LDK Solar: A Bargain Too Good to Ignore?

As of Friday, LDK Solar (LDK) was still going down. But is it very close to the bottom? Certainly some solar stocks, such as First Solar (FSLR), are still trading at very high multiples. These are still down trending with the down trending market. LDK is following them. They likely have further to go, but does LDK?

LDK is now trading at 6 times 2009 earnings. Friday’s PEG listed on Yahoo is 0.12 for LDK. LDK's PEG may be even better with Friday’s stock price drop. The FPE for 2009 is based on an earnings estimate of $3.80 for LDK. The high estimate is actually $7.15. It appears the $3.80 figure can be reached almost solely by the manufacturing capacity doubling that LDK is planning for each of 2008 and 2009. LDK has already shown that it can accomplish this without any problems. LDK has long term contracts. LDK has already sold all of its 2008 production and most of its 2009 production at fixed prices. LDK cannot be easily hurt by a recession in the next 2 years. The only real variable is the price of polysilicone. LDK has contracted for most of the polysilicone it will use in 2008. The earnings figures for 2008 are almost guaranteed at this point. The only real question is LDK’s polysilicone costs for 2009.

LDK is currently building a polysilicone manufacturing plant. Fluor is the contractor, so there is no question of it being substandard. LDK has hired top level people from such companies as MEMC Electronic Materials (WFR) to oversee all of this and to hire and train the people necessary to run the plant. In short, LDK has acquired good experts. It seems likely these people will eventually produce a great polysilicone manufacturing facility for LDK. The only question then becomes when. LDK currently says by the end of this year. Jesse Pichel says not until the end of 2009. Who is correct? It is really hard to say.

Mr. Pichel has made some good points. However, he has underestimated Mr. Peng’s will power and drive. He has written off Mr. Peng as a young upstart who is full of air. Thus far Mr. Peng has proven to be anything but full of air. Further after all the negative news of the fall, you would think LDK would be conservative in estimates that so clearly will effect near term future earnings. Yet LDK is still predicting completion of the polysilicone plant by the end of 2008.

LDK handily beat Q4 earnings and revenue estimates. LDK beat analysts’ estimates for gross margin also. LDK raised Q1 2008 guidance. However, LDK did not raise full year 2008 guidance. Since LDK has already sold all of their 2008 production, one might think LDK is a little worried about how much the polysilicone needed for 2008 production, but not yet contracted for, will cost them. LDK is sensibly restraining itself from making any predictions it is not sure it can back up. Why would anyone think that LDK would act differently with regard to the polysilicone plant completion predictions? The answer is that LDK probably would not.

This may mean that LDK will meet or come close to meeting its schedule for the polysilicone plant. If LDK does this, the earnings for 2009 will likely be close to the high estimate of $7.15. That would mean that LDK is trading closer to 3-4 times 2009 earnings today; and it is a 100% grower. LDK would be able to show gross margins of 40-50% with a functioning polysilicone plant in 2009. This margin figure would be competitive with FSLR’s, which is currently trading at approximately 39 times 2009 earnings. Would you rather buy a company showing the same gross margins (40-50%) which costs 6 to 13 times less based on 2009 earnings results? Or would you rather pay for a brand name. Some people would rather pay for the brand name.

However, I tend to think value stocks will perform better in a recessionary market. This could be the best buying opportunity for LDK that we will see. It is hard to believe it will go much lower. Even Mr. Pichel thinks the polysilicone plant will be done by the end of 2009. LDK’s long term picture looks extremely rosy.

Still, there is the negative press LDK keeps getting. Let’s examine that. First there is the allegation that LDK is cooking its books, especially with regard to inventory. LDK was cleared of this allegation in the fall, by a top 4 U.S. accounting firm that was commissioned for the primary purpose of establishing LDK’s guilt or innocence of this particular charge. It is virtually impossible to believe that the accounting firm did not fully investigate this allegation. LDK may still be skirting the bounds of legal accounting, but apparently it is acceptable GAAP accounting. Second, there is the innuendo that LDK must be cooking their books to achieve as high a margin as they did using the same equipment as YGE. Soon after this allegation, we saw Trina Solar (TSL) improve their margins year over year by about 10% supposedly through greater efficiencies. This also put TSL in the same gross margin ballpark as LDK (27% to 30% respectively). Why could LDK not be more efficient than Yingli Green Energy (YGE)? Perhaps YGE was just more of an analysts’ darling, and the analysts needed to save face. Certainly YGE has no polysilicone plant planned, so it cannot make use of some of its bad scrap polysilicone. It must buy better scrap, which is more costly. It must throw away any it deems too bad to use. LDK can just keep all of this to be used as raw material for its polysilicone plant. In this way LDK will save the raw material costs; and LDK is able to buy lower cost and mixed quality scrap. LDK knows it does not have to throw scrap away.

The comment about wires, etc. in the polysilicone scrap was found disturbing by many. However, if this will end up being raw material for the polysilicone plant, does that really matter? Mineral raw materials rarely if ever are supplied completely pure. If the polysilicone was, there would be no need for the polysilicone plant. To me, this all looks like LDK has a good business plan; and LDK is executing it. The fact that YGE cannot do this is not a mark against LDK; it is a mark in LDK’s favor. Further LDK, like a successful U.S. company – WFR, has substantial long term contracts. It can easily weather a short term recession. Many other companies cannot say the same thing. Other companies may see their sales diminish noticeably during hard times. LDK will not see this. It will remain a top performer. It is a good stock pick for a recession. The market will recognize this eventually. The stock will then shoot up. It should be a good stock to own.

Disclosure: Author has a long position in LDK

Comments

[canbj88]

This is a very good analysis of LDK. Those who predict LDK will go to "single digit" or even to "zero" are grossly underestimating what LDK's Peng can achieve. Looks like for LDK, it's either you believe it and thus it is worth $100+ or you think it is an "Enron" and should be a zero. Based on what I have read, LDK would appear to be a winner in the long run especially with all the support from the local city, provincial and central (NDRC approved it's PolySilicon Plant as a national priority project) government's support. I chose to be long LDK and look to 2009 when the plant will be producing before I would seriously think of selling.

[asd]

"LDK is now trading at 6 times 2009 earnings. "

I think "projected earnings" would be a better way to put it. As we all should know by now, the LDK management are professional liars:

www.pv-tech.org/editor...

[mwd1492]

With regard to building the poly production plant as per LDK statement - Timminco (TIM-TSX) has completed such a plant within a year from ground breaking and have started an expansion to triple production. This expansion is sechuled for completion in mid 2009. Since a Canadian company can achieve such goals - why not China?

[nikeita]

Hakan already well replied to false article reported by asd.
CAPACITY is different from PRODUCING. Do not joke with words.
Who is the lairs?

[ibcnu2day69]

thank you Mr. David White for pointing out the obvious. one item to note is: Why would Customers such as Q-CELLS, Hyundai, Neo Solar Power, & Sun Tech Power (STP) sign LONG-TERM supply agreements (most are 10 years) with LDK if those customers felt that LDK could not meet its production capacity/guidance?

and in response to "asd" - who said that LDK are "liars" - i am disappointed that some people and especially Mark Osborne of PV Tech can not distinguish the difference between "production capacity" and "factory utilization rates" (amount of wafers produced)...

here is the link to LDK's latest slide presentation for March 2008 (hopefully the pictures can show people the difference between production capacity and amount of wafers produced each year)

media.corporate-ir.net...

also note that on page 12 that LDK has successfully produced 180 micron thickness wafers in trial production while 200 micron thickness wafers are presently being mass-produced. (cost savings potential of 10%)

as you stated in your article that YGE has to throw its bad poly away... do you know if LDK has been buying poly from the other solars such as YGE?... thus the recent quarterly increase in LDK's inventory levels... if that is the case then it sounds like LDK is hedging its 2008 poly costs to a minimum in light of ever-increasing spot prices for poly silicon.

[User 162108]

The problem here is not if LDK is a good company or not, the problem here is the huge manipulation, mainly by the naked shorts. I would invest again in this company if that problem is addressed.

I think that LDK is cheap now, but there is a lot of cheap companies now. This is the beginning of a Bear market, don't forget that.

So far only 200 billion dollars have been underwritten, that is only a third of the 600 billion dollars that should be underwritten. My source is Bloomberg and my own statistical data.

I expect another 30 % drop in market prices. I will buy in 12 or 18 months.


Sorry for my poor English (it is my 3rd language).

[kenj100]

For those who do DD and examine the fundamentals of LDK, they would understand the tremendous value that LDK provides at such a cheap stock price. When you buy into LDK you are buying into a company that has a strong potential to be the world leader in PV silicon wafer manufacturing. This is also driven by a man who already built a successful company and has recognition in China as the number 1 CEO in 2007. How many companies of that stature can one buy for $22 a share. It is foolish to scuttle around the bush to suggest that LDK is anything less.

[asd]

White doesn't seem to take into consideration the ramp-up timeframe, which is 2-3 quarters. So even if the plant could be completed in Q4 2008 (not at all likely), the "6 times 2009 earnings" would still be way too optimistic.

[tessant]

ldk has been so manipulated. the numbers right now are redic low.

i have posted a bunch of ldk and other solar equity reports on my site if anyone is interested.
growthportfolio.ning.o...

-scott

[gebby]

goldman sachs went neutral on ldk when the stock was 30

[RGAnstey]

asd I am curious as to what your position is in LDK? Have you done the research to realize that you misread production versus capacity and that you also misunderstood that 6 times 2009 earnings (which is currently 22.5/6= 3.75 eps. Since without inhouse polyproduction they have net margins of 25% and they have almost 2 billion(approx. 1GW) in revenue already sold for 2009.... hmmm can you do the math for me it seems difficult.... 500 million divided by.... 110 million shares.... man you are right asd this is way to hard... SELL (hint 4.54 eps 2009 YE) oh wait nevermind they actually are trading at 4.95 p/e 2009, buy?

[DZ]

this is interesting. i am chinese. when i read the news from china about LDK solar, it is a very different story. those guys have given a evaluation like ldk is a "professional liars" should learn chinese, than you will know what a liar you are because you know nothing about LDK solar.

[asd]

"Since without inhouse polyproduction they have net margins of 25% and they have almost 2 billion(approx. 1GW) in revenue already sold for 2009.... hmmm can you do the math for me"

You fail to mention that polysilicon prices have risen 10% so far this year along with the biggest commodity-boom seen in decades. 25% margins won't be sustainable in 2009.

[canbj88]

Ten years from now, LDK would be profitably growing to become the world's largest solar wafer supplier. It's shares would have been split several times. Buying LDK today at below IPO price would be similar to buying Dell Computers in 1990 for less than 5 cents (split adjusted and below IPO price of 9 cents in 1988). That's how believers in Peng feels like. At 32, he has created an employer of choice for Xinyu city and Jianxi province. The world's largest solar players are lining up at it's door resulting in sales backlog in the billions of USD and 2008 sales conservatively guided to be about $1 billion (all sales contracts and most raw material supplies contracts are sealed, just add labor, electricity, technological process and management efforts) with at least $200 million in net income. This is more visibility than Dell had in the early days. Do your own DD and let me know if my comparison if off.

[David White]

asd: I think LDK has already taken your comments into account in their earnings estimates. Ditto the analysts. The $7.15 EPS figure is actually the really optimistic figure. The $3.75 EPS figure actually takes into account some of your concerns. Also LDK still insists that they can complete the large polysilicone plant in 2008. LDK has cited 2 examples of companies that have built one in less than 1 year. Admittedly it is still a big undertaking. Hence there is risk involved.

[Coolday]

This may put a dent in everthing. biz.yahoo.com/ap/08031...
If this happens all bets are off