Chinese solar play LDK Solar (LDK) announced results for the three months ending June 30th, 2012 on September 17th. The figures were shockingly bad, even worse than analysts had forecast, and the outlook statement offered little prospect of recovery. At this rate it seems likely that by Christmas the company will have negative shareholder funds. At $1.25 (down 13 cents from my original sell advice on August 30th) and still capitalized at $167 million, the stock remains a sell with a target price of virtually nothing.
Sales for the quarter came in at $235.4 million, up from $200.1 million in the first quarter but down from $499.4 million in Q2 2011. That revenue number was $2 million below forecast. In Q1 2012 the company shipped 164.4 MW of wafers and 153.9 MW of cells. In Q2 the numbers were 316.7 MW and 135.6 MW, respectively. So overall volumes were sharply higher, revenues less so. That is not a good sign.
The gross loss for the second quarter was $92 million compared to $131 million in Q1. And the Q2 number was impacted by a $35.1 million writedown of inventory and provision against bad debts. So one might say that the cost cutting is starting to help. But will this be the last writedown against inventory (still $467.1 million at the period end) or bad debts (accounts receivable in less than a year still $342 million - 4.3 months of sales)? I doubt it. This will, I believe, be a regular feature.
The operating loss came in at $172.7 million compared to a loss of $47.9 million for Q2 2011 and a loss of $135.8 million for Q1 2012. Again, there was a one-off in Q2 numbers: a $30.5 million impairment charge. I quote:
"As a part of our liquidity plan, LDK Solar entered into several sales agreements to sell some of its real estate properties and land use rights to local government authorities during the second quarter of 2012. As a result, $30.5 million of impairment loss for property, plant and equipment was recorded for the excess of book value to sales price."
In other words LDK is desperate for cash and so it's selling off surplus properties and "land use rights," but having to do so at a huge loss. I would note that in the June 30th balance sheet, property, plant and equipment is still valued at $3.729 billion (versus $3.828 billion three months earlier) while land use rights are in there at $285.2 million (versus $307.9 million). A company that is shedding staff and rationalising its production is unlikely to need those land use rights ever, and it is not to need more property and plant - it will need less. And of course LDK needs cash, so it seems a racing certainty that there will be more asset sales and consequently more impairment charges. This will be a regular feature going forward.
The net loss for the quarter was $254.3 million or $2 a share versus $185 million or $1.46 a share in Q1. That loss per share was again worse than analysts' forecasts.
It is the June 30th balance sheet that causes concern. Current assets are $2.016 billion, but I have already noted how much of this is inventory or amounts owed by customers. Free cash is just $296.2 million with another $523.4 million cash pledged so unusable. Short-term (i.e. repayable within a year) borrowings are now $2.431 billion and current liabilities are $4.518 billion. Total liabilities are $5.94 billion and net assets (shareholders funds) are now down to just $192 million.
It strikes me that there must inevitably be further major write-downs against property, plant and equipment and also land use rights as LDK struggles to generate cash. There will almost certainly be further write-downs against inventories and bad debt provisions. And the business is running at a loss. The company admits that trading is still tough. It states in the results announcement:
"Turning to the third quarter, our outlook remains cautious as we expect to see continued near-term challenges facing our industry. We remain closely focused on managing costs and operating expenses through streamlining manufacturing operations, reducing production costs and improving utilization."
"We continue to believe that some markets such as China will begin to see improved demand in the second half of this year and expect growth opportunities in this market to continue to expand over the next several years."
I have grave doubts about Chinese demand growth given the hard landing underway in the PRC. Meanwhile, in Europe demand will continue to fall as subsidies are phased out. Hence, it seems inevitable that LDK will continue to run at a loss for the remainder of this year. And on that basis it seems more than likely that by Christmas this company will have negative shareholder funds. The fact remains that its current liabilities exceed current assets by $2.5 billion and that assumes that inventories are turned into cash at book prices and that there are no more bad debts. I would not assume that.
The arguments contained in my original sell note (here) remain valid. The same arguments also apply to Trina Solar (TSL) and to JA Solar (JASO), both of which I advised selling here. Despite the generally buoyant equity markets, shares in all three companies have continued to fall. My target price for all three remains virtually nothing.