LDK, A Dying Solar Giant
LDK Co. Solar Ltd (LDK), one of the largest manufacturers of solar wafers, fell by 6% yesterday, as the Chinese solar wafer company missed analyst earnings expectations. The company posted 1Q2012 revenue of $200 million compared to analyst expectations of $225 million, according to Reuters. High production costs and falling poly-silicon prices are gravely affecting solar companies' earnings industry wide.
We reported in our June 18, 2012 Solar Industry review that low production costs, a strong balance sheet, and a global distribution network are the key metrics to analyze solar companies. Based on these metrics, LDK does not come out as a winner.
The company has one of the highest poly-silicon production costs of $41/kg, compared to the current industry spot price of $22.63, according to Bloomberg. Also, LDK's balance sheet is weakening as the company's short term debt ballooned to $2.25 billion in 1Q2012, compared to $2.1 billion a year ago. On top of that, the company is planning to issue a new long term loan of $890 million in order to payoff its short term debt. Taking long term debts to payoff short term debts signifies the company's inability to finance debt payments from internally generated funds. The company's cash reserves have been halved in a year, from $244 million in 1Q2011 to $135 million in 1Q2012. The dwindling cash position and an inability to generate earnings can undermine the company's ability to seek additional funds from debt markets on favorable rates, and put additional pressure on cash reserves in the form of higher debt repayments.
Owing to an unfavorable industry outlook and high operational costs, the company has forecasted revenues of $220-$270 million for 2Q2012, way below than analysts' estimations of more than $300 million, Reuters reported.
The global Solar Industry is booming as PV installations in the U.S. grew by 85% YOY in 1Q2012, and Japan announced subsidies on solar installations, which will attract more than $9.6 billion in solar installations. Only Chinese companies having wide distribution networks, strong balance sheets, and low production costs are expected to outperform their peers in the long term.
Therefore, we expect LDK to underperform its peers because of its high poly-silicon production costs, weakening balance sheet, and rising debt repayment costs. The company's shares fell by 5.94% yesterday, after the company announced dismal operating results that were below analyst expectations.
CSIQ : We are, however, bullish on Canadian Solar Inc. (CSIQ) because of its lowest crystalline silicon production costs in the industry, and higher cell efficiency levels than First Solar Inc (FSLR). LDK's future outlook for the revenues signifies that the solar industry will remain under pressure due to the declining ASPs and weak balance sheets of the solar companies. The worst is still not priced in the solar stocks and we recommend investors to short sell FSLR against the long position in CSIQ.
Have a look at our previous analysis of the solar industry: "How To Play A Turnaround In Solar."
Investors can also shortsell the Solar ETF (TAN).