LDK Solar Worth $23B?

Am I nuts? I don’t think so.

Did LDK Solar (LDK) pay me to write this? For sure not.

The estimate in my title is based on a DCF model, pure and simple. For those in need of a refresh (as I do, always), DCF stands for Discounted Cash Flow model, commonly used by pros on Wall Street.

As assumptions are the foundation of all models, financial, economical, or engineering, so too, the conclusion can only be as good as the assumptions. Here are my set of assumptions, needless to say, simplified to fit my simple mind. Hopefully I can receive insightful feedback (read: corrections) from those of you who are generous enough.

1. Revenue grows at 80%, 60%, 40%, and 25% after starting year 2009 through 2018. LDK can’t grow at 100% year after year, but it won’t slow dramatically given its aggressive growth strategy. Assuming the unit price is flat (nonconservative, maybe?), the rate for 2009 is 2.0 GW/1.1 GW = 81%. The rest is simply guesswork - and your guess is as good as mine. But do correct me if you have data or facts.
2. Net income remains the same starting 2019 to infinity (throw in the discount rate and the present value calculated is not much different from 30 years, so don’t argue with me on that.)
3. Gross margins are assumed to be 23% in 2008, and 20% thereafter. This is conservative, in my humble opinion, since first, 20% is 300 basis point below the lower end of the 2008 range, and second, the polysilicon price may stabilize and even fall while the waffle price may also remain stable due to the fact that the contracts are mostly long term.
4. Beta is 1.62, calculated using weekly price data compared to SP 500.
5. Risk free rate 3.8% (using 10-year Treasury rate) and market risk premium is 4%. Combined with 1.62 beta, the discount rate is 10.3%.
6. Tax rate fixed at 25%, with the unified corporate income tax for both domestic and foreign companies, under the Corporate Income Tax Law in China, effective January 1 2008.

I don’t know why the first quarter tax rate is 12.5%, but who cares? Just one quarter thing and I am conservative.

Sounds unbelievable, huh? It represents a margin of safety of 5! Graham would love it! You can change the assumption and get a value of the company that fits your judgment and reasoning. And don’t forget to share with me back.

Disclosure: none

Comments

[Ranjit Thomas:]

Well, you've got to discount free cash flow, not net income. And free cash flow is hugely negative right now. What it will be in the future is anyone's guess, but I suspect it will be significantly less than what you think it will be.

2008 May 13 08:23 AM

[jaytrade:]

I have been studying LDK for a while from the sidelines. Though it has not been popular with Wall St., I think from factors like customer base, cheap labor, materials, and other intangibles, we are probably looking at the most dominant solar company of future in its sector .

2008 May 13 10:15 AM

[BlueDome:]

Unit price will drop significantly, as in any industry when
production ramps up, where there is lots of competition.

2008 May 13 10:28 AM

[burton:]

You forgot the impact of the polysilicon factories on the margins, which will rise higher than 40% by the end of 2009.
But yes, LDK is extremely undervalued.

2008 May 13 10:33 AM

[EnergyFinan...:]

If you like LDK Solar, you might be interested in meeting their CEO Xiaofeng Peng at the Renewable Energy Finance Forum-Wall Street (www.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 11:01 AM

[fxtrader07:]

@FalseProfit: well, LDK ain't not building polysilicone plants year after year. So projecting current capex (and hence, cash flow) into the future is outright flawed.
As a matter of fact, LDk is unloved by Wallstreet for a reason. And i suspect that reason is Wallstreet's love affair with FSLR. They tend to move in opposite direction which makes perfect sense because in the long run, if LDK were sucessful it would virtually annihilate FSLR. FSLR has the inferior product and despite claims to the contrary, the product cannot compete in price with silicone modules. Efficiency is below silicone and each and every of FSLR's modules will have to be recycled at FSLR's expense (due to the highly toxic attributes of cadmium-telluride). So the moment silicone matches somewhat the prices of FSLR's thin-film technology, FSLR will go downhill and ultimately cease to exist. AS LDK is one of the few companies which really have the resources and the potential to seriously accomplish that, it is no wonder certain circles go out of their way to fight the company. ITIS NO COINCIDENCE THAT NAKED SHORTS' LACAI BILL ALPERT BASHED THE COMPANY WITH FALSE ALLEGATIONS JUST HOURS BEFORE A VIGILANT SHORT ATTACK HIT BY OCT 3rd, 2007. IT IS NO COINCIDENCE EITHER THAT THE WSJ FOR WEEKS AND WEEKS PUBLISHED ONLY NEGATIVE VIEWS AND NEWS AND COMPLETELY IGNORED POSITIVE ONES; INCLDUING THE COMPANY' STATEMENTS. IT IS NO COINCIDENCE THAT J: PICHEL FROM PIPER JAFFRAY CONTINUES TO BASH THE COMPANY EVEN THOUGH HE IS SHORT FACTS AND VERY LONG BIAS. His latest analysis: despite of all the facts pointing to the opposite, despite the company's updates mr Pichel "BELIEVES" that the company will NOT be able to construct its polysilicone plant as scheduled. NOW, that is objective research, not?
this will be a long and hard battle. ldk has been on the regsho ölist for many weeks.
ultimately the company will prevail. it is worth way more than fslr, yet it trades at a tiny fraction of that bloated overhyped company.
this will correct in due time.
ldk may not be worth 23 bn. it may be worth 20bn. or 40bn. what do i know.
it is in any case worth many times its current stock price

2008 May 13 06:33 PM

[tessant:]

hey, i hope you are right, because my roth will be worth a bunch more if ldk is worth 23bill

-scott
solarfeeds

2008 May 13 09:08 PM

[rlirph:]

Can some one give insights to Suntech Power (STP)? Why was the stock halved?

2008 May 14 04:09 AM

[nikeita:]

@fxtrader07: you said it! WS bash LDK to protect FSLR. LDK is a serious threat for the overhyped american company.

2008 May 14 07:43 AM

[cos1000:]

I think some of the WS animosity comes from the fact that LDK is a Cayman Island Incorporated company. In LDK's governance documentation, which states the significant differences in the standards of Corporate Governance between Cayman Islands and NYSE, their may restrictions on WS investor participation. They actually might not be able to own this company because of their managed fund guidelines.

Does anyone know if this is true or not. The major differences appear to be Executive Compensation reporting and Independent Director Board Composition and their executive session meetings. The full document is at ldksolar.com, under corporate governance.

2008 May 14 09:19 AM

[InvestLDK:]

fxtrader07: I have spend a lot of time researching on LDK and FSLR and I agree 100% with you. LDK being a chinese company has a lot to do with the treatment it's getting. I personally don't trust chinese government and they have the last word.

2008 May 14 11:05 AM