LDK Solar: Just The Facts, Jack

When some analysts say "jump!", speculators and investors alike tend to ask "how deep?"

But you don't have to. Partially because you can be more objective than some of the analysts who provide the ratings, either 'Sell" or "Strong Buy". According to BusinessWeek, Piper Jaffray (who issued a "sell" on LDK Solar (LDK), has provided investment banking services for LDK within the past 12 months and makes a market in its securities. Needham (reaffirmed a "Strong Buy") expects to receive compensation for investment banking services from LDK within the next three months. So what are the facts that you and I should keep in mind?

Yes, the gross margin will be lower in 2008 some where around 25% to 30% due to higher polysilicon ("PS") cost. However, LDK has secured 75% of all the supply needs via fixed quantity, fixed price contracts, or about 3300 tons. The PS market is tight, but the price won't have too much impact on the overall cost of the PS for LDK. 10% increase for the remaining 25% supply will result in a 2.5% drop on gross margin. But cost reduction in manufacturing can improve the margin by about 1% to 1.5%. Then, if on schedule, beginning in 2009 the company's own 7000 tons PS production (costing $70 to $80 per kg) will kick in, which can significantly reduce the PS cost which accounts for about 80% of the total. The PS market price LDK has been paying for has been $130 to $150 per kg. It is reasonable to estimate that LDK will enjoy a 10% cost reduction on PS, which is assumed to be the gross margin of the PS producers.

But higher PS price draws new entrance to the industry, such as MEMC Electronic Materials (WFR), which is to produce in the neighborhood of 18,000 tons. One thing for sure is that PS price fluctuates, like all commodities. All said and done, the margin in 2008 may not be any big surprise either way.

Loss due to dollar to RMB currency exchange is also overplayed. LDK lost about $2 million; compared to third-quarter profit of $41.6 million, it is not significant. Expect $2.5 for the next quarter.

In conclusion, I believe this round of selling provides a good opportunity to get some shares of a company growing at about 50% to 100% in the next a few years, trading at about less than 20 times 2009 estimated earnings. Don't let the analysts command your money.

Disclosure: Author has a long position in LDK

Comments

[carlivar:]

LDK is my biggest holding. The wild swings make me feel like I'm in Vegas, but long-term there's no question it's a screaming buy right now. Indeed the analysts have some sort of agenda against LDK.

2007 Dec 21 10:43 AM

[stock.marke...:]

1) "gross margin will be lower in 2008 some where around 25% to 30% due to higher polysilicon ("PS") cost"
2) "The PS market is tight, but the price won't have too much impact on the overall cost of the PS for LDK."
Will you make up your mind Michael Yu?

Apparently this has a lot of impact on the stock price! This inverted the growth direction, that is, it started decreasing instead of increasing. This is a huge problem for "hot" stocks like this one.

And what about Needham's comment? "expects to receive compensation for investment banking services from LDK within the next three months." I would love to know from where do they get this time frame?
If they bought it now, yeah maybe, but if they bougth it at 70... I'm not that sure.

It seems this stock will underperform in the short term (3-6 months) and may underperform in the long term. Because during this 3-6 months other companies are establishing positions and developing new technologies (it seems LDK strength comes from cheap labor, not tech), as well as new companies appearing like Nanosolar (which BTW, will rule solar power).

Ohh... BTW, I got really burned with LDK this thursday... 50% of my portfolio... That's what I deserve for not doing my homework.
I still haven't sold but... I don't think I will endure much more pain.

2007 Dec 22 03:00 PM

[stock.marke...:]

About my comment "it seems LDK strength comes from cheap labor, not tech", check this one:
www.fool.com/investing...

And please fell free to present facts showing that I'm wrong and when will LDK rise again from the dead (how many months?).

2007 Dec 22 03:16 PM

[SolarGuru:]

These so-called "analysts" have never run a business. Don't be surprised when they often issue "sell" recommendations despite predicting higher profits. It's to allow the "big boys" to buy at better prices. If you listen to LDK's earnings call, you will note that it was THEIR staff that predicted lower margins. They were forthright and honest. The next day, the so-called "analysts", instead of celebrating and rewarding healthy growth, focused exclusively on declining margins. Well, if my company could net $1 million this years on 30% margins and $1.5 next year on 25% margins, I think I'd be pretty happy. I've made a lot of money on LDK. I sold at $74 and bought in heavily (including options) at $50. The stock will see $60 in less than 2 months. Wait till they announce 4th qtr earnings. I've bet against these "analysts" (especially Cheryl Tang of Goldman) every time. I've doubled my portfolio since August. LDK has reached bottom and its climb back up will be spectacular. It's not Vegas. It's a solid investment in a company with exceptinally low PE's, contracts in hand, and healthy growth ahead.

2007 Dec 22 06:18 PM

[stockguru:]

Piper Jaffray Agrees to Settle Charges on Ratings of Stocks
Published: December 31, 2002
The investment firm U.S. Bancorp Piper Jaffray, said today that it had agreed to pay $25 million and to change the way it does business to settle charges that it provided biased stock ratings.

Piper Jaffray said it had agreed in principle with federal and state regulators to resolve its part of an industrywide investigation into accusations that 12 firms misled investors by inflating stock ratings to help them investment banking business.

The case drew widespread attention when regulators uncovered e-mail messages at some firms in which analysts privately derided stocks they were recommending to the public.

Piper Jaffray and another investment banker, Thomas Weisel Partners, had held out while 10 others -- including Citigroup; Goldman, Sachs; and Credit Suisse First Boston -- agreed to pay $1.44 billion in a settlement on Dec. 20 with the New York State attorney general's office, which handled the negotiations. In addition to $900 million in fines, the firms will also pay $450 million over five years for independent research and $85 million for a nationwide investor education program.

In agreeing to the fines, the firms neither admitted nor denied that they had misled investors.

Piper Jaffray and Thomas Weisel had raised objections to the settlement and continued negotiations.

Besides the $25 million in fines, Piper Jaffray, which is based in Minneapolis, agreed to pay $1.5 million annually for five years. The firm said it had also agreed to make ''structural changes'' relating to its research and investment banking program, but it did not detail the changes.

Andrew S. Duff, the chief executive of Piper Jaffray, said in a statement: ''Since this process began, our regulators and we have shared the goals of reinforcing equity research independence, bringing about progressive changes to various industry practices and restoring confidence in the capital markets system. We believe this settlement will accomplish these goals.''

A Piper Jaffray spokeswoman, Erin Freeman, declined to comment further. The New York attorney general's office also did not immediately comment.

2007 Dec 22 06:48 PM

[stockguru:]

Securities and Exchange Commission
Litigation Release No. 18113 / April 28, 2003

The Securities and Exchange Commission announced today that it has settled charges against Goldman, Sachs & Co.

As part of the settlement, Goldman Sachs has agreed to pay $25 million as disgorgement and an additional $25 million in penalties.

In addition, Goldman Sachs will pay, over five years, $50 million to provide the firm's clients with independent research, and $10 million to be used for investor education.

Specifically, the Commission's Complaint alleges that:

1) Goldman Sachs compensated its analysts based at least in part upon their participation in the firm's investment banking-related activities.

2) Goldman Sachs "aligned" its research, equities, and investment banking divisions to work collaboratively in order to fully leverage its limited research resources.

3) Goldman Sachs analysts participated in investment banking marketing efforts, including working with investment bankers to prepare "pitch" materials and in some cases attending the pitch meetings.

4) In several instances, these conflicts resulted in analysts publishing recommendations that were exaggerated or unwarranted.

5) Goldman Sachs failed to establish and maintain adequate policies, systems, and procedures reasonably designed to ensure the objectivity of its published research.

2007 Dec 22 07:06 PM

[SolarGuru:]

Thank you StockGuru. I'm not sure whether you agree with me or whether you assume that things have changed and these firms have cleaned up their act. While some analysts' motivation may be somewhat sinister, I believe that most of them simply don't understand simple business fundamentals. That is, if LDK had returned 37 cents a share on somewhat lower gross sales, everybody would have been euphoric. But because it took a little extra work and they had to generate more sales to achieve this spectacular growth, their stock was penalized by almost 30 points. Common sense disctates that if you continue to generate more sales and ever greater net income and, in addition, you are taking long-term steps to lower margins, you deserve for people to invest in your company. This exchange has motivated me to increase my stake. Thank you!

2007 Dec 22 07:35 PM

[SolarGuru:]

The above should have said raise margins instead of lower margins. Sorry...

2007 Dec 22 07:55 PM

[LightSource:]

StockGuru's analysis hits the point right on.

I believe the dive from 70 to 45 is related, and only related, to Dec options open interest. Think of it in another way, retail investors, thinking (rightfully) that they have more information than the instititions, bought call options en-mass at hight prices, for December betting that LDK would be around 70 by Dec. 21. This creates strong incentive for the call writers to drive the price to the maximum pain price and pocket the money. The option writers (MMs) seem to know less about the foundamentals of LDK, and they know that they do not need to know the foundamentals. What they need to know, and have shown so in multiple occasions, is that they can control the price. With that, they can and will make the most $ out of retail investors.

Last Friday's closing price landed precisely at 45.14 as a show of power. They do not need to show it to us as we all know that they are in control. Who are they communicating the message to? ... other instititions.

So, what can we do?

1. Do not play with options, period. If none of us bought options, there would be no incentive to drive the price to 45.

2. Do not use margins.

2007 Dec 23 08:08 AM

[Jack S.:]

Well, that depends when you use options. I bought it at $26 and sold half of them at each of the 3 gap ups.

2008 Mar 13 03:05 PM