|from seekingalpha M Lu 7/11/08|
As you have read in my previous article last week, I believe LDK Solar (LDK) is in a solid position within the exploding solar industry. It's well on its way to becoming a world leading, vertically integrated wafer and polysilicon producer.
Some people pointed out in my previous article that I didn't include "this or that" aspect of the company, but the truth is that I probably did. However, the article was already quite extensive and would have been nearly twice as long if I wrote about every aspect I have examined in this company. I posted the points I thought were the most relevant and significant. As my first major piece, I am glad it was very well received. I appreciate everyone taking the time to read it.
As an investor/trader in a modern global market, I have found one of the biggest tools at my disposal is my fluency in Mandarin Chinese. I have found that this is very significant when it comes to Chinese companies. Hoping to one day be an accomplished financial analyst, I like to practice my analytical skills. One of the advantages of being bilingual is that it practically doubles your sources for analysis. You read articles, figures, and statistics in Chinese that have never been/never will be mentioned in western media.
This information is not your average day news article either. I'm talking about serious material information that could be a major advantage to those with access and ability. That's why I believe language is one of the strongest tools in the business world.
For example, I was recently researching Chinese news sources and media syndicates for information about LDK Solar. Being a Chinese company, LDK is a lot more likely to appear in Eastern media than in the west.
Interestingly; I came across the official website of the local government where LDK Solar is based, Xinyu City. Looking further into the site, I came across this page. It states:
" ?????LDK????,??????,?????????????LDK????????????????,??????????????????? ?????????????????????????????,??LDK?????????????,?6???,??????1.24???"
For those that don't read Chinese, the page is a government tax report stating the tax revenues generated by LDK Solar for the national government. The most important part is the last sentence that translates to:
As of the end of June, LDK Solar has generated a tax revenue of 124,000,000 CNY (Chinese Yuan) [year to date]
This information listed on an official government website which is quite significant on a number of different levels. The most significant is that it gives us the ability to back solve for the net income of the past 6 months. We can then subtract the reported earnings from the first quarter and know the net income and EPS for the second quarter which is not to be released until July 28th.
Therefore, due to government tax revenue reports being released before LDK's earnings reports; we can backsolve for LDK's yet to be released earnings results.
Information such as this would never leak in western media due to the language barrier.
Another page from the government's website suggests that LDK's revenues year to date (1/08-06/08), weighed in at 3.8 Billion CNY ($554,016,620):
Coming from the Chinese Government website report, I believe the source is very credible. There may be a few rounding errors or exchange issues but we can use more conservative figures.
LDK Solar is set to report 2nd quarter earnings on July 28th (est). Looking at current estimates, most analysts currently expect $0.42/share on revenues of $282.04 Million. We can simply look at the revenue for the YTD revenue figure and subtract the known figure from the first quarter 2008 earnings report, we come up with:
$554,016,620 - 233,399,000 = $320,617,620 Implied Q2-2008 Revenue
Now Let's Crunch Some Numbers
Because the figure from the government report looks slightly rounded, let's round down to be conservative (let's say 123,000,000 CNY). If we take an exchange rate of 6.859 CNY to 1USD, this would give us a total tax revenue of $17,932,643 to the government. It should actually be more since we rounded down and the fact that the dollar has significantly weakened versus the Chinese Yuan to the tune of about 6% YTD. Heres a 1 year chart of the USD to Yuan:
If you guys recall from my previous article, this is how LDK's ridiculously favorable tax situation stands:
NATIONAL INCOME TAX:
LDK will be exempt from national income taxes for 2 years (2006-2007)
LDK will pay a 50% reduced national income tax rate for the following 3 years (2008-2010): -12.5%
LDK will pay the full 25% national income tax thereafter (2011+)
LOCAL INCOME TAX:
LDK will be exempt from local taxes for 5 years (2006-2010)
LDK will pay a 50% reduced local tax tate for the 5 years (2011-2015): - 1.5%
LDK will pay the full 3% local income tax rate thereafter (2016+)
So to set this into perspective, LDK will only start paying its regular combined tax rate after 2016. Seeing how it is currently 2008, this is the first year LDK will pay its half off national tax rate and is still exempt from any local taxes. This is in contrast to the original 15/30% tax from the old law.
So since LDK is exempt from all local taxes until 2010, it is safe to assume that the figure on the website is the national tax revenues generated by LDK to the national government.
Knowing this, we can see the following information from the Q1-2008 income statement press release (figures in thousands of USD):
We can see th at the amount of income tax paid was $8,511,000 USD. This is a little more than at the stated tax rate of 12.5% as stated in the earnings release PR. I am still looking into why it's closer to 14.5% but i think it has to do with other gains/losses outside of operating income or the possibility of the tax differences in accounting standards. It is assumed on a national level that the government implemented IFRS accounting standards as of January 1st, 2007. This would take some effort to convert to GAAP and would be even more complicated since we don't have detailed figures. But for the sake of argument we'll use 15% to be conservative.
We can take the adjusted figure from the Xinyu Government website ($17,932,643) and subtract last quarter's income tax expense to see what LDK paid this quarter in national income tax:
$17,932,643 - $8,511,000= <$9,421,643 in Q2 Income Tax Expense
We then take this income tax expense and divide it by the adjusted 15% tax rate to get the net income for Q2.
$ 9,421,643/.15 = >62,810,953 in Q2 Net Income, Pre-Tax
We can then take the numbers and figure out what net income after tax should roughly be (with a very conservative skew for a generous margin of error) by simply subtracting the income tax expense from the pre-tax income:
$62,810,953 -$9,421,643 = >$53,389,310 in Q2 Net Income After Tax
We can then further solve for the EPS by looking at the outstanding shares as of 3-31-08, which is 106.5M shares. Its hard to say what the outstanding shares is due to the recent $400M in convertible bond offering and $200M buy back plan, but lets just keep it at 106.5M for arguments sake. Therefore the EPS should be:
$53,389,310/106,500,000 = >$0.50/share EPS for Q2 - 2008
Notice how I put the greater than sign in front of all the figures due to the ultra conservative nature of this calculation. Although these numbers may vary from the actual numbers due to rounding/calculation differences, this shows that based on government issued reports:
LDK will blow out Q2 Revenue by nearly 14% and EPS by nearly 20%+
Furthermore, the company is now in the monocrystalline business which diversifies its offerings. Everything I have read (English and Chinese) confirms that the plants are on track and business has never been better. This is quite ironic since the global economy has clearly seen better days.
I've also read material evidence that suggests Mr. Pichel's fears of ramping complications are unwarranted and irrational. Being completely sold out throughout 2009, the next 2 years of LDK are practically set. LDK has next to nothing to worry about.
Some people claim that they "can't trust the LDK management. And that they're a bunch of Chinese crooks that are cooking the books" but they seem to forget that LDK came out 100% clean from the independent investigation. They also seem to forget that Enron and MCI Worldcom were some of the most "American" companies in history. So to claim that LDK is a fraudulent company is more than foolish.
This company is truly a remarkable investment opportunity. It has recently formed a bottom and is a clear steal at current prices. Remember as Warren Buffet once said,
In the short run, the market's a voting machine and sometimes people vote very unintelligently. In the long run, it's a weighing machine and the weight of business and how it does is what affects values over time.
LDK is definitely a heavy-set company. I am actually hoping to visit LDK in JiangXi when I get a chance this summer to further evaluate the company. I look forward to watching this company prosper and grow. Who knows? Maybe I'll have an opportunity to work with them after graduation. The more I study this peculiar company, the more it interests me. LDK Solar is definitely in a great position.
But to the 14M+ Shorts: I Suggest Finding Cover. The Forecast is Looking VERY Sunny for LDK Solar. A Sunburn Would Be Painful.
Disclosure: Long LDK