LDK Solar: A Spark of Light

After spending most of the summer in the dark, the solar industry is seeing a ray of light after an earnings report from LDK Solar Co., Ltd. (LDK). The stock is currently up about 19% on the day and related companies such as Trina Solar Limited (TSL), and ReneSola Ltd. (SOL) are catching a bid as well. The industry-wide strength is a welcome change since declines in energy prices and disappointing news out of Spain sent prices lower last month.

LDK reported revenues of $441.7 million, which is 89.2% above last quarter and an impressive 346% above the second quarter last year. Earnings were recorded at 1.29 per ADS which may be a bit misleading. The company actually had a one time profit of $60 million due to a one time sale of materials, but even if you back out this sale, the earnings were roughly 77 cents per ADS which represents a 108% gain over last year. Management pointed out that it has now signed 9 long-term supply agreements this year, which helps in diversifying the client base. The target for annualized capacity was also raised for this year (to 1.2 GW) as well as 2009 and 2010 (2.2 and 3.2 GW respectively).

If there was a dark spot in the announcement, it revolved around gross margins. Although average sales prices were higher than most analysts expected, the cost of polysilicon (or poly) continues to be high. Gross margins came in at 25.4% which compares unfavorably to 27.7% last quarter and 35.2% a year ago. Management stated that they expect margins to continue to show weakness in the third quarter before rebounding in the fourth quarter and into 2009. The change should be due to in-house production of poly which will allow the company to produce material below current costs on the market.

This production of poly is the most controversial issue in the report. Analysts appear to be skeptical as to whether LDK will actually be able to ramp production into the end of this year. Production of poly is a difficult process and competitors have faced delays when implementing similar projects. Any delay in LDK’s plans to product raw materials would likely be a disappointment to investors. But the positive side of this argument is that if production goes according to plan, the likelihood for further appreciation in the stock price is very good.

Demand for solar wafers continues to be strong even with decreasing subsidies out of Spain. It appears the private marketplace is ready to step in and pick up the slack in demand that may have been released last month. With lower prices on most solar wafer producers, there should be ample opportunities to pick up strong investments at discounted prices. I believe LDK is one of those opportunities.

LDK Notes

FD: Author has a long position in LDK.

Comments

[ezetrader:]

You forgot to mention that net margins were 22.7% up from the last quarter of 22.5%, a result of management producing higher efficiencies and cost savings. It appears that LDK has a complex formula that increases their ASP when the cost of the polysilicon increases. On top of that, management was smart enough to sign long term contracts and keep an inventory of $656 million, mostly for polysilicon feedstock. As their in house poly production comes on line, they will reduce inventory to free up cash to finance more expansion.

They have backorders for over 12GW of wafers which is about $20 to $30 BILLION in revenue depending on ASP (currently at about $2.40/watt). Today they added another 300MW deal that included a cash downpayment.

From their conference call, I am guessing they will have 2008 EPS of about $3.50 which is about double what the analysts expect. This revenue is from wafer sales alone. They plan to increase wafer capacity from 1.2GW in 2008 to 2.2GW in 2009. Now consider that they expect gross margins to almost double when their in house poly in complete, you get forward EPS in the $10 to $15 range.

* Lowest cost producer in the industry
* Blow out earnings, 2 to 3 times estimates
* 12GW in backorders
* world's largest polysilicon plant on schedule
* Forward PE in the low single digits
* over 100% revenue growth per year
* a renewable energy market that is expected to explode for the next 10 years.
* A game plan that has customers financing expansion of their plants.
* CEO Ziaofeng Peng, China's Entrepreneur of the Year
* Short squeeze coming soon, short shares of more than 50% of available float

In my opinion, a grossly undervalued stock with huge growth and huge earnings.

2008 Aug 13 06:10 AM

[DucPho:]

LDK has been the victim of illegal naked shorting for years by hedge funds. There are 16 million bogus shares out now that need to be covered at a time when the stock price is going up. Beware of "news" that "swiftboats" LDK, such as statements that the new poly plant will not produce. That is the hedge funds trying to keep the price down while they try to salvage their criminal naked short positions.

2008 Aug 13 07:09 AM

[absurd:]

Can you guys get something straight, EPS last year was .29 and Q108 was .45 I wonder if this is done on purpose, every single article compares this quarter EPS of 1.29 with .45 last yr??

2008 Aug 13 07:13 AM

[John Lounsbury:]

I have been long LDK for almost 1 year and have made a bundle with short hedge positions against the box (2 shares short for every share owned) on several occasions. I most recently closed a short position on Aug. 6 @ 33 for a $2.47 profit per share and remain long only as of today. My long position was acquired with an average cost of just under $33 per share so my potential long term gain is on $6 and change as of today. However, my short positions have produced total returns of more than $72 per share and I have twice written covered calls for a total return of $21.50 per share.

Needless to say, I love this stock because of the spectacular trading profits. However, I calcuate fair value today between $35 and $58 per share, depending on the estimated five year earnings growth used in the calculation and on the assumed value for Beta going forward (it's very high right now). This is very attractive compared to the very over-valued prices currently on most solar stocks. Ultimately, I expect more long term gains from LDK than short term trading returns.

Using the high end of my fair value range, the fair value price for LDK in five years is approximately $260.

2008 Aug 13 02:42 PM

[suhaas:]

jjounsbury59 is trying to set you up, so that he can make profits from you ,by further shorting of your stocks in a few days. Do not depend on this short seller to make your purchasing decisions.In a few days these guys will create negative publicity, and bring the price down. Do not play their game. Wait for a pullback.

2008 Aug 13 05:08 PM

[Zachary Sch...:]

ezetrader: Thanks for the good analysis! I do think the company has great potential and management seems to be doing a great job of managing resources as you mentioned.

absurd: I think reports you mention may be adjusting last years earnings up to give you a comparable ex the one time gain this quarter. I would instead adjust this quarter down to take out the one time event (which although legitimate, is still not repeatable). It just goes to show that statistics can be tweaked in any direction.

jlounsbury: That's a pretty wide range! good luck with your trading.

Thanks all for the comments!
Zach
zachstocks.com

2008 Aug 14 06:56 AM