LDK Solar: Not Worth the Risk

| About: LDK Solar (LDK)

LDK Solar (LDK: NYSE) has finally been exonerated, sort of. But I still wouldn’t put my hard-earned dollars anywhere near it.

LDK Solar IPOd in June, and the stock went on a tear, more than doubling its $27 initial price in the next few months. The stock peaked at nearly $74 in September before an accounting scandal sent LDK back under $50.

A former employee told reporters that a large portion of the company’s inventory was actually junk, waste silicon that LDK had no way to process into new wafers.

LDK denied the accusation (at one point the solar cell company even made the claim that just because it couldn’t process the silicon right now, it didn’t mean it wouldn’t develop the technology in the future). And LDK brought in an external auditor to prove it was telling the truth.

As is usually the case in a Wall Street scandal, the actual truth is less important than a few soothing words and a nice soft-shoe to make investors feel better about the situation. And that’s what LDK gave us.

The external auditors swore the solar cell company had just as much silicon as it had claimed. And the stock soared on the news, without anyone mentioning whether or not LDK could do anything with that silicon.

LDK still hasn’t proved it can turn any of that waste silicon, which includes defunct wafers sold as garbage and ingots too impure to be processed by other solar cell producers. But maybe we weren’t supposed to notice that.

If LDK can’t use its recycled silicon, if that former employee was right, then the company’s only advantage is its cheap Chinese labor. Don’t get me wrong, we’ve built plenty of fortunes on a pure-play outsourcing deal.

But that cheap labor doesn’t make up for LDK’s lack of processing know-how. And it won’t prevent the company’s profit margins from continuing to fall as silicon prices grow at an alarming rate in the next few years.

Silicon is already incredibly expensive compared to prices even a few years ago. And solar cell and semiconductor manufacturers are already preparing for a probable shortage. Companies are setting up contracts for silicon years or even decades in advance, as if the stuff was… oil. And as technology puts computer chips in more and more devices in our everyday lives, don’t be surprised if silicone becomes as precious a commodity as oil.

In that environment, I don’t trust a new kid on the block with nothing to recommend it but inefficient business practices and penny-a-day labor.

If you want to grab some gains in the short term, go ahead and jump into LDK Solar, but be prepared to jump back out again within a few months or weeks. If you’re looking for a long-term investment, don’t put money into the stock. It’s not a durable competitor in the silicon wafer industry.

The Chinese government may be able to make LDK last with subsidies, bailouts and “strategic investment”. But that government has no incentive to promote the company, and it has shown no preference toward it so far.

I wouldn’t risk my money on LDK, not even if they paid me.

Disclosure: none

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Tagged: , Semiconductor - Broad Line, China
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