Light the Way with LDK 32 comments
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Imagine a company that is so successful that it can handpick its clients. A company with products so highly coveted that it sold out its inventory for the fiscal years of 2008 through 2009, and nearly 50% of its inventory for 2010. A company in an industry that has brought the cost per watt down from over 100$ per watt in 1975, to less than 4$ per watt in 2008. A company that has been averaging a 200% year-over-year growth rate for the last three years. Now stop imagining: This company is LDK Solar (LDK).
Performance:
Since its inception in early 2005, LDK has been setting the standard for excellence in the solar sector. Through hard work, diligence and visionary leadership, LDK has become the world's largest producer of mono-, and polycrystalline solar wafers. By the end of of 2008 LDK will be producing vast quantities of polysilicon in addition to solar wafers making it the worlds largest solar company.
Summary:
Unlike some better known solar companies, such as First Solar (FSLR), Sunpower (SPWR), Suntech Power (STP), or Solarfun (SOLF), LDK does not produce the actual photovoltaic solar modules. LDK is positioned in a similar place in the solar supply chain as Intel (INTC) is in the technology sector. Intel's processors and motherboards are critical components of any computer; and similarly, LDK’s wafers are critical components of any solar module that is made using polysilicon.
As a result of these similarities, LDK is often referred to as the Intel of the Solar sector. Many analysts insist that First Solar is the best of the breed, because it does not use polysilicon wafers. This could not be any farther from the truth.
First Solar’s Debacle:
First Solar has the largest market capitalization of any solar company trading on the united States exchanges with a market capitalization exceeding twenty Billion. First Solar manufactures its thin film panels using a cadmium-telluride substrate blend. Cadmium-telluride is a combination of tellurium and cadmium. Both of these elements are very toxic and very scarce. According to the European Union's 2003 ROHS (Restriction of Certain Hazardous Substances) Directive, use of six hazardous materials is prohibited in excess of 100 PPM (parts per million).
Unfortunately for First Solar, cadmium made the list. In fact, First Solar's panels use 470,000 PPMs of cadmium. As a result, the European Union could ban the use or production of First Solar's panels at any time. Because First Solar makes most of its money in Europe, this could decimate its business overnight.
Other Issues Weighing on First Solar:
Moreover, tellurium is becoming increasingly expensive. Tellurium is used to produce Blu-ray discs, CD-RW discs, and various types of random access memory. Soaring demand from Sony’s (SNE) Blu-ray has lead to a meteoric rise in the price of tellurium. Blu-ray's long-term success was guaranteed when the Toshiba Corp. (TOSBF.PK) announced it will no longer develop, manufacture or market HD DVD players and recorders. The price of tellurium has risen from $10 a kilogram in 2004 to well over $300 a kilogram today. Demand is expected to continue to rise dramatically, and without a substantial increase in production, tellurium prices should go through the roof, largely eliminating First Solar's competitive advantage.
Conversion Rates:
While toxicity of cadmium-telluride, and the scarcity of tellurium, will continue to hinder First Solar's growth, the company's biggest problem is incredibly low conversion-efficiency rates. Compared to its peers, First Solar has one of the worst solar conversion efficiency rates in the sector.
At present levels, First Solar is able to convert 10.5% of the sunlight it brings in into electricity. This is significantly lower than the 13% conversion rate Sharp achieves and Suntech Power's 18%. In fact, First Solar's rates are less than half that of the market leader Sunpower, which achieves a whopping 22%. In addition to soundly beating First Solar's conversion-efficiency rates, what do these companies all have in common? They all manufacture their photovoltaic modules using polysilicon-manufactured solar wafers.
Advantages of Polysilicon:
Silicon is one of the top ten most common elements on the planet, so raw-material shortages should never be a problem. Analysts have been criticizing companies that use polysilicon-manufactured wafers due to steeply rising polysilicon prices. They argue that high polysilicon prices will erode profit margins for polysilicon-based solar modules. While it's true that polysilicon prices have been rising at an exorbitant rate, prices are expected to plummet in the latter half of 2009-2010 as more production comes on line (Gupta, 2008).
On the other hand, some analysts expect polysilicon prices to drop as early as the 3rd or 4th quarter of 2008. While production bottlenecks lead to rising prices of polysilicon, raw-material shortages predominantly spur higher tellurium prices. Polysilicon prices will fall as more production comes on line, because of the abundance of the raw material. The tellurium problem is not so easy to solve. Production increases will not be able to offset rising costs. Very much like oil, tellurium production will not be able to keep pace with rising demand.
Polysilicon Plant:
During the summer of 2007, LDK Solar announced that they were partnering with Fluor, one of the world's largest, and most prestigious publicly owned engineering, procurement, construction, and maintenance services companies. Flour will provide engineering, procurement and construction manufacturing services for LDK's two polysilicon factories in Xinyu City, Jiangxi, People's Republic of China. When completed, these factories will be the largest in the world. Fluor uses a comprehensive EPCM (engineering, procurement, construction, maintenance) services approach that will include a trichlorosilane plant, chemical factor-deposition reactors, converters, and other necessary infrastructure and utilities.
Partnering with Fluor made perfect sense for LDK. Its experience and ability to quickly construct a state of the art polysilicon factory means LDK can continue to execute its business initiatives.
Polysilicon Production:
Upon completion of the two polysilicon factories, LDK will expand its polysilicon production capacity to include three production lines. Enabling LDK to produce 15,000 tons of polysilicon and more than 90,000 metric tons of trichlorosilane by 2009. In comparison, current worldwide production of polysilicon is approximately 100,000 metric tons per year. The smaller of the two factories will intially produce 1000 metric tons of polysilicon. This factory is slated for completion by the end of the second quarter in 2008. The larger of the two factories will be completed late in the fourth quarter and it will initially produce 7000 tons of polysilicon.
Demand:
Demand for solar wafers will remain very strong as other solar companies expand their production capacity. Over the last eight years, the solar sector has grown over 849%, with production rising from 877 megawatts in 2000, to 8325 megawatts in 2007. Most analysts remain optimistic about industry growth, and the global solar photovoltaic market is expected to grow from US$13 billion, to over 40 billion by 2012. And as aforementioned, all of LDK’s inventory for 2008-2009 has been sold, and nearly 50% of it’s inventory for 2010 is already commissioned.
Second Quarter 2008 Results:
In the second quarter of 2008, LDK reported fully dilluted earnings per share of $1.29. This stellar quarter slaughtered analyst estimates of 44 cents per share. LDK recorded over 441 million dollars in revenue, a 89.2% sequential increase over quarter 1 of 2008. LDK also reported record net income of 149.5 million dollars, a 200% sequential increase in revenue over quarter 1 of 2008. While explosive revenue and income increases highlighted LDK’s strong quarter, gross margins sequentially declined 2.3% over quarter 1 of 2008 to 25.4%.
In spite of an overall decrease in gross margins due to higher polysilicon costs, operational margins improved slightly due to LDK’s successful execution of its vertical integration strategy.
Guidance:
Due to unprecedented demand for its solar wafers, LDK raised revenue guidance from 1.08-1.18 billion, to 1.65-1.75 billion dollars. The company now expects wafer shipments to be in the range of 750-770 megawatts. Its gross margin guidance remains unchanged and LDK expects gross margins in the range of 23-28%. These numbers seem very conservative and I expect margins to be much closer to thirty percent, because LDK will be producing its own polysilicon in the third and 4th quarter.
By the end of 2008, it is anticipated that LDK will achieve 1.2 gigawatts of capacity. LDK reached 1 gigawatt of capacity on 8/25/2008.
Raw Materials and Profit Margins:
Many solar companies outsource or offshore many of the stages of the production process, but in hopes of increasing overall profitability, LDK will ultimately complete nearly all of the phases of the production process in house. Once LDK’s two polysilicon production facilities are operating at full capacity, LDK will reduce its raw material costs dramatically because the company will be immune to market-pricing fluctuation of polysilicon: mitigating the need to sign new contractual polysilicon agreements.
LDK’s profit margins will improve robustly in the 4th quarter and throughout 2009 as polysilicon production capacity is expanded. By the end of 2009, LDK anticipates profit margins in excess of 40%, and some estimates suggest that profit margins could be as high as 55%!
Wafer Thickness:
LDK effectively reduced wafer thickness from 200 microns to 180 microns, and both wafers are being mass produced. Further reduction is expected by mid year when wafer thickness will be reduced to 160 microns. Reduction to 140 microns is expected by the end of 2008. Currently, LDK has a 120 micron wire in trial production.
The company is also cutting down on the number of broken and fragmented wafers. Reductions in wafer thickness and breakage provide increased efficiency, and lower inventory and raw material costs. These reductions will directly contribute to the bottom line and reflects LDK's ability to execute its strategy of becoming the worlds premier providers of solar wafers.
Contract Signings:
Other notable contracts include long-term deals with BP (BP), GE (GE) and Sharp. Year to date, LDK signed ten long-term contracts with some of the worlds leading producers of photovoltaic products.
Based on current metrics, LDK’s contract backlog is worth over twenty billion dollars. The company signed a paramount deal with Qimonda (QI) solar that will privilege it to the excess polysilicon and damaged wafers produced in Qimonda's factories. LDK's top-notch recycling facilities will melt the broken products down and turn them into premium-grade polysilicon. Under these agreements, LDK will receive large prepayments that usually reflect 10% of the contract's value. This will help LDK finance its polysilicon factories, purchase raw materials, and further its expansion plans. The prepayments promote shareholder value, because the necessity for equity or debt financing is reduced.
Technicals:
On a valuation basis, LDK is also trading much more favorably then other American companies in the sector. Though LDK's revenue exceeds industry “leaders” First Solar and Sunpower, both of these companies unjustly command much higher market capitalization's and valuations.
First Solar's price-to-earnings ratio is well above 90 and its market capitalization exceeds $22 billion. Sunpower's price-to-earnings ratio is well over 150, and its market capitalization is $8.3 billion. Meanwhile, LDK is trading at 20 times its earnings, and its market capitalization is only $5.46 billion. Its forward price-to-earnings ratio trades at an even deeper discount of 11.60.
Based on these numbers, it is clear that investors are willing to pay a premium for First Solar and Sunpower, despite LDK's similar earnings and better long-term prospects.
Going Forward:
After reporting a record quarter on August 11th, LDK’s stock has risen from $33.58 to $51.26 cents as of the close on August 30th. While LDK has risen more than 50% in the last 2 weeks, this is just a drop in the bucket. By the end of 2009, LDK will conservatively earn 1 billion in net income. If LDK is trading at 51.26 by the end of 2009, its pe ratio would be about 5. Surely LDK will command a much higher valuation because of its unparalleled performance, and conservatively LDK will have a pe ratio of 15. Using these numbers, LDK will conservatively be trading at 150 by the end of 2009 and I believe the upside is north of 250 dollars a share.
Commodities, Global Warming, and Government:
Soaring commodity prices and global warming will also contribute to LDK's long-term growth. According to many analysts, the solar industry will grow at an annual rate of 20% and we should expect LDK to capture a large percentage of this market. Countries around the world are curtailing their emissions of greenhouse gases and carbon dioxide because they are contributing to global warming. Solar energy is creating a feasible alternative to traditional energy sources, such as coal, oil, and natural gas. Solar panels produce electricity that businesses can use, store, and sell back to the power companies if the infrastructure exists. Once we reach grid parity-the point at which fossil fuel created electricity coincides with the price to produce solar energy-solar energy demand will erupt.
In coming years, analysts anticipate solar energy prices will continue to decline. With the U.S. elections right around the corner, global warming debates are going shift into high gear. Even more energy legislation will be passed mandating lower emissions, which in turn will provide more incentives to shift to solar energy. These incentives will include tax credits, grants, and-most important- government mandates. While politics and the stock market are separated by a fine line, both John Mccain and Barack Obama have pledged their support for renewable energies.
LDK is perfectly positioned to profit off the growing demand of solar energy, because the components it manufactures are critical to any polysilicon manufactured photovoltaic. Polysilicon will dominate the solar market because of the abundance of the raw material and the higher conversion rates. LDK will take advantage of this growth by delivering world-class solar wafers manufactured in state-of-the art facilities.
Disclosure: Author holds a long position in LDK
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This article has 32 comments:
We will always need oil and natural gas, but investing in and developing alternatives, will give all countries more choices...and less control to these conglomerates (and associated countries).
I say this as once again, a hurricane gives big oil companies an excuse to jack up oil and gas (I mean, as if 150 bucks a barrel when no tropical storm was in sight wasn't already enough)!
These shorts have painted themselves in a corner.
I wonder if more lies are to follow. And more BS analyst reports with scary rumors or manufactured doubts. DO NOT let them scare you away from this gem. By and place in your kids college fund.
Good luck
Disclosure I own a lot and I am well into the money.
Tell us about REC sounds intriguing
So basicly, as for large polysilicon providers, should the price of polysilicon alter significantly then it would affect LDK more than REC, as REC has a large amount of it's revenue trough it's pv panels. Should the price drop significantly then REC won't be affected too much as it can reserve large amounts of it's own polysilicon for it's own PV production. LDK is dependant on customers, fabricaters of solar pannels and cells, to buy their products, and when prices of polysilicon and/or wafers go down then their revenue would be affected significantly.
REC is also quite larger than LDK and in a much more financially stable situation, as REC is one of the largest and is the most profitable solar company in the whole solar space, it's also one of the oldest solar company's, one of "the 1st generation", and at that survived some very troubled times for this sector.
LDK, with it's large investment to expand polysilicon production, is in a somewhat more risky financial position, wel mainly should polysilicon prices go down. How likely is that? I don't know, even the analysts have quite mixed oppinions about it, personally i think they won't be affected much, and that LDK is actually quite a good investment, but REC's verticly integrated structure, size and age and profitabilety makes REC one of the most conservative picks in the solar space, and i prefer taking as not too much risk.
Even then, LDK has long term contracts with one of the best company's in the solar space, German Q-cells, set for years, and some other company's. Rec has contracts with the same company, although REC does buy some cells from Q-Cells. My oppinion has always been that these long term contracts mean that the solar industry isn't affected much by this crises, if at all, especially since many of such contracts have been created during this crisis for various company's in the solar space.
Location plays a role to. LDK is strong in China, REC is strong in Europe and USA, atleast iirc, and depending on how the political wind might blow this could favour REC somewhat, or not, but i think subsidies in Europe and USA will rise in volumes. Not that REC really needs subsidies, actually they are now also busy with setting up a large polysilicon plant in Singapore.
Afcourse, at 20$ LDk was just a blatent no-brainer, PE wise, and i was expecting them to end on atleast 50$ by the end of the year. At some point during this crisis LDK was just the cheapest stock in the solar space for a company that made solid revenue's and profit. Hence why many pitched it here.
For the long term i prefer REC above LDK, REC is that rich that it might outexpand quite a few competitors in the long run, it's deffinatly big and strong for a solar company. LDK is more of a risk, but pottentially very rewarding, even at this point, but afcourse lesser so than when it was at 20$. REC was a relative bargain when it retraced to 14-15 euro's too, and it came there again when LDK had a nice move up, so i didn't mind changing position from LDK at that point to REC.
Disclaimer: I'm not an analyst, just my own perception of these stocks, from what i know and have read.
In a negative section of the TSC review of LDK they note both the margin erosion and poor debt management and a less-than-desirable quick ratio (which indicates a setupwhere short term cash crunch may happen). I am not worried about margin erosion given the new plants that will soon come online (Read article) but I am worried about short term cash management. Does LDK have all the cash it needs to expand, supply its many many customers with many many contracts? If it needs capital would LDK get it and if so the fact that is seeking capital look negative on the stock front?
My large wind positions are Vestas, Gamesa, Nordex and Repower, basicly i like virtually all wind turbine company's and they are performing quite well trough this crisis, especially Vestas.
My larger solar positions are Q-cells, REC. Some smaller positions in more risky solar stocks like 5N plus and Ascent solar.Mixed results over the year but the volatility has been nice for trading. I have been playing with such stocks like LDK, CSIQ and SOL on earnings, and i often switch volumes of positions during earnings periods.
I keep away from such stocks as FSLR and SPWR. I tend to keep away from high priced stocks as there is plenty to be gained in less riskier stocks at this point. However you look at it though, it's been a great bargain time for many good alternative energy stocks, and i wouldn't mind another credit crunch induced dip to buy some more cheap stock.
You said "The reason ive changed is because LDK in the long run would be more exposed to fluctuations in polysilicon prices than REC would be. "
Didn't you read the artical?? IT SAID they are bringing their polysilscon production on line and they will be the laregest polysilicon manufactrurer in the world.
Answering yourself with a 'Tell me more' crap is the sign of a pumper. Go and PUMP REC somewhere else.
One of the big holes in this analysis is that it does not consider Suntech and it should because Suntech is the low cost Si-PV company. According to their earnings call, Suntech is currently purchasing wafers for about $1.60/watt and they expect costs to be about $1.25/watt in 2009.
LDK's on the other hand currently has costs of about $2/watt with ASPs of $2.40/watt.
How can Suntech purchase wafers at a 20% markdown from LDK's costs? How can company X buy wafers from LDK for $2.40 and hope to compete with Suntech that has a total module cost under $2.40/watt. Something has got to give. It's rather amazing that something hasn't given already because the numbers don't make any sense.
I'm sure LDK is going to do a great job reducing costs but the exaggerated ASPs they've enjoyed over the last year are not going to hold up. No way no how get outta town.
It seems that LDK is going to have to get costs down to half what they currently are and fast. Factor that into your formulas...
Next year Suntech plans on wafer costs of about $1.25/watt. What is LDK expecting wafer costs to be in 2009?
@Gaucho:
No i'm not really pumping REC, i doubt i could even do that. But i should have understood from the article that LDK didn't produce enough polysilicon in the first place for it's own wafer production. I was under the impression that LDK was a company mainly producing polysilicon with the smaller segment being wafer production. I should read more of their presentations.
User JoeJoe -- something is not kosher here. You can't pre-sell inventory and sign more customers on every day if you are not price competitive. What gives Mr. JoeJoe? All these companies that are signing contracts with LDK (this includes BP, GE, Sharp and recently Hyundai) are all part of a giant consipracy.Is that your theory?
Scott
phx.corporate-ir.net/p...
biz.yahoo.com/prnews/0...
STP says their non-silicon costs are 70 cents per watt and that their silicon costs (wafers) are 70% of total costs. That makes their wafer costs about $1.63/watt. Then look at LDK's earnings call and they say their ASP are $2.40/watt with margins of about 22.7% - so costs are about $1.99/watt.
Are there any indications of LDK's projected ASPs for 2009?
seekingalpha.com/artic...
I had stocks in REC till fall last year. Its a very good company no doubt. LDK and REC are 2 companies following 2 very different strategies though.
REC seeks to become fully vertical integrated and is so to a degree now, still ramping up production capacity on the cell and panel part, to meet their big wafer production. They have also been building a new polysilicon plants ( Im afraid to admit I dont know the current status of that 1). REC has plants in the western part of the world in countries like Norway Sweden and America.
LDK seeks to become the world biggest manufactor of wafers and seems to now have accompished this goal. Also it seeks to become a major player in the polysilicon buisness. Its focus in those areas are cost reduction and they seem to go great length for it. Also instead of a fully integrated solar company they instead seek partnerships. I have to admit Ive been quiete impressed with the contracts they have landed the last 10 months.
Which is the best?. They are both very good companies. The reason I swapped to LDK myself is that there seems to be bigger growth and in long term better profit. They have cheap labor, cheap energy, and benefit from a low tax.
LDK will eventually become a huge wafer producer with noone even near them in terms of production capacity and REC on the other hand will become a big fully integrated company where their wafers firstmost go to their own production of cells and then panels.
If we are to use the same words as the author then LDK is the intel of solar and REC the IBM/Dell etc.
You ask for evidence of cost reduction and data showing ASP for wafers through 2008 and 2009. I don't have all the data but I gathered this by sifting through LDK's investor presentation the link to which is here..
media.corporate-ir.net...
The devil is the details! Bear with me here and you will see how we can create some evidence of what could be significant cost reduction and margin improvement at LDK and how soon it might affect LDK earnings. I don't have all the data points here and I have asked some questions as I present the evidence and some readers that know more than others could possibly help put the picture together here.
#1 Page 5 (Summary Page) is the most important one and gives the highlights of how LDK sees the business. Note the ASP's -- they have been holding steady through past several quarters and have actually gone up in the last Q -- from a low of $2.25 to $2.44 in recent quarter. If this is true it is good news. I think wafer ASP's have been steady to rising because of demand and LDK has been able to pass on some of the cost increase to its customers.
#2 Page 5 (Summary Page) -- LDK gives an IMPORTANT hint that the first of the two in-house Poly plant will actually produce output in year 2008! The numbers are 150-300 MT in 2008. This is a potential upside to the margin as LDK states in page p23 that the costs per kg of Silicon will range from $22 to $32 as opposed to current industry numbers. I remember reading numbers somewhere on what it costs LDK to get the Poly from the outside and I swear the numbers were anywhere from 60% to 100% higher. If true LDK here will have a HUGE cost advantage over competition. A question to knowledgable readers here -- how much MT of Poly does LDK need in 2008 and 2009 to meet backlog orders? From this data we could calculate margin improvement contribution in 2008 and 2009.
#3 Page 7 talks about cost improvement efforts. A couple of things going on here -- one, reduction in wafer sizes (done), reduction in wafer breakage loss (ongoing), and three, (which the presentation does not mention but the author of Seeking Alpha article does) is the pact with Qimonda to recycle Qimonda's wafer breakages as raw material for LDK manufacturing.
#4 Page 7 is heartening in that LDK continues to invest in technology (IP - Intellectual Property) to incease efficiencies while reducing costs.Look at the higher end wafers and the efficiencies they think they can get. If true this would be higher than efficiency leader SPWR's efficiences.
#5 The most important takeaway points are with respect to the construction of the two Poly plants which the analysts have been skeptical about. Two things you can gather from here -- Plant #1 will produce in Q3 and Q4 of 2008. Plant #5 will be up sometime in 2009. Look at the schedule of completed activities for plant #2 in Page 17. Looks good!
to JoeJoe: did it ever occur to you that STP might be lying their pants off when they say that
- their non-silicon costs are 70 cents per watt
- that their silicon costs (wafers) are 70% of total costs?
It is easy to fudge either of those numbers. We dont know how conservative they are compared to LDK's. Gonna have to wait out the next couple earnings reports to know for sure.