Update on LDK Solar, Applied Materials Thin Film Deal

Hakan Telenius co-wrote this article.

Since our last report from the PV conference in Munich, LDK Solar (LDK) has completed a financing of $400 million of convertible debt, $200 million of which is to be used for buyback of shares. The upcoming Q1 conference call will provide an opportunity for LDK to provide additional details around this deal.

In the meantime, we need to share with you two pieces of news; one on the recently announced Applied Materials (AMAT) thin-film deal; and the other on our envisioned polyplant technical due diligence review.

Applied Materials Deal

In an SEC 8-K filing on March 4, Applied Materials revealed it signed a contract with a non-US firm to supply equipment, install and warranty multiple solar factories using its SunFab thin film tandem junction production equipment. The combined output from the fabs will reach 1 GW, and the total contract value is $1.9 billion. To put this in perspective, First Solar (FSLR) aims to achieve 435MW capacity by the end of 2008.

There has been much speculation that LDK is involved in this deal; however, this is not the case and has been confirmed by LDK. Xiaofeng Peng, the founder and CEO of LDK has set up another independent company called Best Solar and it is this company which has signed the deal with Applied Materials. Best Solar aims to begin operations by the end of this year. Mr. Peng has so far arranged the financing (we estimate it to be over 1 billion dollars) for the new venture which, by all accounts, aims to rival First Solar as the world's largest supplier of thin-film solar modules. We gather that the current plan is for Best Solar to do an IPO in one or two years.

We obtained this information through independent means. When asked about these developments, LDK has not had any comment other than to restate that they – the company – are not involved.

This news has several implications.

• First, Mr. Peng is reinforcing the impression we have of his ability to strike bold deals and launch large companies – a true entrepreneur – and that he is committed to building a strong solar industry in China. Being very much in charge of LDK – and with the majority of his personal wealth residing in this company – we can expect more deals.
• There is a concern about bandwidth and distraction, of course, and this is something that will need to be explored going forward.
• In addition, for shareholders in LDK, more speculative implications are how this new venture may become positioned around LDK, and possibilities for interactions.
  • There is a lack of silane (Sih4) on the world market (this is the material from which amorphous silicon is made; that is, the feedstock). Very large quantities are required to supply up to 1 GW of production. Currently, much of potential silane production is diverted towards polysilicon manufacturing, which has obviously been in demand of late.
  • It is conceivable that LDK could expand its TCS plant at some point in order to supply silane for the new venture: this would provide LDK with a ready client for such material, and a diversified revenue stream, and solve the feedstock problem for Best Solar. (It should be noted, however, that world production of silane is also being ramped up.)
  • There is an interesting precedent on the solar market, where Globe Specialty Metals, an LSE-listed company, allowed managers to start a private company in the UMG Silicon space, SolSil, which raised private capital and removed some risks, before merging with Globe. It is not uncommon for public companies to undertake risky but strategic initiatives off their balance sheets.
  • As Mr. Peng is, in all likelihood, the majority shareholder in the new venture, he is able to drive and control a future deal between the two companies. However, actually merging the two is not something that we foresee in the near-term and might go against the terms of the non-competition deal LDK has with Suntech (STP). (And, of course, LDK has made similar commitments to many of its customers, not to be entering their businesses.)

Polysilicon Plant Review

We are also reporting that the previously announced initiative, to send a technical team to LDK and evaluate the polysilicon plant construction and resources, did not meet with the company's approval. The proposed project, which was to be funded by LDK shareholders, had multiple mechanisms to ensure that no confidential information would be released to any shareholder, and we were committed to release the information widely, to avoid the possibility of selective disclosure of such key information.

We believe that this type of research is essential for current and potential shareholders' ability to evaluate the outlook for 2009 - given the available data from other sources - but respect the company's decision. (It should be noted that our request was one that few public companies would allow shareholders to undertake. Customers and partners routinely conduct due diligence studies, but their findings are of course not made available.) It is worth reminding that the very fact that customers (including QCells and Hyundai) have contracted over 1 GW of wafer production from LDK in 2009 is suggestive of a good testimony in this regard.

Disclosure: Authors hold long positions in LDK

Comments

[ezetrader]

Thank you Mr. Peng for avoiding the wrath of Wall Street that seems to punish companies like LDK that have bold plans. Look at what is happening with construction of the world's largest poly plant. LDK shares are being held down by questionable analysts that cast doubts about LDK's ability to execute, even though Peng has build a great company that is one of the world's top solar companies. The analyst like to upgrade other solar stocks such as TSL for cancelling expansion plans. WS hates risk, but I personally like to back smart people with a bold vision. Look at the LDK customer list and billions of long term contracts. They are all backing Peng and LDK with real dollars.

Imagine what WS would be saying if LDK was taking on the thin film plant. The stock price would get killed in the short term. Thank you Mr Peng for keeping most of the risks away from LDK shareholders by keeping the new thin film plant a private company. If he had done that with the poly expansion LDK shares would be much much higher today.

I am long LDK.

[fxtrader07]

well, things would be drmatically different if FSLR were a chinese company, too. for dure they never had trades above 100, lest 300$/share.
Or if ldk were an american. then it might have seen $100/share long ago. The bias among analysts and money managers is simply breathtaking there. I mean, never mind that enron or worldcom weren't very u.s. american companies....

[fxtrader07]

sorry - lots of typos in my previous comment as i was typing in a hurry...

well, things would be dramatically different if FSLR were a chinese company, too. for sure they never had traded above 100, let alone 300$/share.
Or if ldk were an American company. then it might have seen $100/share long ago. The bias among analysts and money managers is simply breathtaking here. I mean, never mind that enron or worldcom were very u.s. american companies....

[gebby]

fslr just earned .56 for the quarter. stp which is also enter thin film earned .46 last quarter. i have to buy stp. i am long also ldk. asti, sol,
eslr, csiq,

[annyone]

Conor is this a good opportunity to short LDK. Where are the facts? LDK said it has nothing to do with best solar. Given that Peng has nearly 70% stake in LDK, I doubt there would be any lack of effort on his part.
I wish you gathered more information (not speculations) about Peng's stake in best solar before writing anything.

[harvesthesun]

In the name of good old American protectionism, my bet for the future is on USA and bets that the new administration chases oil substitutes aggressively. Therefore, eslr's thin ribbon, and stp's pluto. Fslr is still #1, but at close to $300/share will be hard to squeeze exponential yields. Also, dfe in Canada because they have a track record CEO (John MacDonald of MacDonald-Detwiler).

[EnergyFinancier]

You may be interested that both LDK Solar and Applied Materials' executives will be presenting at the Renewable Energy Finance Forum-Wall Street (www.reffwallstreet.com), June 18-19, 2008 in NYC.

[bigbet888]

Best Solar is funded by SuZhou municipal government, Peng and a few wealthy individuals in China. It is targeted at utility solar power. The thin-film produced with Applied Materials technology is not suitable for roof-top application (as it requires very large surface space). If you read Chinese, you can find quite a quite info on the web about this venture.

[Doublechin]

Conor Shaw was shorting LDK and pretending to be long. This double chinned turncoat should be sued.

The "investor group" is a fraudulent group.

When you screw with people's money expect consequences.

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