handle on the magnitude of the demand for solar cells. This is especially true for analysts in the USA, which is backward thinking in terms of renewable energy and its importance and demand in this decade, and for decades to come. However, China, Europe, and Asia get it - and what "it" is, is the world must invest in clean, renewable energy sources - there are no "ifs, ands, or buts" about this. Unless of course, you are a US analyst beholden to big oil (ala Lazard, GS, et al).

LDK is signing, and will continue to sign huge solar wafer supply contracts that ensure exceptional top-line revenue growth. And with the completion of the vertical integration plan for producing virgin polysilicon, the bottom-line earnings will not be influenced by outside supply constraints of polysilicon. This locks in huge profit margins for LDK. With this, not only is LDK likely to meet expectations, but blow those expectations out of the water.

3) Access to Captial Funding:

This comment is so ridiculous as to be almost humorous. Likely rooted in the arrogance of Wall Street, and fear of China rising - the Wall Street kids just don't understand the nature of China's will.

China will fund LDK with guaranteed low-rate loans. Also, LDK has the option of listing on the China exchange, which would infuse the company with a huge amount of cash.

The Chinese see things long term, combined with unstoppable energy and commitment to being world-class. The Chinese are not beholden to the banks in the US that only view business in a "quarter by quarter; what's your share price today" mentality.

4) Aggressive In-House Polysilicon Schedule:

Indeed, to construct and have operating, a functional, 6,000 tonne/yr polysilicon plant by the end of 2008, and expanding to 15,000 tonne/yr by the end of 2009, is aggressive.

It is also, opportunistic. And to see it through, LDK has contracted with Flour as the builder (world-class constructor of complex processing plants) and hired top polysilicon scientists and program managers from the polysilicon industry (MEMC-Spain). LDK combines this outside expertise with a workforce of thousands, all with the same goal, of pulling off the seemingly impossible.

Considering that LDK went from a bare floor start-up to full fledged production of solar wafers in under 6 months, and has ramped its rate of wafer supply by %100/yr, it would appear, that LDK can do what it plans to do.

I will leave you with a final comment, that being, when there is one voice, many listen, and some follow, when there are two voices, some listen, and many don't. When there are many voices, most don't hear any of them, and some her a few of them. Point being, listen to the voices as you so chose, and then listen to your voice as the voice of reason.

Disclosure: none

Comments

[HH99]

Great analysis. BTW, I donot own LDK

[DuffBeer]

Great advise that you state at the end of your post !!!!!
cheers,
DuffBeer [e-mail]

[Chuck]

Fan-...-Tastic !!
Thanks for the view and comments.
I'm also LONG LDK

[omooc]

Out of curiosity, what Chinese companies have Lazard analyzed before? Has its analyst been to the company's site? Or is he/she relying completely on Barron's article (which says, inter alia, that the article's author, through an interpreter, talked to a mid-level staff member)? This would indeed be a test case (since the company is off-shore) to understand how analysts get their info to reach a conclusion. omooc

[omooc]

Your comment on LDK's sources of funding is perceptive. Given that the company continues to sign long-term contracts internationally, it seems that these buyers have no problem with LDK and/or its product quality. omooc

[asaf]

in $25, P/E for 2007 is = 17.5 and P/E for 2008 is 9.3

are they stupiid? renewable stocks have an average P/E of 50-60 so a $25 is unreal. actually, $75 tag is much more real.

[User 86338]

RE: Lizard (Lazard) I don't usually follow analyst recomendations, in fact, rarely read them. I find it odd that an analyst would initiate coverage with a sell recomendation. Isn't it logical you would have covered with a buy or hold prior to selling? If those relying on this analysts recomendations to invest, where are they getting the shares to sell? Or is this a rec to short?

[User 86338]

RE: Lizard (Lazard) I don't usually follow analyst recomendations, in fact, rarely read them. I find it odd that an analyst would initiate coverage with a sell recomendation. Isn't it logical you would have covered with a buy or hold prior to selling? If those relying on this analysts recomendations to invest, where are they getting the shares to sell? Or is this a rec to short?

[User 86338]

RE: Lizard (Lazard) I don't usually follow analyst recomendations, in fact, rarely read them. I find it odd that an analyst would initiate coverage with a sell recomendation. Isn't it logical you would have covered with a buy or hold prior to selling? If those relying on this analysts recomendations to invest, where are they getting the shares to sell? Or is this a rec to short?

[User 86338]

RE: Lizard (Lazard) I don't usually follow analyst recomendations, in fact, rarely read them. I find it odd that an analyst would initiate coverage with a sell recomendation. Isn't it logical you would have covered with a buy or hold prior to selling? If those relying on this analysts recomendations to invest, where are they getting the shares to sell? Or is this a rec to short?

[semi expert]

Clearly ou don't know anything about what is going on in china or LDK or si reclaim. Time will tell...

[MSA]

Hi "semi-expert"... Please feel free to refute my comments with those of your own. To say I know nothing is not an argument for/against my points, but simply an "attack the messenger" slight that only indicates you are unwilling to respond intelligently.

Please respond intelligently, with point-by-point arguments that show why it is that you say to me "you don't know nothing".

Thank you,