Why LDK Beats First Solar

Solar stocks have been zooming, but can it continue? What's going to be good in the future and what's not?

First Solar (FSLR) had a terrific 2007. From around $30 at the beginning of 2007, it has risen about 8-fold to its current $240 and this is down off its high. Many think it will be added to the NASDAQ 100 this month. This likely means that many money managers will buy FSLR in the short term. But what about the long term?

FSLR uses tellurium as one of the critical materials in its solar panels. As FSLR doubles, triples, or quadruples in size, it also multiplies the amount of tellurium it uses. Figures I have seen say that FLSR will use 135 tons of tellurium per GW of solar manufactured (see Mark Anthony's article). There is at least one other solar company currently using CdTe technology. It will also want to grow. The global yearly supply of tellurium is only about 200 tons, perhaps a little more. Stretch this to 400 tons, and you are still in trouble. Additionally the tech sector may have found another desirable use for tellurium in memory for computers. This could by itself use all of the tellurium supply. Where will the tellurium come from?

One thing is certain: the tellurium will become increasingly more expensive and increasingly harder to get. It seems almost certain that FSLR will not be able to grow at a rate that can sustain its hefty multiple (FPE=120, PEG=3.89 according to Yahoo yesterday), much less lower it. FSLR can currently manufacture CdTe solar for much less than polysilicone solar, but will that last? It looks like CdTe costs should rise while polysilicone solar cost should fall. Further CdTe solar isn't even as efficient as polysilicone solar (16.5% solar energy conversion efficiency compared to 22% efficiency), and its performance degrades more quickly over time. If a company with limited roof space is thinking long term, they should decide to pay more for the more efficient solar, knowing they will make up the difference in price over the long haul.

What these companies are paying for roof space should also be viewed as a real cost of solar. This is not acknowledged in most solar cost figures I have seen. If you can't install enough solar for your needs because you are using inefficient solar, you are losing money each day that you would not be losing with the more efficient solar. If CdTe becomes more expensive, no one will want it.

A better bet than FSLR might be a standard polyilicone solar, LDK Solar (LDK), with much better fundamental numbers (FPE=24, PEG=.46 on Yahoo today). This company has been hurt recently by a questionably stable employee and yellow journalism. Its price is a relative bargain compared to the other solars. This company will face the same problems that the other polysilicone solars will face in 2008. There is currently a shortage of polysilicone, and there is likely a coming surplus of solar supply by year end. LDK should perform better than most solars versus each of these problems. LDK has already contracted for most of the polysilicone it will use in 2008, so it will not get overly hurt by the higher than expected cost of polsysilicone in 2008. LDK is currently building its own polysilicone plant. It should have a cheaper source of polysilicone stock by 2009. LDK has long term contracts. It should be able to ride out much of the solar industry oversupply problem that will present itself in 2009 and 2010. LDK is growing quickly, with no real roadblocks in its way.

LDK recently released guidance for both 2008 and 2009. The 2009 guidance indicated that LDK should have an FPE of 6 to 10 based on yesterday's stock price and 2009 earnings. Keep in mind that the production has already been sold. LDK just has to execute its plan to make it for approximately the costs it has envisioned. Mr. Peng (the CEO) has shown he can get his companies to do this. For a predicted 75% annual grower over the next 5 years, this is a bargain basement price for a stock. When LDK reports earnings for Q4 2007, 2009 will officially become next year's earnings. The stock will then trade based heavily on next year's earnings. It should go up! If you're in FSLR, I'd consider moving to a company like LDK. Even if there is an economic downturn in the next year or two, LDK has already sold its production for 2008 and 2009. It should not get hurt. LDK already has reasonable multiples. LDK doesn't need to sell off to make them more reasonable. FSLR, by comparison, has stratospheric multiples. If there is a an economic downturn, those numbers will look even worse than they do now.

Disclosure: Author has a long position in LDK

Comments

[User 137279:]

FSLR mgt is NOT DUMB. They have stock piled Tellerium for the last couple years and have plenty and are sourcing everyday. LDK is shady and not trust worthy. More importantly, their polysilicon plant will not produce enough poly in the near term to make a big impact on costs and in fact, costs associated with ramping and debottelnecking will likely outweight any near term benefits. It will take them 2 years before they perfect the process (TCS gas - a poly input - is very hard to make, is very dangerous and requires a lot of expertise). They will have higher costs than that of WFR and will by the time they get the plant online, they will not be able to enjoy the current lofty prices as other producers will already have begun production as well and margins will likely get marginalized. Plus, the current poly market has risen from the lofty first half 2007 prices of ~$350/kg to around or even over $400/kg in the second half of 2007 and into 08. This will squeeze LDK's 4Q margins, and likely 08 margins as well as no new capacity is slated to come online until at least mid 08 (likely having a minimal impact on prices as ALL of it is already accounted for in long term contracts --- something many neglect to mention in their oversupply cries). FSLR has a defensible position in that its proprietary "Copy Smart" production process allows for rapid expansion to meet the needs of UTILITIES (NOT small sized roofs as implied above) in a rapid deployment fashion. Hey pal...what happened to your Cadmium complaints?? That point is misteriously missing from this report.

2008 Jan 08 09:03 AM

[SEEKING ALP...:]

Your editors are all bashing FSLR with the same bull crap story. A supplier has already confirmed that there is more than enough to meet their needs and those of any competition. Who else would write such a paper except one who is long LDK.

2008 Jan 08 09:10 AM

[Neither bul...:]

Tellurium offers firm up in China

BEIJING (Metal-Pages) 7-Jan-08. Levels for tellurium ingot have been firming up in the last week on the back of tight domestic supply against relatively strong demand.

Chinese market participants reported to Metal-Pages today that quotations for 4N tellurium ingot are currently hovering at around Rmb1,150-1,180/kg (US$159-163/kg), representing an increase of about Rmb100/kg compared to values seen towards the end of last month.

A Guangdong- based supplier confirmed the price increase. "Right now we are offering Rmb1,180/kg for the minor metal, while the recent contractual values are ranging at around Rmb1,100-1,150/kg," said an executive of the southern supplier.

While some sources also reported that as prices for the ingot are expected to move up further in the coming weeks, some suppliers are still inclined to hold their stocks right now instead of selling. "As a consequence, recent domestic feed has been tighter," said a Shanghai-based broker.

In the meantime, another broker from Shanghai also claimed that recent values for the 4N metal have been lingering at around Rmb1,150/kg, but some higher quotations of around Rmb1,200/kg have been visible on the current market.

2008 Jan 08 09:16 AM

[SolarGuru:]

In the immediate future FSLR might still be overpriced (very high PE's AND PEG's). But in the long term, both FSLR and LDK (not to mention STP, TSL, JA Solar, ASTI, ESLR, HOKU, ASTI...) will reward investors handsomely. As for FSLR and LDK, it's not either or. And none of the raw materials needed for solar energy is in short supply. What's especially attractive about the solar sector is that even a company that fails to keep up with its competitors will, in a worst case scenario, simply become a takeover candidate.

2008 Jan 08 12:53 PM

[GH:]

"David White" is either an alias for Mark Anthony, or a clone. Same ill-researched or made-up numbers, same unsupportable innuendo. "Questionably stable employee" ?? Questioned by whom, except LDK shorts? Are you *trying* to get Seeking Alpha sued?

What you clowns don't get is that the rest of the people who write misleading, manipulative market commentary are GOOD AT IT. They know how to make it sound convincing. Your stuff just sounds like you're getting paid by the word.

2008 Jan 08 01:04 PM

[Micky:]

Bad press and yellow journalism? Have you ever seen the company's cash flow in a filing? I am still looking. Why do they give such periodic updates of their prospects? I just counted they do it every two weeks and it generates a brief pop. How do they propose to expand margins the way they claim in their guidance? Sorry, I pass.

2008 Jan 08 01:31 PM

[SolarGuru:]

I admit that I am not as bullish about LDK as I am about some of the other solar stocks I own. However, I fail to understand all the vitriol. There seems to be a bunch of LDK haters who are really passionate about their dislike of the company. I have followed LDK for quite a while. I've listened to their earnings calls. I am aware of the accusations. I am trying to be objective. Are their numbers not some of the best in the industry? Is the company not growing at a healthy pace? Are their P/E's and PEG's not lower by far than the other players? Does the company not have contracts in hand that assure sustained growth? Is it really that unthinkable that their silicon plant will be up and running within a year or two, leading to greatly improved margins? I admit that I am long on LDK. But I am long on some 11 or 12 other solar stocks. Why the passionate hate for LDK specifically? Thanks!

2008 Jan 08 02:03 PM

[alpha24seven:]

Because you referenced Mark Anthony and his never ending (and completely wrong) "unobtanium Jihad" -- I quit reading.

Try again.

2008 Jan 08 02:53 PM

[kkin365:]

Responsible posters do not refer to others in the field (perhaps with professional credentials such as being employed by Barron's) as doing "yellow journalism." Try to be civil if you want people to read your posts.

2008 Jan 08 03:59 PM

[rizzo:]

Referring to it as "polysilicone" doesn't make you sound all too smart. Perhaps you wrote this while watching the boob tube...

2008 Jan 08 04:36 PM

[tootse:]

To the earlier poster who brought up LDK's polysilicon price for 2008: They have already contracted 75% of the raw material for 2008, based on what they mentioned in their conference call.

To the other poster who does not believe the future margins: LDK's polysilicon plant is slated to come online in the latter half of 2008. The increasing raw material cost is the biggest detriment to the margins, which will be addressed by in-house production(vertical integration), thereby increasing the margins.

2008 Jan 08 05:17 PM

[Mark Anthony:]

Neither Bull Nor Bear:

Thanks for the quotation of that tellurium price news from China. It pleases me to know how much I am making in my tellurium investment, although I do not feel the need to check out latest tellurium price myself.

Could you post the URL where you get that information?

The tellurium shortage situation is actually much worse than I realized when I first wrote the tellurium article. 5N Plus Inc., the dorminant CdTe supplier to FSLR, now goes public and you can check out its prospectus. On page 26 it claims the need to expand annual capacity to 350 metric tons of CdTe, and possible even further double from that level, in order to satisfy the demand from FSLR and from other CdTe solar panel makers.

That's a lot of consumption of tellurium. I do not know where they can find enough tellurium to produce 350 metric tons of CdTe per year. So expect tellurium price to run up to crazy levels. I have invested in physical tellurium ingots and will continue to buy more.

Over the course of 2007, the price of tellurium has doubled. I should have studied tellurium and bought at the beginning of 2007.

I do not have an opinion of LDK's current valuation. But as a silicon company, LDK surely has a great growth potential in the future as long as the management execute strategic decisions right. Good luck with your LDK investment, folks!

2008 Jan 08 05:38 PM

[jaytrade:]

I am sorry to say that I feel if LDK were an US company, it's stock would have performed much better. I feel that a lot of US analysts, including some, whom I really admire, show a negative bias against Chinese stocks. And this kind of negative psychology, supported by a couple of "blown out of proportions" issues have created unfair turbulence around the stock price.
I myself would like to see some protectionist measures to support our ailing industries here, but not this way. I hate to see our big boys here selling out our industrial manufacturing muscle to foreign countries, in the name of globalization, and for huge profits for only a handful, while most of the country suffers.
But LDK is a US exchange listed stock, where thousands of US citizens make investments, and deserve fair treatments; and it seems to me that it probably has one of the best fundamentals. It should soar !!!

2008 Jan 09 12:57 AM

[Neither bul...:]

www.metal-pages.com/lo...

METAL-PAGES is a subscription based site. However they do allow for a 7 day free trial.

2008 Jan 09 03:41 PM

[User 138100:]

wow I read this same article 2 months ago and look where fslr is now. whoops

aaplcentral.com

2008 Jan 10 03:32 AM

[matts12345:]

Silicone is what you put in your wife's chest, silicoN (or polysilicon) is what you make functional materials out of.

There is no question any form of silicon is more abundant than Tellurium. Silicon comes from sand (SiO2) and is one of the must abundant elements on the planet. Tellurium is a toxic heavy metal with much much lower natural abundance. However, what was the supply of microchip-grade silicon in 1970, pre-semiconductor industry as we know it today? Tellurium is rare and will become more expensive, but we will likely find enough to produce CdTe solar cells from it.

The key is waste: if a company that uses thin-film technology such as Nanosolar can come along and effectively use almost all of the silicon it buys, then they are going to do things the cheapest. Toxicity in CVD-process gases is not an issue: can you name a major industrial process that does not use toxic liquids or gases?

2008 Jan 11 05:34 PM

[smokey:]

Hello to all.

There is some good give-and-take here, and I enjoy the exchange, even if sometimes it seems to get into the so-called "callous" zone at times.

But for myself, "zooming out" and looking at the whole solar (and alternative in general) picture, I think the main problem in this country is the huge disproportionate subsidy to the oil/coal/nuclear industry. Europe is way ahead of us, and the gap is widening.

If subsidies for the oil/coal/nuke industries were eliminated, as many democrats want (and Ron Paul, who doesn't believe in subsidies for anyone), the field of alternative energy would not only expand, but more importantly, stabilize as well. Stability is more important in the long term than quick growth and glory stocks. Dividends become important rather than quick profit.

(To get a picture of the disproportionate nature of our current subsidy policy, out of 200 billion dollars last year in subsidies that went to the entire "energy sector," less than one half of one percent of that went for wind power in this country. Further, I'd bet a lot that this amount was also probably an all time historical high for wind)

And that is the whole point of sustainable energy anyway. With true sustainability, you don't have to worry endlessly about whether a particular stock is going to beat another stock, or whether a particular form of alternative energy production (like wind) is going to beat another form (like solar) -- and so on. The ultimate point is to be sustainable -- and that should make the idea of quick and/or huge profits somewhat moot, as well as any one source being the dominant one. In a world of truly cleaner, more stable energy production, there is less worry, less rancor, and even less need for profit (at least in any excessive way). With less military spending for oil etc., there is less national debt, and less worry about money in the long term. Likewise, exploiting wind and solar and waves, the only worry is keeping the mechanical infrastructure from breaking down. With less money into maintenance, you have ultimately cheaper energy, and thus less need for money anyway.

Being free from the endless "rat race" is the biggest "profit" I can think of, where you don't have to worry about what the next big energy stock is going to be. We need all of the various technologies, including solar thermal.

For those more into the reason for alternative energy, and not just the financial picture, I would recommend the new Scientific American issue, whose cover story recommends a huge investment in solar power and storing excess energy as compressed air. (For myself, I would be just as bullish on wind and waves et. al, however).

2008 Jan 15 01:33 PM