Gregory Pepin's  Instablog

LDK Solar, a well known Chinese Solar Company, invested since summer 2007 in a very ambitious plan that almost cost them their future : Build a in house Poly Plant to build the polysilicon needs for their Wafer Production.
Why that plan ? Well Polysilicon is a major cost component of a Wafer and at the time of the project decision (that the market warmly welcomed), the price of polysilicon was rising constantly.
The project was clear at that time : Produce by mid 2009, polysilicon at a price of 35$/kg or something around that price level. (It was a very positive comment considering that Poly price was above 250$/kg when the project began).

But many unexpected event appearred :
- Due to the crisis, Poly priced dropped to 50$/kg
- The ASP of solar panel dropped quicker then expected
- The poly plant in house didn't meet the time target (New target Date : 2011) and cost more then expected (Total cost approx 1,5 billions).
- The value of their Poly plant is dropping below the price of investment since the poly spot price dropped to range very close to their target in house production price.
- LDK had to write down the price of inventory for their polysilicon which hurted their balance sheet
- The company had to rely on short term debt to fund their development because of a weaker balance sheet.

With all those elements, LDK was in very bad shape and could be in a dangerous position financially.
And now here comes the great deal : An investment group, close to the province of Jiangxi agreed to purchase 15% stake of the poly plant for a cost of 219 Millions $.

That deal is very interesting because :
- The real value of the Poly plant is pretty low for an external investor, why ?
Because the Plant has only one vocation : Provide at the cost of production the poly to LDK in order to build their wafer at the lowest price possible. So owning a share of the plant isn't that sexy of an investment.
- Since it isn't a very sexy investment, it still price the poly Plant at a total price of 1,46 billions $ which is roughly the amount LDK invested in it.
- It provides fresh cash, needed by LDK to support their company.

But the implication of the deal is deeper, first for LDK :
- LDK receives fresh Cash to their balance sheet which secure the company at least for the near term and allow them to continue their aggressive expansion plan.
- The Deal allow LDK to price their Poly plant in their balance sheet at a value of 1,5Billions roughly, what does it mean ? They can easily convert some of their short term debt over Chinese Bank to long term debt, with their poly plant factory value as a collateral. They can also rely on long term debt with it too.
In other word, they are able to clean to the balance dramaticly with that deal.
- Remember : there is still 34% left on the poly plant (in order to let LDK keep the majority ownership on the plant) that could be sold to the same investment group... to support the growth of the company.

To me the message is clear :
- China wants to support the solar industry in anyway possible. Since LDK is a major company in the sector, China found a very clever way to fund their growth without attract any negative comment from Europe or USA since it is through very well build investment.
- LDK, and the top Chinese Solar, probably has a bright future (at least they probably won't go under) since China support is now very clear.
- The beginning of Solar fight at a international begins now with the clear implication of China in LDK.

On an investment point of view, is that deal enough to buy LDK shares ?
I won't be a little prudent over the long term, here are my quick though on it :
On the bad side :
- LDK still have some issue concerning the credibility of their management. Now they learned to be less rosy and more prudent but we need more time and proof that now they really have a prudent approach in their business.
- There is more and more player in the solar industry that produces their own Wafer which reduce a little bit the market potential of LDK
- Evergreen Solar, which has the best technology to produce Wafer, could try to adapt their technology to become a Wafer producer which would hit seriously LDK. But it is still far from happening.
- The Q-cells conflict could be the beginning of new conflict with customer. We need to be sure that LDK handles very well their customer and that Q-cells story is just a one time story and will be solve.

On the positive side
- LDK development plant through poly plant factory could very well paid over the long term if you think Poly price will rise over time (which is something that wouldn't shock me at all). Now that we know, China will allow them to finish their project and if the pricing of poly increase, LDK will have a major competitive advantage that would put them at the top of the solar chain. On the other side, if the poly price doesn't increase, that investment reduce the effect of their choice and the only way they would lose out of it would be : If poly price drop below their in house price, which is very unlikely.
- LDK has so far the best cost structure to produce Wafer (if you exclude Poly Price and Evergreen Solar) which gives them a competitive advantage over the long term now that we know the company should be financially secure and has the clear China support.
- Solar industry still has a very bright future and specially with the will of major government to develop renewable energy with solar at the top of the chain.

To sum up, i would keep LDK in my radar, as well as many other solar stock. That deal provides some interesting message to the market : LDK is support by China. I would probably consider buying some stock of LDK as soon as i have some more elements concerning the Q-cells conflict and the credibility of the management (that they are trying to regain).

Disclosure : No position

Lately when we listen to expert and economist, they call the end of the recession and believe that the economy is back on track (even if the recovery will be slow according to many of them). I have one major question behind that : Is the end of the recession so near that we can call it already ?

It seems that the market turned a little bit bullish on the economy as the rally seems to continue even when data aren't in line with expectation. Is that rally overdone and should we still consider it as a bear market rally ?

In order to find answers to those question, I though it would accurate to study all the economy data to find out where is (in absolute value) the economy.

First, i found out that data aren't that rosy :
If you look at job loss data :

 I just want to point out two way to read this data (and all the other data also has two way to read it) :
- The way i read it : Job Loss are still very high on a monthly basis, and the more interesting thing is : in the last two/three month we are losing as much job per month as before the Pre-Lehman bankruptcy period.
- The way the market seems to read it : Job loss is slowing and we have a little better job loss picture if you compare it to October 08 to April 09. Job loss is clearly in better shape.
- Bottom Line : Job loss are still very high and therefore the consumer is still in a middle of a very tough period that limits is will to consume and increase is will to save money. This behavior will impact the economy strongly as 70% of the US GDP comes from consumer.

If you look at New Homes sales (as the Real Estate Market is very important in this crisis) :

Once again two way to read it :
- The way i read it : We are back to the level pre-Lehman which is still very low. The New Homes sales is still very weak to consider a pick up in the real estate market as people used to consider in the Pre-Lehman period.
- The way the market seems to read it : We see a strong pick up in new home sales after a big drop during October 08 to April 09 period. It is a strong sign that the real estate market bottomed.
- Bottom Line : The real estate market is still very weak as new home sales are far from their level of 2006-early 2008 level.

If you look at existing home sales :

Two way to read it :
- The way i read it : Like New home sales we are back to pre-Lehman Level and still in a very weak situation. We still have a lot to do to recover from early 2008 level before the big drop.
- The way the market seems to read it : Like New Home sales we have a good pick up after the drop we saw during October 08 to April 09 period. It confirms the assumption that the real estate market bottomed.
- Bottom Line : Still a very weak market....

Retails sales :

Two way to read it :
- The way i read it : Retails is picking up a little bit and we are back to pre-Lehman level once again. However, the cash for clunkers deal helped increase retail sales during summer 2009 it will be interesting to see how it is holding throughout the end of the year.
- The way the market seems to read it : The consumer is coming back to spend. We see a steady increase of retail sales after the strong drop we saw late in 2008 and early 2009. It proves that the consumer confidence is coming back.
- Bottom line : Retails sales are very weak and data's from the holiday period will be very interesting to see if a real pick up is here or not for the consumer.

GDP data :

GDP projection for the coming quarter is a positive GDP. However, we dropped to such a low level that we have a long way to go before recovering to the pre-Lehman Period. Also, it would be interesting to see how much of the GDP growth comes from the government spending and stimulus and how much comes from the real economy.

Other data :
If you look at all other data's (i won't comment each of them individually) but there is also two way to read it :
- The way i read it : Data are coming back to Pre-Lehman Level but overall it is still very weak.
- The way the market read it : Data experience a pick up after the low of October 08 to April 09 which proves that the economy is slowly recovering.

My point with all those quick outlook of data is simple. Post-Lehman interpretation is a major component to the interpretation of today situation:
- The way i interpret Post - Lehman : The bankruptcy of Lehman Brother is unexpected, we can clearly account it as a "Black Swan" that likes to describe Nassim Taleb. As every "Black Swan" the turn of events after was like a "black hole" and impossible to predict. The period between October 08 to April 09 has been a clear unknown and unpredictable period. We could clearly call it a "Mini Depression" that happens on a very fast pace. Then, All Government and Central Bank acted to get out of this "Mini Depression" and avoid a bigger collapse. But if we take the fact, Before Lehman Brother failed, everyone was calling the recession a "very severe one" that still has a couple of month before we see the return of solid growth (Some predict 12 to 18 month to get out of the recession at that time). Then when Lehman Brother failed, the recession we were moved to (according to me) a "stand by" mode, to enter to a new era : the Mini Depression era. Thanks to strong moves from government and Central Bank, we moved away from the Mini Depression era but now we are only back to the severe recession period we experienced before Lehman failed. If Lehman Brother didn't failed and we had those data after September 08 people would consider that we are still in a middle of the severe recession we still need many months to recover. In addition to that, i consider that the recession we are back in now (as the stand by mode is off now for the pre-Lehman recession era we were in) is in some way more severe then the pre-Lehman version because more then 2,5 millions US citizen lost their job during the stand by mode, Confidence in bank is lower, Credit-Card bubble bust is high due to the unemployment situation, Government has higher debts and we don't know what are the side effect of all the solution Central Banks and Government applied to save the economy from the Mini Depression etc. In other word, there is many element that has been added to the recession pre-Lehman that increased the potential severity of it and therefore it could increase the duration of it.
To sum up, The era post-Lehman Brother is a period that i would call as a  "Black Hole" ("Mini Depression") where the economy was in "stand by" mode (And with it the recession we were experiencing) as we were in a "black hole" or "mini depression" era. Now we are back to the recession era we were in before Lehman Failed with some potential increase of severity due to the side effect of the "black hole" era. Therefore, i do believe it is a little bit to quick to call a recover as we just are back to a Pre-Lehman situation and we would need more pick up in data's and more visibility in side effect from all the solutions government and central bank applied and also side effect from the very bad employment market (specially on credit card bubble).
- The way the market reads it : The process we saw after Lehman Brother is the normal process of the recession that just got worst then expected. Now the economy is recovering from this recession and is in a slow recovery process. We can call the very near end of the recession because we saw the bottom in early 2009 from this recession. Since the economy is recovering, we are confident in the near future of the economy.

Since i do believe we are back to the recession mode we had in the pre-Lehman Era (and the data confirms it), i think we should be in the Pre-Lehman way of thinking : We are back in a strong recession with strong severity and we needs more month of pick up to really start to consider a recovery of the economy and the end of the recession. The market should be in a very "volatile" mode with some sell-off period as we could see some confirmation that we are just in middle of the "recession" era and not in a "recovery" era and the post Lehman period was just a "black hole" we cannot use as a reference to evaluate the actual situation and that we should go back to Pre-Lehman situation to evaluate the actual situation of the economy.

First Solar Inc (FSLR) is by far the best solar company in the industry. They have a strong market share and also have the best cost structure in the business. The management is pretty much the best in class. Since the beginning of the year, the Arizona Base company pretty much killed Market forecast easily. During the first quarter, First Solar made 1,99$/Share against an average estimation of 1,51$. The stock rised on this news as the management kept their forecast (1,9billions to 2,1billions for the entire year) and had a cautious tone but still enough optimistic to please the market. You have to admit that with a 48c beat you can expect a market that would be happy no ?
Then come the 2Q which was release a few days ago, Bearish analyst were all over the place with some "source check" that seems to see First Solar Inc losing some major customer. We could then expect a pretty surprise for their Q2 earning. The stock even pullbacked already from the Q1 earning high (move down from 200$ to 170$). First Solar Inc announced just before the earning call, a big project with EDF ER in France, which is a new market that could become as important as Germany if you take into account the feed in tariff in place. The earning finally comes : The market expected a 1,62$ / Share and the company comes with a very solid 2,11$/Share. You could expect another big rise (at least to the Q1 High no?) well the market sold off on the news. Why ? Because the management issued a rebate program in Germany for a certain part of their business their. It seems that the market didn't like that. Now the stock is around 150$. I though it would be interesting to check why it was at this level :
- The rebate program will cost too much to First Solar Inc and hit their bottom line ? The management, which is notoriously known for being very cautious (Apple-Like cautiousness) said that they think their full year forecast will stay in place even with the rebate.
- If you study the rebate program, you will see that it is a benchmark quarterly adjusted price. First Solar Inc made a very clever move on this one. They are aware that the market price is pressured on the downside because of the polysilicon inventory and poly price that is low. They also think, and they are totally right on this one, that it will be a temporary issue, so instead of hurting for the long term their price structure they applied a benchmark quarterly adjusted price. If you look closer at this system, it simply means that if Chinese Solar Company continues to work on a negative margin by dumping price, First Solar Inc will adjust their price in consequence every quarter (on contract ALREADY signed with those conditions included). But we all know that Chinese Solar company won't be able to continue to leave on negative margin, so they will have to increase their price and therefore the quarterly adjusted price will work in favor of First Solar Inc. I wouldn't be surprise to see a very little effect on the bottom line for FSLR on this. But on the other side, they are able to conclude deal with customer by giving them the warranty that if prices continue to fall they will offer them a great price and if the prices doesn't move down, they will still have a fair price. So to sum up, people will be more interested in signing deal with them as they will be sure to always get a fair price, whatever the markets spot price is. So i would like to know where is the bad effect on FSLR their ?
- The actual growth of First Solar Inc between 08 and 09 is around 100% both in the top and bottom line. The P/E is around 20. Don't you feel something is wrong ?
- People shouldn't forget that First Solar has, by far, the best cost structure in the business so they can support a temporary price cut that competition cannot now as they are already very tight in term of margin and cost structure.

Now if we quickly look at the overall Pro/Con of the company (very quick look) :
Pros :
- Great Management
- Huge backlog
- Best cost structure in the business
- Best marketing network in the business
- Very high customer satisfaction
- Very conservative Management
- Great Brand value
- Amazing Balance sheet (best in the business with GT Solar i guess) with a debt/Equity ratio at 10% and a cash level of 777 millions $.
- Best margin in the business (and will probably keep that advantage for many quarters at least)

Cons :
- Their product depends on a very rare commodities that could see a big rise in price. But we don't know the real exposure in term of cost on this component and also we don't know if the company has already a long term agreement to fulfill their needs at a decent price. I guess the cost impact on the overall cost structure is probably far below the silicon impact on polysilicon based panel.
- Tough competition on pricing with Chinese Solar Company mainly. But with their solid cost structure and their great idea of rebate program (the way it has been built) should prevent them from facing a huge margin pressure.
- The overall weak credit market could hurt their business. Well so far no real effect has been seen specially when you look at their huge growth year over year.
- According to channel check (that seems to be wrong so far), First Solar lost some major customer. The only news we found is : They won a big project with EDF EN. But still we should still have a look on those inaccurate channel check.
- Their panel needs big space to be as effective as polysilicon based panel because of their lower conversion rate.

I still believe that First Solar is the best Solar company in the industry for years to come and right now it is a bargain for any long term investor. Due to the possible pullback of the market, it could be a good idea to build slowly your position on FSLR as it has a high beta with the market. For example, you should consider buying a small piece every month until you purchased the potential amount of stock you planned to own. you will get a very good average price for the long term.

And one more thing ....
When First Solar Inc gave their guidance, they said the currency rate assumption for Euro/USD is 1,15, and every 1c above as around 4millions$ positive effect on the company result. Do i need to calculate the actual positive effect since the beginning of the quarter just based on the currency impact ?

With First Solar Inc, you have a leader in the upcoming very high growth market of Solar energy (and renewable energy in general) with the best cost structure in the business and the best organisation. Also you own a company that has a very cautious management which is a great thing because you know they will make very wise decision for the shareholders and won't take stupid risk or make to rosy projection (in fact they will probably always be over pessimistic). I would compare the quality of FSLR management to Apple Management, and as you probably knows, only very few in the market understand that Apple always has been lowball and they often get hit by their lowball projection. First Solar Inc is pretty much in the same class. So take advantage of those great gift pullback and thanks the CEO and CFO for being over conservative, it offers great long term opportunity for wise investor.

Disclosure : My fund is beginning a long position on FSLR and some other solar stock.

Oxbo just made a filing about a bigger then expected loss.
I think people should look at it more carefully. It is a non cash loss probably link to the warrant procedure.

The only news people should keep in mind and i hope (expect?) to be confirm in the 10K filing is : The equity situation of the company should get far better in favor of the shareholder. And don't forget the best is still ahead. We still expect, a potential approval from SwissMedic to because TBI Test.
On the new website of the company (www.oxybiomed.com/) if you look at the topical product (that is highly undervalue now on the market cap of the company), it says that they expect to sell it through the website soon. It means INCOME. It's a big news.


Disclosure : My fund is long on Oxbo

Today, Bulls will tell you that we are at the middle of a strong bull market. They will also argue that the recent rally isn't that "big" because the Dow Jones is only slightly positive in 2009. Whereas Bears will advice you to short the market because the market is overbought and we should see another big drop (or even another strong leg of a long term bear market).

Both of them in fact have no clue about what will happen in the Future, neither do i. I do believe that the only thing that is true is :

- The VIX is a little better now but we are still at a bear market level for the VIX (above 20 means bear market level).

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Today, Oxygen Biothérapeutics announced :

COSTA MESA, Calif., July 16 /PRNewswire-FirstCall/ -- Oxygen Biotherapeutics, Inc. (OTC Bullletin Board: OXBO) today announced that the company has closed on the first $5 million financing tranche with the Vatea Fund, Segregated Portfolio under a June 8, 2009 securities purchase agreement (source)

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