LDK Solar: Not Worth the Risk

LDK Solar (LDK: NYSE) has finally been exonerated, sort of. But I still wouldn’t put my hard-earned dollars anywhere near it.

LDK Solar IPOd in June, and the stock went on a tear, more than doubling its $27 initial price in the next few months. The stock peaked at nearly $74 in September before an accounting scandal sent LDK back under $50.

A former employee told reporters that a large portion of the company’s inventory was actually junk, waste silicon that LDK had no way to process into new wafers.

LDK denied the accusation (at one point the solar cell company even made the claim that just because it couldn’t process the silicon right now, it didn’t mean it wouldn’t develop the technology in the future). And LDK brought in an external auditor to prove it was telling the truth.

As is usually the case in a Wall Street scandal, the actual truth is less important than a few soothing words and a nice soft-shoe to make investors feel better about the situation. And that’s what LDK gave us.

The external auditors swore the solar cell company had just as much silicon as it had claimed. And the stock soared on the news, without anyone mentioning whether or not LDK could do anything with that silicon.

LDK still hasn’t proved it can turn any of that waste silicon, which includes defunct wafers sold as garbage and ingots too impure to be processed by other solar cell producers. But maybe we weren’t supposed to notice that.

If LDK can’t use its recycled silicon, if that former employee was right, then the company’s only advantage is its cheap Chinese labor. Don’t get me wrong, we’ve built plenty of fortunes on a pure-play outsourcing deal.

But that cheap labor doesn’t make up for LDK’s lack of processing know-how. And it won’t prevent the company’s profit margins from continuing to fall as silicon prices grow at an alarming rate in the next few years.

Silicon is already incredibly expensive compared to prices even a few years ago. And solar cell and semiconductor manufacturers are already preparing for a probable shortage. Companies are setting up contracts for silicon years or even decades in advance, as if the stuff was… oil. And as technology puts computer chips in more and more devices in our everyday lives, don’t be surprised if silicone becomes as precious a commodity as oil.

In that environment, I don’t trust a new kid on the block with nothing to recommend it but inefficient business practices and penny-a-day labor.

If you want to grab some gains in the short term, go ahead and jump into LDK Solar, but be prepared to jump back out again within a few months or weeks. If you’re looking for a long-term investment, don’t put money into the stock. It’s not a durable competitor in the silicon wafer industry.

The Chinese government may be able to make LDK last with subsidies, bailouts and “strategic investment”. But that government has no incentive to promote the company, and it has shown no preference toward it so far.

I wouldn’t risk my money on LDK, not even if they paid me.

Disclosure: none

Comments

[canbj88]

What a crap. No facts, just her personal opinion without any scientific support or research to back the opinion. Compare this article to other Seeking Alpha articles on LDK. LDK is profitable, signed major contracts worth multi-billion dollars with major solar players like Q-Cell. These contracts speak louder than the bashing crap in this article.

[David White]

First there were two parts to the "bad polysilicone" statement by Mr. Situ (the ex-controller). First there is apparently some of the scrap that LDK has found thus far unusable. Apparently LDK has kept this in stock with a value which has not been publicly disclosed (that I know of). The thought is that LDK will be able to use this as feed stock for the polysilicone manufacturing plant it is currently building. It seems likely that it would be more pure and more usable that simple raw materials. Or perhaps they have some plan to simply blend it with larger amounts of highly pure polysilicone from their new plant. I am not even sure they have completely decided on their future course in this regard. The only real debate is about whether or not LDK can get the polysilicone plant up and running in the time frame they have cited. Mr. Peng has actually hired several top people to build the manufacturing team, including a top guy from MEMC. MEMC is one of the top polysilicone manufacturers. Mr. Peng (the CEO) has hired Fluor (a top infrastructure construction company) to build the plant. There seems little doubt that LDK will eventually be able to manufacture its own polysilicone (and do it well). The only real question is the time frame. I note LDK just announced they have contracted for all of the TCS they will need in 2008 for the smaller of the two polysilicone plants they are planning to build in the next year. Hence they are making progress on that front too. It looks to me as if the small plant will get done almost for sure in 2008. The second, larger plant timetable is probably harder to predict with certainty. However, LDK has given every indication thus far that they are executing their plan.
The second type of "bad polysilicone" was supposed to be "too old" "virgin polysilicone". Mr. Situ apparently jumped to the conclusion that a lot of LDK's polysilicone in stock was "bad" because he heard one of the manufacturing equipment vendors blame the polysilicone for the problems they had been having in manufacturing. This was a case of Mr. Situ not being very experienced in the nuances of manufacturing. LDK no doubt had the vendors experts in to help sort out the problems LDK was having in manufacturing. What typically happens in this case is that each side finger points at the other until the problems or problems is figured out. There could have been many causes for the problems: 1) vendors sometimes sell you lemons; 2) the new, inexperienced LDK workers were not operating the machinery to best effect; 3) there could have been environmental issues such as temperature and dust; 4) they could have encountered one bad lot of polysilicone (which doesn't necessarily have any bearing on other lots); or 5) LDK could have had a lot of bad "virgin polysilicone". The external audit seems to have ruled out this last possibility.
The only issue analysts are now compaining about is the process for using the TCS in the new polysilicone plants, specifically the larger plant. Apparently there will be more costs associated with TCS (more TCS needed and more TCS disposal issues and costs) if this is not recycled for further use. Apparently MEMC is able to do this. LDK has made no comment that I know of about exactly how they are going to address this problem. One thought which pops into mind is that LDK may be planning to skirt patent infringment on MEMC's designs in this area???? Or perhaps they simple have not completely decided how they are going to approach this issue. They may go for the brute force method to start in order to get the plant running quickly. Then they may, when the rest of the business is not waiting on their progress, try to address the issue of recycling the TCS.
The numbers on LDK are great. It gives every indication that it will be a hugely successful company. LDK seems to be executing their plan outstandingly. They simply have the normal growing pains of any startup. From what they have done so far, including their conduct in the recent inquiry, LDK has given every indication that the company is very worthy of long term investment.

[agosin]

That grimm Grimmet clearly has an agenda...

She wrote a bashing piece on LDK a while ago and I can see she copy/paste parts into this supposedly fresh opinion. Well, wombat...

[fxtrader07]

in short the author states: "I hate LDK, though i do not know anything about the company - and both is never going to change, come what may."

it's one of the growing numbers of absolutely useless and extremely poorly written articles on seekingalpha that is solely transporting a very biased opinion which is based on zero facts and zero research and investigation. the girl obviously didn't even remotely try to look into the matter.
if it weren't published on seeking alpha one would think it was just one of the myriad daily yahoo message board crap postings

[kkin365]

I think it would be better that SA editors have a contributor's bio together with his/her first piece. Having no position is only part of disclosure needed. Where does a contributor work? is relevant, in my view. Judging from 2 commentators re this contributor, we need to know more about her.

[carlivar]

How can you write an article about LDK and make no mention of the polysilicon factory they are building, or their massive deal with Q-Cells?

[paul b]

Not one of SA's more illuminating pieces. Maybe there should be some minimum standards. I've read better on message boards.

[pvb]

the lady should stay far away from material she does not understand

[maxbid]

I can't believe the editor let BS like this go through to publication.

And that seekingalpha acutally paid Stephanie Grimmett for writing this worthless crap!

Folks who approve shoddy journalism should at the very least have their pay docked.

[User 120523]

Didn't LDK has a contract with Fluor Corp for the new plant expansion? What you do mean no "technology know- how" ?

[oldnewbie]

A few more articles like this and Seeking Alpha can change it's name to The Seeking Enquirer.

Garbage!

[User 140926]

This is like the analysts that put a sell rating on LDK: I don't trust the company, I don't need to see their numbers, I don't think they can do what they say they will do, even though they have been doing it correctly so far. I don't trust it, sell!!!!

This is a case of ignoring fundamentals, only poor investors and analysts follow a company this way. Too many poor investors around making bad investments because they ignore fundamentals, exactly the reason for the subprime mess.

[crookOnDisplay]

Wow, what a piece of bitter and worthless trash! Sounds like a divorced wife who got nothing out of her ex.

"I wouldn’t risk my money on LDK, not even if they paid me."

Where was that coming from? I understood she has an agenda, but at least try to be tactic and disguise a little bit instead of just telling the world "I don't like LDK, I know I'm stupid but I don't care"

[tessant]

worst.story.ever.
cant believe this gets fed to yahoo finance.

scott w
growthportfolio.ning.c...
investment social network

[billx]

I am disappointed that Seeking Alpha has no oversight of an authors integrity or intellectual presence. Both are blatantly lacking in the above article. Its only purpose would appear to be stock manipulation because it provides negative sentiment but clearly does not inform the reader of any real or relevant facts. It also appears that the author lacks the concept of knowledge being a prerequisite to opening mouth.

Seeking Alpha, you have built a valuable reputation by publishing articles which are almost always rich in facts and follow through rationale. These have often exposed the fallacies propagated by the mainstream financial media. Please do not dilute your standards by allowing access to empty heads, egotists or liars that hide behind distortions of truth. This is happening at Motley Fool - do not let it happen to you.

[CharlesC]

What a disappointment with SA for publishing this article without any facts, only an imagined opinion. SA needs better quality articles to keep you reputation.

[EricSaeger]

No disclosure, you fat little shill? How's Exxon treating you?

[gnosis988]

Playing the old Barron's game -- rehashing an old artle. This was originally posted Jan. 4 on a different blog. Great responses the first time as well. See www.todaysfinancialnew.../

[yeggis55]

I don't understand what possible incentive you could have to write such ignorant information about something you seem to have very little knowledge of. Your information (seemingly more opinion driven information) seems only top level, superficial, and very bias. I noticed you also wrote similar comments at todaysfinancialnews.co... on January 4th about LDK. Did you put your money in when it was in the $70's and now you're ticked because you have to stay long? SA should do a bit better job in filtering out it's paid "writers" opinions.

[User 132432]

Stephanie Grimmett didn't even read the audit release carefully and doesn't even know the facts. The release said the various "defunct wafers" had been made into valid ingots and hence no inventory correction was necessary. Such armature reporting is a liability to Seeking Alpha site.

[Jason Bui]

Thank you for defending me! Even I couldn't have made up $hit this bad!

[PhiSai]

I would not read another article from this amateur author even if she pays me.

[tom_cntrn]

Also enjoy two sides of a story...but this side was embarrassingly non-factual and inaccurate. What a shame. It's not the fact that I disagree with the author's position, its more that the author's position is conjecture.

Very sorry and sad for this service.

[PhiSai]

It looks like no one appreciates your article. LDK has many big contracts that proves the company is trusted. Defend yourself with your proof. Lets see if you can come up with anything.

[VinceSanchez]

Why seekingalpha allowed to publish this article?
The comments,... they are great !

If you don't know about materials and this technology, go and try something else, but don't spend time and space on this type of unsupported articles.

[InvestLDK]

She lost all my respect and I will never read her blog again.