LDK Solar Serves Notice, Brings Top Firms to the Fight

LDK Solar (LDK), a leading manufacturer of multicrystalline solar wafers, served notice yesterday that they will not be pushed any further. Recently the company was the subject of allegations from a disgruntled former employee (Charles Situ) that there were improprieties concerning scrap inventories carried on the books longer than 180 days. The company was subsequently victim of a massively coordinated naked short selling [NSS] campaign resulting in a 50% reduction in market capitalization since the allegations first became public.

To date there have been three rounds of heavy short selling, each commencing within minutes of sensational headlines being released by one of several “news” organizations under a single corporate umbrella. One round of NSS actually came simultaneously with a re-post of an old article with a misleadingly new headline that would lead a reader to think new and damaging information had surfaced. While the headline has been retracted, the damage done by the NSS campaign has not. In what would have been the final chapter in the trilogy for most companies, there were multiple class action lawsuits, filed by predatory law firms, not privy to any actual information, filed in several states.

In response, LDK Solar has contracted two of the world’s top law firms to handle the different aspects of this attack against them. First, in response to the felonious conduct of Mr. Situ in making public allegations concerning company inventories, and purportedly making public the private records of the company (albeit only partial records), LDK has hired the law firm of Simpson, Thacher and Bartlett, LLP. [STB] The firm is a top litigator and advisor for firms such as U.S. based private equity firm Blackrock. They were brought in by the independent directors of LDK to run the independent audit of inventories. STB in turn independently hired an unnamed Big 4 firm to perform the audit. STB will function as lead counsel for the audit.In response to the multiple class action suits prematurely filed against them, LDK has hired Latham and Watkins, one of the top 4 law firms in the United States, to handle any and all litigation that arises as a result of these suits.

The company maintains their original position that the claims of the disgruntled Mr. Situ, and therefore the suits filed in conjunction with those claims, have no merit.Given this quality of response, it would appear that LDK is supremely confident of their position. As an investor given all available information, this company appears to be a lump of coal being exposed to intense heat and overwhelming pressure, becoming a diamond before our eyes. Had the company done any less in defending themselves against this blatant attack, the residual doubt already created could have eroded investor confidence over time, driving the company to obscurity.

As it now stands, the company not only stands to emerge with a newfound credibility, but investors will be forced to consider what else LDK Solar has been telling us. According to Mr. Jack Lai, LDK will grow capacity at an annualized 100% for the next two years. New contracts in place, just in the last several weeks, will bring in an additional $2.3 billion US over the next three years in addition to already outstanding guidance. In the face of newfound credibility, we have to place credence in the margins the company is currently reporting (30.8%), making them almost twice as profitable as their nearest competitor and trading at much lower P/E. That’s a $708.4 million net over three years on recent contracts alone – before their new facility is online (which will inevitably create much higher margin).

For a high growth stock in what will be a hot sector for years to come, this company is trading at a deep discount.LDK has served notice: they are substantial, profitable, and reputable and they are here to stay. The writing is on the wall for those willing to read. This company is going to weather this storm and emerge stronger with better controls in place to deal with issues like this when they arise, as they inevitably do for large fast growing multinationals. I’m not going to wait the few weeks to see how this turns out – I’m getting in now, with the fast money.

Disclosure: Author has a long position in LDK

Comments

[MNRTrading]

Thanks for the LDK updates. I agree with your assessment and added LDK to our portfolio early in October.

mnrtrading.blogspot.co...

mnrtrading.blogspot.co.../

[alpha24seven]

"As an investor given all available information, this company appears to be a lump of coal being exposed to intense heat and overwhelming pressure, becoming a diamond before our eyes"

Diamond? Well what you should realize is that you DON'T have access to "all available information". This will be revealed in discovery and audit. You have access to all perceived information which isn't even remotely close.

Your writing and positioning on this company is clearly skewed to the point of pathology. Clear your head and wait for outcome.

I know the solar industry at large very well, and I will tell you with full authority that many times things aren't what they seem.

[mbs]

Pathology...wow, you sound scary. Take it easy short man!

[KSTHANE]

Wouldn't it be just as reasonable to expect the hiring of top tier law firms to be bad news? Couldn't this be interpreted as analogous to OJ hiring Johnny Cochran as his defense attorney?

If the company is supremely confident in their position and the claims are baseless, why spend tons of money to clear the air when you can get a run of the mill law firm with a good track record to clear the air instead?

I'm not going to comment on whether I believe LDK has done anything wrong or not; but the assumption that hiring top tier law firms to deal with the issues is a sign that the company has done nothing wrong goes against all conventional wisdom.

[RLau]

Why would they NOT hire a top tier law firm? They owe it to the Shareholders to hire only the best. It is their responsibility to the share holders to assure that the Company is being represented by the best. I don't think the shareholders would want anything else. Hiring a top tier law firm doesn't bring up a red flag. Why would they risk hiring a run of the mill law firm. As we know, cases are won by lawyers as much as they are won by evidence. Just look at OJ. He got away with murder. But on the opposite end there are also those who were innocently convicted of a crime they didn't commit because of ineffective lawyers, that is why LDK needs to be hiring the best. They should not allow these kinds of variables such as the quality of lawyers which would raise the risk for its shareholders. Thats why I believe that LDK hiring or not hiring a top law firm is of no significance in determining their innocence. So no, it isn't going against all conventional wisdom.

[RLau]

Why would they NOT hire a top tier law firm? They owe it to the Shareholders to hire only the best. It is their responsibility to the share holders to assure that the Company is being represented by the best. I don't think the shareholders would want anything else. Hiring a top tier law firm doesn't bring up a red flag. Why would they risk hiring a run of the mill law firm. As we know, cases are won by lawyers as much as they are won by evidence. Just look at OJ. He got away with murder. But on the opposite end there are also those who were innocently convicted of a crime they didn't commit because of ineffective lawyers, that is why LDK needs to be hiring the best. They should not allow these kinds of variables such as the quality of lawyers which would raise the risk for its shareholders. Thats why I believe that LDK hiring or not hiring a top law firm is of no significance in determining their innocence. So no, it isn't going against all conventional wisdom.

[oceandude]

One question - let's say the inventory problems are real. LDK announces the audit turned up problems and they have to restate their figures, etc.

Does this change anything long-term? Aren't they still well-positioned with the upcoming polysilicon plant and a bottomless source of cheap labor?

[jby]

I totally agree with your viewpoints and I am going to follow your lead by buying more shares of LDK tomorrow, even though I already have a large position on it. At this price LDK is indeed a great buy.

[KSTHANE]

So spending several hundreds of thousands of dollars worth of shareholder money to clear the air is better than spending a few hundred thousand dollars?

I'm not advocating that LDK go out and hire some washed up hack of a lawyer to represent them, I'm simply suggesting that if there is nothing to worry about, any corporate law firm would be able to get them through this. A well known, but not top tier, law firm would put their best people on this and put forth an incredible effort because of the good publicity it would bring their firm.

[solar jim]

I have no idea where this guy gets his numbers from that he is using. There are other companies that are over 20% margins in the solar industry. one half of 30.8% would be 15.4%, which he said was the next nearest competitor at best. From his post... "...margins the company is currently reporting (30.8%), making them almost twice as profitable as their nearest competitor". In reality there are more than one other company above 20% margin besides LDK. Before anyone buys LDK from this guy's advice remember to actually check consensus estimates or any analyst estimate and compare to what the author's post says to check his veracity. Another post this author has completely misrepresents estimates for all the solar companies in his "spreadsheet"... At least based on consensus estiamtes you can get at Yahoo, Google, most stock brokerage company accts, etc...

[User 86999]

price/book is already too high. if there are inventory problems, the ratio goes even higher, not to mention the dent in earnings caused by the high priced weasels and auditors!

[mbs]

I just checked Reuters and Google finance and they backed up his numbers. You guys sound like you have a short agenda where LDK is concerned.