Why is LDK Solar Constantly Beaten Down? 13 comments
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Did you ever feel that the beatings from some of the Wall Street analysts on LDK Solar (LDK) seem to be a little excessive? I think I discovered the answer. I keep both LDK Solar and Suntech Power (STP) stocks in my virtual trading account. I noticed STP was quite dull before October. But a few days after Piper Jaffray reported Situ's accusation, STP's price started to pick up and now has risen to $58.89 today from $39.9 on 9/28/2007. On Thursday afternoon I accidentally opened an SEC filing on Suntech's website and found in Form 424B7 filed on 9/28/2007, Piper Jaffray finished the registration of 5 million dollars worth of ADS of Suntech.
Right now nobody knows if Charley Situ was using the wrong method in counting inventories, or if LDK was. But even if LDK was wrong, 250MT of discrepancy is really not that a big deal considering the capacity and expansion plan of the plant. LDK was already beat to half death by those analysts by an incident that could hardly justify the magnitude of the price drop. LDK has been lingering between $35 and $45 for the last couple weeks. But it seems to me that PJ is determined to push it further down. So they strategically set the target price at $34.50 --- 50 cents below the support. I suspect once LDK goes below $35, it will trigger another round of panic selling. Or so Piper Jaffray hopes? I wonder if Piper Jaffray is trying to gain on STP's rise since "China" and "Solar" are a hot combination and now that investors are losing confidence and trust in LDK, all the attention and money will turn to STP and push STP even higher.
Is it just a coincidence that Piper Jaffray had their $5,000,000 STP stocks registered on September 28, 2007 and then reported Situ's accusation on LDK on Oct. 3?
To me, neither Piper Jaffray nor Barron's comments appeared objective at all.
Piper Jaffray did underwrite 869,200 shares of LDK, but I did not see evidence of them purchasing the shares. I think they are just making commissions helping LDK put these shares onto the market. Otherwise it does not make any sense that Piper Jaffray tried so hard to denigrate LDK. Or could they have bought put options or short sales right before they released the report on Situ’s accusation?
In my opinion, LDK is a quality stock with the best fundamentals. Both LDK and STP have tremendous growth potential. However STP is getting a little pricey.
By the way, there is a video about the LDK factory on YouTube. Also check out Michael Shaffer's good comparison of LDK and other solar stocks.
Disclosure: Author has a long position in LDK
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Who are all of these people? Are they truly objective? All I see are article after article of people saying LDK is good and everyone who is criticizing LDK is nefarious. Come on guys, this is ridiculous.
Prove to me why a stock is good other than saying "LDK is a quality stock with the best fundamentals."
Why is it quality? Why are the fundamentals good? What are the fundamentals that you keep looking at?
If is it so good a stock, you should start increasing your holdings. That is usually what I do when a stock is hit hard but I believe in the fundamentals. And if so many analysts think the stock is so good, one would think that it would have skyrocketed back up.
Let's have more objectivity here.
S. Rein
1) The author states:
"Right now nobody knows if Charley Situ was using the wrong method in counting inventories, or if LDK was. But even if LDK was wrong, 250MT of discrepancy is really not that a big deal considering the capacity and expansion plan of the plant."
If LDK was wrong it's not a big deal -- it's a huge deal. A discrepancy so large would cause any relevant analysis of this company to come into question. 250 Metric Tons is not something someone casually makes mistakes accounting for...
2) I agree that there are several LDK "champions" on Seeking Alpha that are obviously bent on convincing us that the company has been made an example of by "evil Wall St." One writer went on and on about manipulation, short selling and assorted other evil practices that he knew "for sure" were being perpetrated by Wall St. Preposterous.
You may be right to suggest that knowing "for sure" that there has been improper manipulation going on from Wall Street against LDK is a stretch, but if you've been watching this whole drama play out, then you should be able to recognize that it is not unreasonable to come to the conclusion that there is something fishy going on in terms of anti-LDK sentiment. Just look at the volume over this event, and you'll see that they were under very aggressive attack from somewhere, and then remember that this is all based on a single former employee (an employee who thought that it would make sense to go to the CFO and tell him that they needed to write off a large amount of stock because it was "over 180 days old."*)
So, Seeking Alpha is posting quite a few articles supportive of LDK. What's wrong with that? For one thing, they're probably getting hits, and if you're a capitalist you won't have a problem with that. For another thing, it seems to be the case that of the writing going on around LDK, the majority of non-mainstream sources are in the court of LDK. At the very least it seems quite reasonable to suggest that the current price properly reflects this accounting issue, and that LDK is at a good level to buy.
*The issue is nowhere near so simple as to say that 250 tons of silicon are no good and needs to be written off. Lai (the CFO) told Situ in the recording that Situ needed to do detailed data analysis on the situation, which is a perfectly reasonable order for the CFO to give, especially when he's just been told that the stock needs to be written off because it's too old (which makes no sense at all when talking about silicon).
You may be right to suggest that knowing "for sure" that there has been improper manipulation going on from Wall Street against LDK is a stretch, but if you've been watching this whole drama play out, then you should be able to recognize that it is not unreasonable to come to the conclusion that there is something fishy going on in terms of anti-LDK sentiment. Just look at the volume over this event, and you'll see that they were under very aggressive attack from somewhere, and then remember that this is all based on a single former employee (an employee who thought that it would make sense to go to the CFO and tell him that they needed to write off a large amount of stock because it was "over 180 days old."*)
So, Seeking Alpha is posting quite a few articles supportive of LDK. What's wrong with that? For one thing, they're probably getting hits, and if you're a capitalist you won't have a problem with that. For another thing, it seems to be the case that of the writing going on around LDK, the majority of non-mainstream sources are in the court of LDK. At the very least it seems quite reasonable to suggest that the current price properly reflects this accounting issue, and that LDK is at a good level to buy.
*The issue is nowhere near so simple as to say that 250 tons of silicon are no good and needs to be written off. Lai (the CFO) told Situ in the recording that Situ needed to do detailed data analysis on the situation, which is a perfectly reasonable order for the CFO to give, especially when he's just been told that the stock needs to be written off because it's too old (which makes no sense at all when talking about silicon).
If you disagree, you can either prove my facts are wrong, or prove my thinking is wrong, instead of asking “Where are these people coming from?” Does it matter if I am a college professor or a plumber? Does it matter if this is my first article or the 1000th? After looking at the data presented, people can use their brains to judge if my theory makes sense.
To prove LDK is a quality stock, it has to be another long article. But if you have done your homework researching it, you will know. Time will prove it too.
BTW, I did use all the available cash in my account and bought LDK shares several days ago, because I am convinced it has a bright future.
P.S. If you see a child being abused, will you report to the authority? That was what drove me to write this article.
I think people are slightly are slightly upset because some if not all of the articles written in the defense of LDK are obviously less than center.
To me, this is not passing the smell test. I've looked at what is available in the public domain and something doesn't add up. Why would Situ incur the wrath and risk his entire career for "some personal problem"? The way that LDK is handling their defense in this situation seems heavy handed -- like they have something to hide so they are bringing out the heavy guns to make sure nothing comes of it.
It is a routine profile of a C level executive to quit their position and leave the company upon unearthing material issues. There is no doubt many Enron people would have done just that knowing what they know today.
We know that Situ claimed that scrap should be written off that was over 180 days old, but this is ludicrous on its face. Age of the material has nothing to do with whether LDK's stockpile has value. Several possibilities exist, one of which, obviously, is that LDK plans to recycle presently unusable material back into silicon suitable for use in solar panels (they've said as much). Here is a link which lists several companies involved in the recycling of silicon ( www.enf.cn/magazine/is... ), and here's a link that describes the increasing value of silicon scrap material ( www.marketwatch.com/Ne... ). We know that recycling is technologically feasable, we just don't know the details and efficiencies as they pertain to LDK. We don't know this, and the mainstream media isn't asking the questions.
Example: If LDK buys scrap at, say, $150 / kg, they break even if they can recover material at around a 43% efficiency in a market where virgin material is now worth $350+ / kg. Of course, we're not just talking monetary value here. To a Solar Wafer Manufacturer, Silicon is everything, because they are busy adding value to it by converting it into wafers.
Now, we don't know the details, but it's certainly plausable that this stored material has a value to LDK greater than zero (as Situ would have it). It's already been mined for immediately useful Silicon, from which LDK is generating enormous profits, but it still contains high concentrations of Silicon. In fact, we know that LDK has been stocking this stuff up since the beginning, even when the price of scrap was much lower than it is today, and so any recycleable Silicon has actually increased in value since the original purchase.
One item of note is that though Mr. Peng, the CEO, may not be a Silicon expert, he has hired Nicola Sarno and Pietro Rossetto, two Italians with a combined experience of over 40 years at MEMC (Senior Vice President - Manufacturing and Plant Manager, and Chief Engineer respectively).
Another important note involves their planned polysilicon plant, for which the ground has been broken, and contracts have been signed with Fluor, Sunways, and GT Solar. All three of these companies are completely independent of LDK (two American, one German), and all three are highly respected. LDK is poised to be a leader not only in the efficient use of scrap silicon, but also in the production of virgin polysilicon, and it's not just that they are making claims, they have taken action toward this goal with credible partners.
As for Situ, you ask why would he incur the wrath and risk his entire career for "some personal problem"? Ok, fair enough; we don't know. I ask, however, why you don't believe every statement to the contrary from the company and even its customers (both LDK team and customers are international in scope). Situ is a single accountant who, when tasked with accounting properly for materials in a complex technological setting went to the CFO and told him that he had to write off their silicon because it was too old. Honestly, it sounds like Situ was incompetent. When Lai (the CFO) then told Situ to do "careful data analysis" Situ proceeded to leave town, get hidden, and start to send out private company data not only to authorities, regulators, and IPO insiders, but also to the financial press in what was certainly an attack on the company's stock price.
I don't think my comment is "less than center," so I'm going to take the following liberty.
In your comment you mention Enron. Well, I'd say that is less than center, so I'm going to indulge in a similar emotional reference.
John Galt.
"Who is John Galt" you ask?
Galt is an industrialist, of course.
The CEO of LDK appears to have the industrialist drive (see online.wsj.com/article... ). Ok, so he doesn't have a PR department, but he's got 3000+ people working their butts off to build a business that not only makes money, but provides a rapidly growing amount of product that is critical to the world economy; energy. He doesn't have to have a vast staff of salespeople to sell his products to hesitant buyers; he's got customers that come to LDK because they need what LDK has got to sell, and the price is right.
We'll see what happens in the end, of course. We're all betting on our own expected outcomes, and we'll win or lose depending on whether we're right or wrong.
x-posted for future reference to americansolareconomy.b.../
1)I think your position is certainly more balanced than others which is obviously welcome.
2) Your analysis of the Si valuation may be 100% correct. For sake of argument I will agree. Let's expand the conversation. The worldwide supply of solar grade Si will explode in 08-09. Everyone from MEMC to REC is massively increasing production. This in the face of several new technologies that will need less Si such as ESLRs String Ribbon and never mind thin like FSLRs. And then of course we are on the precipice of the new material science solar companies such as Konarka, Nanosolar and Miasole'. They promise massive quantities priced closer to $1/W using zero Si. Now lets throw in a possible worldwide slowing of growth and perhaps a US recession, maybe further reductions in subsidy such as Germany. Increased production with reduced demand -- we all know how that ends. And lets not forget the US housing debacle which has already crimped demand regardless of all the PR flying around. I know this has nothing to do with Situ and accounting irregularities but I'm highlighting it because as soon as those issues wash over, then LDK flies right into these other headwinds. This industry is dynamic like few others and there will be big winners and massive losers. It is a nonlinear event.
2) Solar contracts. The industry is very cavalier with their contract announcements. They are always used to move the stock price higher. The announcement of a $X00,000,000 contract is always eye opening and thought of as a positive. There should be much more scrutiny here. These contracts are many times as porous as the US border with Mexico. There are generally so many "outs" that your head will spin. Things like take or pay, narrow delivery dates, pre-sell contingency's, excess payment clauses and the list goes on. And no, these contracts are not like other industry regular contracts. Witness the unceremonious dumping of ESLR by MEMC which was of course -- under contract.
3) The Chinese track record. This is just to show that while many will come to defense of LDK proper, let's not forget this *is* a Chinese company. The Chinese have not shone well at all. Everything from lethal rogue genetically modified food introduced to the world, to dangerous toys to poisoning entire water supplies of large Russian cities. I'm not suggesting that this automatically incriminates LDK, but from a cultural and demonstrative track record of how business is done in that country, they will definitely be judged negatively first.
4) Enron. I'm not being emotional at all. I mention Enron because it was a company vigorously defended by shareholders as being attacked, It was a company accused of accounting irregularities, it was a company with C-level people being accusers and being accused. It is completely relevant unlike her mention of child abuse which was completely hyperbolic and off base.
There is much more at stake here than just LDK. The entire investment world was waiting to see how long it would be before a Chinese based US listed company, would be accused of fraud etc. The ramifications here are huge from the perspective of trust. The FBI simply can't walk into the HQ of a Chinese company with a subpoena. It's not going to happen. If this does turn out to be scandal (note I said IF) then the underwriters for future Chinese IPOs will either completely shy away or demand much more transparency which I don't think Chinese companies are willing to do.
2: We can expand the conversation as far as you'd like. I agree that there will be winners and losers. I also like the technology coming from thin-film companies like FSLR and ASTI, as well as the potential from companies like Nanosolar. However, Silicon should not be written off as done. Yes, there is tremendous growth in the supply of Silicon, and with it will come decreased margins from Silicon Manufacturers, but LDK stands ready to compete amongst the leaders even as the market evolves. Their niche is a powerful one, is fundamentally efficient, and is developing to a leadership-level scale. They are adding value to their Silicon by turning it into wafers and selling it to the Chinese Cell manufacturers. This is a powerful clientelle in the Solar industry, as they are primary suppliers of these products to Europe, and will have very significant marketshare on the growing US market. As it stands, FSLR and ASTI are nowhere near developing on the kind of scale that will be required to beat cheap chinese silicon-based panels on the World market in the near term.
As for American recession, the best thing we could do in this country would be to get on the alt-energy bandwagon, as these new industries will provide new jobs to replace those disappearing from other ailing industries. Access to energy is at the core of economic activity, and America stands to benefit or suffer greatly depending on its choices in future energy investment.
2?: You seem to want proof that there is some kind of conspiracy going after LDK, yet you seem to expect that it should be taken for granted that these chinese companies and their contracts are of no value as an indication of the future prospects of this company. A week or two ago TJ Rogers (of Cyprus Semiconductor) was on CNBC and when asked about the success of their "chip" (wafer) business due to solar, he made the claim that "Demand is Infinite." Demand is sky-high and there are no signs that it is letting up. As long as LDK's clients can continue to sell panels, you can bet that they won't be breaking any contracts that they have with LDK.
3: Yes, the Chinese are learning that the environmental impact of their industrialization has a real cost to their economy and industry. It's hard to make clean food when the fields and the water is poisoned. They will struggle with these problems over many years. On the other hand, Solar energy is an environmental plus over the long run, as well as a strategic asset, which explains why LDK is so well supported by that Government. It's laughable that you would try to compare the value of LDK with chinese food exporters which have recently undergone scandal. Should FSLR be made to suffer because both it and Enron are (were) American companies?
4: Enron was a heck of alot better at depriving people of energy, than they were at providing energy. They were scoundrels and cheats. Their collapse has nothing to do with LDK whatsoever.
Finally, you say "There is much more at stake here than just LDK. The entire investment world was waiting to see how long it would be before a Chinese based US listed company, would be accused of fraud etc," and I think that's a key point here.
They were waiting for scandal, and when it came, some hedgies jumped in with both feet. The scheme doesn't work if they aren't committed and disciplined. They sold like mad, and there was no uptick rule to keep them sane, and now they're stuck because LDK is a prize company out of China, and has powerful support (in addition to superior performance). All they have to do is to make sure that the laws and regulations are followed as written and the hedgies are going to have to back off and pay for their mistake.
The reasons I think that LDK has the best fundamentals and that 250MT discrepancy is not a big deal are:
· LKD is the largest manufacturer of multicrystalline solar wafer in Asia. LDK has the lowest P/E, highest EPS, etc etc (See Michael Shaffer’s comparison) and other financial data.
· Total Sales for LDK was 130 million dollars for the year ending 12/31/06, and it was 480 million dollars for the first 8 months in 2007 (Source Techcn website). Its new polysilicon plant is now under construction. When it is completed in 2009, it will produce at least 7,000 tons that year and has a capacity of 15,000 tons. Demand is strong for LDK’s cells, the company was sold out for 2007, and almost sold out for 2008 and 2009. With the evidence of increasing sales and the growth potential that lies ahead, how important is this 250 MT polysilicon? The stock price went up from $27 to $76 in 4 months. Would the stock behave differently if the inventory has been 750 MT? Would the inventory number change the sales and net income and investor’s enthusiasm? I don’t think so. How much consideration will an investor place on the inventory when he is deciding whether to buy LDK or not?. I believe the stock price dived not because how serious this 250MT polysilicon really is, but because the mainstream media was trying to convince the public that LDK was defrauding by intentionally inflating the inventory. At first, I thought: Nobody in his right mind would falsely accuse such a giant company if indeed the company did not do anything wrong. Therefore, the company MUST have done wrong. So I sold all my LDK stocks and lost 40% of my money and decided not to touch LDK ever again. But out of curiosity, I still followed the news from every possible source. The more I learned, the more I am convinced that IF Situ was right and that the inventory should have been 750MT, the company could not have done this intentionally, because I had to ask myself: How would the company benefit from this extra 250MT? And How much would it gain by running a fraud like this? An anonymous registered accountant said LDK was performing very well financially and it did not make sense that LDK would find the need to inflate its assets (Source Techcn).
· Michael Rogol, managing director of Photon Consulting, said silicon inventories is a complex issue and that LDK was very good at using silicon that other companies often can’t use. Rogol is a former Piper Jaffrey employee. (Source: greentechmedia).
· Solarfun and Canadian Solar Inc. (CSI) said their supply from LDK has been steady and as promised and that they agreed with LDK’s interpretation of the silicon material counting and that they did not find any reason to doubt LDK’s capability to supply wafers in the near future in a news report issued on 11/1/2007. I agree the management did not handle the situation well, however they were aware of this and said they would handle and clarify matters in a professional manner in the future.
· Apart from Nicola Sarno and Pietro Rossetto as mentioned by Ytterbius, LDK’s management team also include Xingxue Tong, who served as a former general manager for south-east Asia business development with GT Solar since 2004, Jack Lai, who served as the chief financial officer and vice president of Silicon Storage Technology, Inc., and many others with impressive resumes. It looks to me Mr. Peng has assembled a pretty good management team.
· Total investment by LDK has exceeded $760 Million by August 2007 (Techcn).
While all the positive comments from LDK’s customers and peers appeared rarely in the mainstream media, the inventory accusation was posted and reposted on many major financial websites. Before he started his solar enterprise, Mr. Peng together with another company from Suzhou were investing $50 million on an industrial park housing production lines for safety apparel including safety clothes, hats and gloves for export to European countries. It is beyond my comprehension that this should become a negative factor in Barron’s article. All in all, I feel LDK was treated unfairly, hence the analogy to the “child abuse” case.
to the tilt and am intended to hold for the next couple of years.
I am no Buffet but I do have a habit to buy when no one wants this stock after panic and mindless selling.
In all honesty, PJ ought to find competent analyst who knows what valuation yardsticks are. After all, its their reputation at stake.
Thanks Ellen for the fair and objective article.