Sunrise or Sunset for LDK Solar?

LDK Solar (LDK) has been down significantly since their latest quarterly report, even though their numbers supersede the street estimation. Is it going to be sunrise or sunset for the future of LDK?

Big picture

Renewable energy, such as solar power, is projected to have a bright future due to high oil prices, environment concerns and improved solar technology. LDK is in the silicon based solar energy business. In order to produce solar modules that converts sunlight into electricity, the whole product process looks like this:

Silicon --> Ingots, wafers --> solar cell & modules

LDK is currently positioned at the second stage to produce wafers and sell them to cell and modular manufactures.

Although there is no question about the demand of their product, concerns have been raised on lowered margin, inventory accounting, and the new polysilicon production plant. It appears to me that all these concerns all fall under a single issue: uncertainty of silicon supply.

Lowered margin

The lowered margin is due to the rising price of silicon. However, the rising price also indicates the rising demand on silicon based solar cells and modules, which provides the fundamental support to silicon based solar energy companies.

Inventory accounting

It appears that LDK divides inventory into two groups. One is the inventory that will be used within 1 year, and the other is inventory that will be used in more than 1 year. This raises the question whether this is a way to hide a big pile of unusable inventory, and therefore a possible shortage of silicon, which means the high cost of silicon supply. Driven by the high price of silicon supply, more and more companies, include LDK itself, are working on processes to increase silicon supply. With known booked product, LDK knows how much silicon they need for 2008. It also make sense to have two groups of inventory to reflect the possible price reduction of silicon supply in the near future. A related question was asked by an analyst during the conference call why LDK's customers would bring their own ignots to LDK. This question in a way hinted that LDK has trouble securing enough silicon supply. Is that the case?

We also provide wafering services to both monocrystalline and multicrystalline solar cell and module manufactures, which provide us their own ingots to be sliced. We charge a fee based on the number of wafers to be sliced.

Source: LDK website

Many companies in Asia are doing business in two ways: one is to have product of their own brand name, the other is to OEM, or "if you want something, bring the materials, I will make it for you" kind of business model. In the OEM scenario, LDK is not affected by the rising price of silcon supply at all. It helps LDK to reduce the risk on both ends: to buy supply and to sell the product. This works in the same way as VISA and MasterCard process transactions without worrying about the loans associated with the credit card.

Polysilicon production plant

LDK is also building a polysilicon production plant that will produce 6,000 metric tons in the fourth quarter of 2008. This will reduce the cost of their 2009 silicon supply, which relates to the question why they divide inventory into two groups.

The sunshine

Given the high demand of their product, the secured silicon supply for 2008 product output, and the potantial reduced cost of silicon supply from their own polysilicon production plant, the question remains: why is the stock price down?

Comments

[User 157073:]

Becuase it is not the stock market bell of the ball like FSLR

2008 Mar 04 08:32 AM

[User 157073:]

most large stock brokerages are beating this stock up just as much as the can if FSLR or STP posted gains like LDK they would most certainly have jumped 10% or more in one day

2008 Mar 04 08:35 AM

[User 157073:]

Check out institutional owners some very respected names seem to think this stock is worth owning

2008 Mar 04 08:36 AM

[stvcomment:]

uncertainty caused by some anal ists who shoot first and figure things out later

2008 Mar 04 09:24 AM

[SolarGuru:]

We should thank these anal-lists for driving the price down. It allows the rest of us to accumulate this stock for the long run. Take a look at LDK's future P/E. No one else is even close. Just keep buying. It's just a matter of time before the "big boys" jump on board.

2008 Mar 04 11:25 AM

[hellofriend:]

There are some rules preventing the fund managers involving the LDK. For example, even though they know LDK has some good future, but since the stock has fallen below 50MA, even 200 MA, they can't touch it. Also, there are some uncertainties they don't like, such as the poly project and future poly price. Also, they know some hedge funds are shorting LDK, they don't want to show down with the hedge funds. They know the stock has the potential going up to $100, or $200. So they don't really care buying at $25, $35, $40. They can even buy at $50 and still get very big profit when everything settles. So, now it is VERY good opportunity for the retail investor to buying in at this "low" price. One thing, you need to hedge the possible down trend, buying some long term PUTS to protect your buy.

2008 Mar 05 05:39 AM

[User 160013:]

Uncertainity exists in all markets today...it is a good stock to hold.The current price is a great one to buy.

2008 Mar 11 02:45 PM