LDK Solar Earnings and the Dark Cloud of Polysilicon Shortages

I can best sum up the LDK Solar (LDK) earnings review with the comment that the shortages of polysilicon continue to act as a dark cloud overhead. While the company beat solidly on both revenue and earnings this quarter, gross margins continue to degrade - down to 27.7% from last quarter's 30.1% [Feb 25: LDK Solar Reports Solid Numbers] - and much worse than the year ago period which was in the high 30%s. This continues to be an issue for the space. Even worse is guidance for 2008 which now is guidance for 23-28% gross margins (this is down from a 26-31% gross margin guidance for the full year given less than 90 days ago). As polysilicon prices stay stubbornly high, the drag on profit margins for these companies continues.

Essentially with lower gross margins, you need a much higher revenue number, just to stay "flat" to where you would have been with higher margins. So incremental revenue gains over previous projections simply get washed out by lower margins. At *some point* polysilicon prices will drop and we should see margins stabilize/expand, but we've been saying that for a few quarters now, and the target continues to get pushed out into the future.

Frankly, if I could trade after hours, I would have been out on the initial spike to $38, but since I cannot do that in the Marketocracy.com account, I have to see how the stock reacts tomorrow and then re-assess after thinking it through tonight. This is not of a situation of a lack of growth, but the associated profits with said growth continue to be curtailed - much farther out than originally anticipated. This is not a LDK specific issue and all the players on the polysilicon side of solar are facing the same issues - some can offset it with other efficiencies or scale, but it's a drag on profits for all of them. So I suppose the story now is margins will improve..... in 2009.

• Net sales for the first quarter of fiscal 2008 were $233.4 million, up 21.1% from $192.8 million for the fourth quarter of fiscal 2007, and up 218.0% year-over-year from $73.4 million for the first quarter of fiscal 2007.
• Gross profit for the first quarter of fiscal 2008 was $64.6 million, up 11.2% from $58.0 million for the fourth quarter of fiscal 2007, and up 127.5% year-over-year from $28.4 million for the first quarter of fiscal 2007. Gross profit margin for the first quarter of fiscal 2008 was 27.7% compared with 30.1% in the fourth quarter of fiscal 2007 and 38.7% in the first quarter of fiscal 2007.
• Net income for the first quarter of fiscal 2008 was $49.8 million, or $0.45 per diluted ADS, compared to net income of $49.2 million, or $0.44 per diluted ADS for the fourth quarter of fiscal 2007.

Guidance

• "Regarding our polysilicon plant project, the construction remains on track for completion based on our previously announced schedule. With the recent funding we secured, in addition to our other financial resources, such as advances from customers, LDK is well positioned to pursue its aggressive growth strategy," concluded Mr. Peng.
• For the second quarter of fiscal 2008, LDK Solar estimates its revenue to be in the range of $278 million to $288 million with wafer shipments between 136 MW to 146 MW.
• LDK Solar also revised its outlook for the full year of fiscal 2008: Revenue to be in the range of $1.08 billion to $1.18 billion; Gross margin in the range of 23% to 28%

Disclosure: Long LDK Solar in fund; no personal position

Comments

[stockbull:]

mark!! Are you really long or short?? i wonder, why no mention of ldk having best margins in the solar industry!!!

2008 May 12 09:13 PM

[ezetrader:]

LDK is the only solar company that will have control of future costs. Their poly plant, which will be the largest in the world, is due to begin production this year. LDK is expecting margins of 42% to over 50% when their poly plant is running, with the lowest operating costs for poly production in the world. The current high poly pricing only makes LDK's poly plant investment even more valuable since other solar companies are much further behind.

No matter what happens to the price of poly, LDK will be in the best position by having their own poly plant with low operating costs. They also have a huge investment in silicon inventory which will keep their costs stable for the next 2 quarters. Per the CC they have over 90% of their silicon needs on hand or under contract.

2008 May 12 09:35 PM

[ccerenzie:]

LDK has more than doubled it's sales and capacity over the past year. Stop and consider that for a moment. In the next nine months they will double again assuming everything goes as committed. In 09, the company will DOUBLE AGAIN. By the end of 09, their sales and capacity will be FOUR times what it is today. Sales and capacity will be more than EIGHT times what it was in Q1 07 by EOY 09....
This rapid increase in scale has to have some inefficiencies associated with it. For these analysts/writers to somehow imply or expect this hyper growth rate to occur without flaws in efficiency and margin is beyond my comprehension. Being from a manufacturing company and trained in Lean Management philosophies, it's difficult for me to imagine how the management can address every detail effectively and keep the projects coming in on time.
This company and the other solars are going to have hiccups. Its a virtual certainty. To sell LDK when it has so much going for it, including RAMPING PROFITS, is unthinkable for the investor. Think about it...we could be looking at Q1 10 profits of $1.76. Perhaps more if things go better than expected. It's only the trader that would consider selling now when the very real potential of quadrupling profits are potentially less than two years away....There is risk as to whether they pull it off, but even if LDK ONLY doubles capacity between now and the end of 09, that's an incredible story/company.

I've read the various articles published by Barron's and others, and I say "Thank you" to all of them for giving me the opportunity to buy the stock at artificially lower prices. And to you Trader Mark, "Thank you" as well. I'll be buying more while the lemmings take their walk over the next couple of days
Good luck to all.

2008 May 12 09:39 PM

[carlivar:]

Like the previous comments, I don't get it. Why so focused on current margins? They are irrelevant! LDK obviously recognized the margin problem long ago which is why decided to make their own polysilicon!

Am I just so out-of-touch with today's investors that only seem to be able to see one or two quarters ahead?

2008 May 12 10:25 PM

[JAD9000:]

I find it pretty interesting that there is such an overwhelming need to discount the positives on LDK and accentuate the negatives. We all know that their margins will be vaulting by yearend as their internal poly production comes online - lowering their poly costs by a staggering amount. In the interim, they need to build their production and sales pipeline - which they are doing with great success. And, they have managed to also grow their earnings at a substantial clip even with high spot prices for poly. They will also throw off $35-50 million more in cash this year than prior estimates, reducing need for additional borrowing. As the market supposedly looks out 9-12 months, a moron could see that LDK will be a cash machine by this time next year and should see valuations based on this. Exactly who in this this business has a better story, a better margin and a better future?

2008 May 13 01:24 AM

[Jack Yetiv:]

Let me answer some of the above questions:

1) Why only look out a couple of quarters?

Because the farther out you "look," the less you can actually "see" because it becomes more and more speculative.

2) Great margins by the end of 2008?

Don't know where you get that. LDK guided to 23-28% for 2008.

3) LDK has highest margins in the business?

I would doubt that will be true in 2008, but even if true, LDK is at a PE of about 17, which is a premium to TSL and CSIQ, which will grow just as fast (maybe faster) in 2008.

4) Produce poly in 2008?

According to what I know, not in any meaningful quantities in 2008.

5) Poly plant a great thing?

Maybe. Depends on how cheap LDK produces poly versus market price. When TSL cancelled their poly plant, their stock went up about 20% that day. Obviously, the market didn't think much of TSL's plans to produce poly. Of course, LDK will be producing poly much sooner, which is a plus, but I'm still not so sure poly production in 2009 or 2010 will be such a great thing.

Jack

2008 May 13 02:39 AM

[larsson:]

People, we all know that TSL will alway have the highes GM's in the sector due to best vertical integration.

LDK is about double valued compared to the P/E of TSL (based on 4-5 EPS 2008), so why waste time with a risky investment like LDK, which is so much depedent on the Poly Plant?

Smart money enters TSL.

2008 May 13 03:02 AM

[EnergyFinan...:]

If you are interested in LDK Solar and poly silicon investments, you might be interested in meeting the LDK Solar CEO Xiaofeng Peng at the Renewable Energy Finance Forum-Wall Street ( reffwallstreet.com ), June 18-19 in NYC. He'll be joining the executives of First Solar, Applied Materials, SunPower, Acciona, Abengoa Solar, and BrightSource Energy -- along with 30 other executives from other renewable technologies. Specifically, LDK Solar's CEO will discuss the growth of Solar PV.

2008 May 13 11:03 AM

[jaytrade:]

question for Jack Yetiv's comments :

You said LDK has higher PE compared to TSL and CSIQ !
From Yahoo Finance I see that LDK has lower figures than TSL and CSIQ in both forward and trailing PE; and the 5yr PEG is less than half of both !!
Also are you long or short on LDK ?

2008 May 13 12:25 PM

[gebby:]

to jack, there is nothing more speculative going out past 2 quarters. much of your response is based on typical brokerge analysts measuring. these analysts tell you to sell on low and buy when the coast is clear and the stock price is much higher. not just in ldk but in all stocks. this is why ldk is and investment. not a trade.

2008 May 13 12:53 PM

[carlivar:]

I would agree that LDK is heavy on speculation except for one thing: all the long-term contracts they've signed. If you do the math on these contracts they are going to print money as long as the factory works. I see no reason why it won't (and I almost want to hear short-term negatives about it so I can buy more).

2008 May 13 07:10 PM

[larsson:]

Jay!

Forget about yahoo estimations!

Latest estimations on TSL show a 4-5 EPS in 2008 and a 8-10 EPS in 2009. Now compare this to LDK!

Jack is totally right, and after yesterday's gain, Canadian is not as cheap as TSL again. So again, leave the high risk investment of LDK and look for something safe and cheap - TSL

2008 May 14 03:07 AM

[larsson:]

Furthermore, TSL will reach GM of 37% at Q4 2008, compare this to LDK please ;-)

2008 May 14 05:46 AM