Solar energy has been an attractive area for 2007 with many new companies entering the playing field, and many more established companies listing on US exchanges. While governments have subsidized the advancement in technology and provided incentives for solar energy producers and consumers alike, shortages have arisen in raw materials necessary to make the panels that harvest the sun’s rays.
LDK Solar (LDK), along with nearly every one of its competitors, has experienced difficulty in securing enough polysilicon to keep up with demand for the wafers it produces. Management finally threw up its hands and decided to produce its own polysilicon. This is no small decision as the investment to enter into polysilicon production is estimated at $1.2 billion dollars. Fortunately, the company has a healthy balance sheet and strong free cash flow to fund the expansion.
In order to build the production facility, the company needs to have access to four important resources.
- The facility needs to sit on roughly 13,000 acres of land
- LDK must have access to critical technology
- There are substantial equipment commitments
- The entire facility must have access to a major power plant
LDK appears to have found the necessary ingredients and construction is currently underway. Management has stated that they expect to start polysilicon production in Q3 of 2008 and ramp the production up sharply in 2009. Analysts are very skeptical with the production levels management offered, but the same analysts are quick to point out that even without the polysilicon production, the company is profitable and growing through its wafer production business.
One of the reasons the wafer production business is so strong is because of the companies ability to use recycled silicon as an ingredient. The company claims to only use 25% “virgin” silicon with the remainder made up from recycled material which is much cheaper. This allows the company to product the product at lower costs (30c per watt versus 43c for the industry). In turn, margins are much higher than competitors offering investors a better return on capital.
With all the optimism surrounding the ramp in business, there is also a large cloud hanging over the stock. In early October, the financial controller resigned after submitting allegations of poor financial controls to management, the SEC, and to the company’s auditors. The issue in question is whether inventory levels stated on the balance sheet are accurate. As the company holds and accounts for its levels of recycled silicon for production, there is question as to whether the majority of this silicon is actually usable. If it is not, the company would have to take a write down for the impaired value of the assets, and could be subject to fines and penalties if it is found that the company tried to cover up the issue.
With the bad news on the table, the stock dropped nearly 50% from its peak. It seems that investors should have placed a lower value on the company given the uncertainty, but a 50% mark down appears to be a bit excessive. With a future that still includes growth and expansion, and a management that is taking steps to review and correct the problem, one might expect to find value in the depressed level of the stock. While I don’t currently have a position in LDK, I am watching closely to see if the stock has stabilized and will likely work my way into a long position shortly.
FD: Author does not have a position in LDK
LDK Solar Co. LTD (LDK)
October 24th, 2007 at 4:20 pm
Very fair post.
Question: How do you feel that the naked short sales will affect the price of this stock in the short term? What do you feel are the chances of a significant squeeze on good news?
October 24th, 2007 at 6:30 pm
How long more it may take to give news about itscorrect inventory? If the news is positive and company is right then how much stock can appreciate.
October 24th, 2007 at 6:31 pm
Thank you for your comments at this time with LDK.
I got LDK at $55/share a few weeks ago and still have it.
A few things I don’t understand are:
LDK has been getting new contracts in the last weeks and it seems that this issue does not affect stock value as compared when Mr. Situ (former controller) opens his mouth against LDK.
Has Mr Situ found a new job? Or Is Mr. Situ dedicated exclusively to go against LDK?
LDK officials need urgently to respond to the public, to those that believe in this technological sector and in a company with great potential.
The worst risk element in these days is “silence from top management” that translates to uncertainty.
LDK top management has to provide the inventory audits results to the public just to close this chapter at once.
Some investors are loosing money and I see no fundamental reason for this to happen on this sector.
Thank you again for your notes.
V. Sanchez
October 24th, 2007 at 9:15 pm
Actually if you can read in Chinese articles, you will find that LDK was founded with recycled polysilicon in mind. They are already providing 60-80%solar wafers in the Chinese market.
October 25th, 2007 at 11:05 am
Mr.situ ex controller was pencil pusher. What does he know about material quality of polysilicone? Hew is not an Engineer. He is just trying to justify his case that he was not fired but resigned so as he could get a job somewhere and say he stood to his words.
October 25th, 2007 at 2:05 pm
LDK management has been silent since they tried unsuccessfully to support the stock with raised guidance and new contracts. The silence is deafening and WALL STREET is spooked. I am a buyer but recognize that another 10 point drop is possible. This is just one name amongst 20-30 stocks I have in the renewable energy field. We need an inventory correction statement from the company and sooner is better.
October 27th, 2007 at 12:55 am
Very fair report on LDK. Even in the worst case situation, when the inventory in question is unusable, the drop shouldn’t have been more than 10 points. I have been a trader for a long time, and the relentless price drop, inspite of repeated good news of getting new contracts in this case seemed mysterious to me, and I can’t rule out some kind of unfair stock manipulation. I have noticed that many Wall St analysts – some of them are very good, and I admire, e.g. Jim Cramer, are unfairly biased against Chinese stocks. These people should realize that a lot of Americans are investing in Chinese stocks now a days, and it will be unfair if they lose money because of any unfair and untrue publicity on their stocks.
October 27th, 2007 at 3:59 am
It’s very near, that Nov. 2nd the earning report and inventory audit report.
October 29th, 2007 at 9:32 am
Does anybody know the firm date of earning release of LDK for 3rd quarter. Thanks
October 30th, 2007 at 3:49 pm
all Street is the Spooker not the spookee.
The Hedgies are attempting to do what they do to all US companies, that is artificially manipulate the market into levels they can pile up on and say “buy, buy, buy” much like they did with well everyone: AAPL, GOOG, RIMM you name it. See this video: http://youtube.com/watch?v=cxx11tCoZh4
Don’t be a spookee.
FD: Bought at $41.75 long.
December 13th, 2007 at 3:12 am
http://www.asensio.com
If you spend time looking into these solar stocks, you may find something rather highly suspicious