Thoughts on LDK Solar's Preliminary '08 and '09 Guidance

LDK Solar (LDK) is out this morning with preliminary guidance for 2008 and 2009. As mentioned repeatedly in the blog, margin pressure will be an issue for the entire sector, but at this point all investors seem to care about is revenue growth. With that said, by putting some firm numbers out, instead of analysts speculation, this helps give us a more firm outlook on the company.

However, I still find the 2009 margin guidance to be aggressive (analysts are in same boat as me, with assumption of sub 30% for 2009), but I would not complain if gross margins would show such an increase by that year. My working assumption is LDK Solar can get back to mid 30's by 2009 as the benefits of the polysilicon plant slowly accrue, but anything over that is just icing on the cake.

As for 2008, a 5% gross margin variance is still huge, but if 26% is indeed the floor (with 31% being the ceiling) that at least puts a downside parameter in the numbers and in theory avoids fears of gross margins falling down below 25%.

2008 Financial Outlook:
* Revenue: Between $960 million and $1 billion.
* Wafer shipments: Between 510 MW to 530 MW
* Polysilicon production: 100 metric tons to 350 metric tons
* Gross margin: Between 26% to 31%

2009 Preliminary Business Outlook:
* Wafer shipments: 1,050 MW to 1,150 MW
* Polysilicon Production: 5,000 metric tons to 7,000 metric tons
* Gross margin: Between 42% to 50%

Again, even a 40% gross margin in 2009 would mean a massive explosion in profitability - this would be due to the polysilicon plant LDK is breaking ground on being operational and cutting out a lot of cost. With a very aggressive timetable, and the pitfalls that always befall a company breaking into a new business, we shall see how it plays out, but as always any news (even bad) is better than uncertainty on the Street.

Some old analyst reaction with typical boo hoo from the Goldman analyst:

• LDK Solar Co. said Wednesday it expects profit margins to remain under pressure over the next two years, though its outlook topped Wall Street expectations. The solar-wafer maker expects margins between 26 percent and 31 percent in 2008 and between 42 percent and 50 percent in 2009. Analysts polled by Thomson Financial forecast gross margins of 25 percent for 2008 and 28 percent for 2009, on average.
• LDK's third-quarter profit margins fell to 30.8 percent from 35.2 percent in the second quarter, because of higher costs for polysilicon. Prices for the solar product component have surged amid increased demand. Some analysts and investors were disappointed in the results and expected profits to continue to be strained in coming quarters.
• "We believe the Street may have a higher expectation for LDK's margin retention capability and that potential consensus earning downgrades could trigger profit-taking in the stock," Goldman Sachs analyst Cheryl Tang said in a note to investors last month. She has a "Sell" rating on LDK.

Needless to say, the revenue growth is there and it is priced into the stock. Until polysilicon pricing falls back to more sensible levels (as more supply comes online, especially from Chinese producers) over the coming 18+ months, these companies will still struggle with margins across the board, but the next 6 quarters should identify the real winners in the group. And I don't mean stock winners, as speculators seem to run up the 'cheapest' (i.e. most risky) - but I mean the real business winners.

EDIT 10:10 AM: I sold about 10% of my LDK Solar position into this 6-7% spike, relieving some of the shares I bought around $45, north of $50. At this point LDK Solar is marking time - we want to see a nice uptrend through $53+ before we know the investors are jumping back on the bandwagon. Until then LDK Solar is probably in a relatively tight trading range of $45-$51. This reduces my exposure from 4.1% of fund to 3.7%.

Disclosure: Long LDK Solar in fund and in personal account.