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From: OmertaSoldier3/12/2009 2:56:43 PM
   of 79
 
seek alpha take Q4

LDK Solar (LDK) reported Q4 and FY08 financial results this morning. The results weren’t too surprising, given the fact that the company has taken a couple opportunities in the past months to lower guidance in the face of eroding ASPs (which is an industry wide phenomenon) and the current global economic crisis which is slowing the pace of solar projects. Against a backdrop of challenging conditions, LDK, like so many of its peers has seen its multiples compressed to the extent that almost all future growth is fully discounted. That being said, based on management’s guidance yesterday morning we are adjusting our expectations for FY09 downward as well as our target trading range for the stock.

Results: LDK Solar reported a 21.3% decline in Q4 sales on a sequential basis to $426.6 million, and a 121% increase on a Y/Y basis. Gross profit in the Q4 was negative $126.8 million, impacted by an inventory write-down. Backing the write-down out, GP would have been $89.9 million for the quarter, or a GM of 21.1%. However, with the write-down, GM in Q4 was a negative 29.7%. Net loss of the Q4 was $133.1 million, or $1.25 per diluted ADS, compared to net income of $88.4 million for the same period last year. For the FY08, revenue was $1.6 billion, a 214% Y/Y increase. Gross profit was $173 million, representing GM of 10.5%, down from 32.5% in FY07. Net income for the year was $154.7 million, or $1.42 per diluted ADS, compared to net income of $144.1 million in FY07. In terms of guidance, management said it expects Q1 revenue in the range of $240 to $280 million with wafer shipments between 170MW and 200MW and gross margin between 3% and 6%. For the FY09, it expects revenue in a range of $1.4 billion to $1.8 billion, with wafer shipments in a range of 1.2GW and 1.45GW, gross margin between 12% and 19% and poly production of between 2,000 and 3,000MT. Reducing cap ex plans for 2009 in a range of $190 to $245 million.

Our Take: We listened in on the conference call, where managed provided further color:

Q4 ASP per watt $2.18 decrease of $0.30 from prior quarter – result of rapid wafer decline in prices;
Management expects prepayments to decline in the face of global financial crisis , and continues to undertake cost cutting initiatives to compensate for lower anticipated cash flow and pricing pressures;
Conditions will continue to be challenging in the near term for LDK, as they are with other solar firms facing headwinds.
The biggest concerns we have, which seemed to be consistent with the analyst questions on the call, are that there is another write down ahead. Piper’s Jesse Pichel focused in on this risk in his line of questioning, with management stating its average poly costs were in the range of $170 to $180, Pichel implied with poly prices continuing to decline there is potential for another write down. In the worst case scenario, we wouldn’t expect a second write down on inventory to mirror the $216.7 million write down in the Q4, but it would likely be material to the company’s results and this risk will inevitably continue to be priced into LDK’s stock, which is trading this morning down to $4.30.

Another concern we have from a liquidity standpoint, primarily, is that management said it expects deposits against backlog orders to decline going forward. Here again, Pichel noted that his understanding was that LDK was set to receive an additional $300 to $400 million in deposits which would be used to help finance the build-out of its 15,000MT poly plant. As it stands, management has said it is slowing down its plans for this plant, focusing now 100% on the first 5,000MT train, delaying installation of its second and third trains. The strategy is primarily one of cash preservation, but it creates some additional concerns as well. Namely, when poly production facilities are brought online, it takes some time to iron out the inefficiencies and this early period typically inflates operating costs, on a relative basis. The additional 10,000MT from the other two trains would presumably bring sufficient volume and economies of scale to help offset this effect. So with an anticipation of higher initial poly production costs, in a market where poly prices are widely expected to continue to decline, the implication for operating margins and further write offs is a concern.

On the positive side, management seems to have found a level of conservatism in its guidance and planning at this point that should serve it better. In addition to continued cost cutting measures, its liquidity position is relatively strong, with a cash balance of about $300 million, or roughly $2.50 per ADS, expected operating cash flow (based on 12% to 19% gross margin expectations), and more than $500 million available on its Line of Credit, the company should be able to navigate through the year without raising addition capital through equity. It intends to control cap ex through maintaining relatively level wafer capacity through the year (at about 1.5GW), monitoring market demand to determine when it makes sense to plan for further expansion. Management also indicated it is talking with Chinese banks about moving some of its short term debt into long-term bonds. Its revenue guidance this year is based on wafer shipment guidance of 1.45GW, even though it has a backlog this year of 1.7GW.

So management is being cautious and acknowledging risk in its forecasts for slippage from customers facing issues of their own. That being said, there is some additional upside to the guidance built in here as well if they are able to fulfill their backlog. Poly production has begun at the 1,000MT plant and management reiterated that it expects to reach full production capacity by mid-year. It is about 95% complete with respect to train 1 on its 15,000MT facility, and, as noted above, plans are to produce about 2,000 to 3,000MT of poly in 2009, which will bring cost benefits to the business as well. Though not as significant as it would have been if LDK had been able to stick to its guidance of 5,000 to 7,000MT for the year.

But in this environment, it makes sense to preserve cash and avoid trying to tap the capital markets – especially at current levels. Keep in mind last September it raised capital north of $40 per share. And don’t forget that LDK is the largest and lowest-cost wafer producer in the world. At $4.30, the company’s market cap is a paltry $513 million, or 0.32x FY09E revenue of $1.6 billion and 3.21x FY09E income of $160 million. It has about $2.50 in cash per share, and it is valuing its raw materials at about $500 million. Its backlog is massive, about 20GW in total. To put that in perspective, the management anticipates driving about $240 to $280 million in revenue on 200MW in the first quarter.

We are lowering our expected FY09 revenues to $1.6 billion from $2 billion, and income expectations for the year to $160 million, assuming 10% net margins. As we noted above, there are some legitimate reasons for concern over LDK’s near-term outlook, but at $4.30 we think the risk has been more than factored in, given the points made in the previous paragraph. We think a reasonable set of metrics for the stock, until visibility gets better in the solar sector, and until LDK can demonstrate that write offs and lowered guidance is behind us, is .8x FY09E revenues and 6xFY09E income, which would yield an implied market cap range of $960 million to $1.28 billion, and a target trading range of $8 to $10.

Disclosure: Todd Pitcher/Aspire is LONG LDK. The information provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities.
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Print this article with comments This article has 2 comments:
Register or Login to rate comments » caviar 1 Comment What is the likelihood of poly prices going back up sooner than expected? If it happens, could it reverse sensitively LDK's losses in the short term? Mar 12 11:02 AM | Link | Reply 00 dzr_greg 9 Comments Here is my take on this :
Poly price is like commodity. So if there is a little turnaround in the economy, Poly price will increase.
Concerning LDK,
The management looks more cautious, but their outlook on Poly production aren't reliable. They changed their position on it every month (their Earning statement is different then last month downside forecast).
Because of all that, i'm just worry about the accuracy of the management, i do feel that the market is more pricing lack of confident on the management then more LDK issue.

Now i also hope that they will reflect Poly stock price more on the margin then on write downs (i think it is perhaps the reason why margin will be around 6-8pct in Q1).
Long term is still bullish on LDK if they make through this crisis.... (that is closer to the end then the beginning i think and hope).
But renegociation of the debt will be important (long term debt over short term) and .... regain credibility from the management is the most important element. Mar 12 02:07 PM |
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