North Coast Solar Stocks

July 6, 2009

Outlook Dims for LDK Solar

Filed under: LDK — Tags: , , , , — Jason @ 2:09 pm

By TIERNAN RAY
barrons.com

LDK is being hit by pricing pressures, which could further cool the wafer maker’s stock price.

LAST THURSDAY BROUGHT a bitter reminder to investors that solar energy, hot as it is, is a commodity, whose prices can decline, especially in a recession.

Chinese solar energy wafer maker LDK Solar (LDK) reported that its wafer shipments in the June quarter were higher than it initially expected. However, revenue was lower than analysts expected. That combination raises the possibility of pressure on the prices at which LDK sold those wafers.

LDK’s shares are down 10% today, at $9.82. Given that there is about 10% upside, assuming an average solar stock valuation, and substantial potential downside if wafer prices continue to decline, investors ought to continue to avoid the stock.

The years 2007 and 2008 were filled with controversy for LDK, based in the Chinese city of Xinyu, about 300 miles from China’s eastern coast. Now 2009 is shaping up as the test of whether the company can manufacture large volumes of refined polysilicon wafers, which is the raw material for most solar cells.

LDK, after all, just started mass production in one of two silicon factories in Xinyu in January of this year.

Barron’s magazine columnist Bill Alpert first called attention to questions about how LDK accounted for its manufacturing back in October of 2007 when shares traded above 50 bucks. (See “China’s Solar Boom Loses Its Luster,” October 8, 2007.)

With the announcement of higher-than-expected shipments of polysilicon, some of the concern over whether the company could meet demand goes away.

Now, the economics of starting up silicon production amidst a global recession are becoming clear, and they’re not great.

It’s costing LDK much more than the industry average to produce polysilicon in the Xinyu facility, even as prices for its wares decline, estimates Edwin Mok with Needham & Co.

LDK probably is producing polysilicon for between $80 and $90 per kilogram in the Xinyu facility, he estimates, above the current spot market price of $65 per kilogram.

At the same time, the company’s less-than-expected revenue suggests LDK is having to sell its finished wafers at a little under $1.10 per watt, estimates Mok. That’s above the spot market price for polysilicon wafers of 95 cents per watt, but it’s also below the low end of the forecast of $1.10 to $1.30 that LDK offered back in May.

This suggests that despite having signed long-term contracts of ten years or so with customers for its wafers, LDK has to renegotiate those contracts to match industry wafer prices that have dipped with the recession. LDK executives admitted as much in investor conferences this year.

Guessing where profit goes from here is like guessing about any commodity in the recession. Mok thinks LDK’s prices will have to come down further as the year goes on, as customers push to renegotiate terms in light of falling industry prices.

A fair value on the stock is probably $11 per share, given an enterprise value-to-projected revenue multiple of 1.6. But if wafer prices continue to deteriorate for the company, revenue estimates could decline further and that valuation multiple of 1.6 could narrow.

Until it’s clear LDK can lower its production costs and maintain pricing power, it’s best to steer clear of this business, hot as it may appear.

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