May 22, 2009 – We sat in on LDK’s Q1 2009 conference call yesterday (notes below) and weren’t too surprised by anything we heard – declining ASPs, risk of further write-downs on poly inventory (although management thinks it can avoid this), and potential need to raise more capital through equity. All of these factors will continue to pressure the stock in the near term, until the company shows it is back on track with wafer shipment growth, works through some of that inventory which is priced in the $150 range and begins to prove out its poly manufacturing plan.
Based on management’s comments yesterday, we still think our target revenue for the company of $1.4 billion is attainable but we doubt the company will be able to post a profit this year, and have lowered our expectations from $98 million in income to a net loss of about $40 million. On a pro forma ratio basis, we are adjusting our target multiple of sales for a valuation down from 1 to 0.8, which would lower the high end of our price target from $11-12 down to the $9-$10 level, but we wouldn’t be surprised to see the stock dip lower than yesterday’s close at $9.30 in the near term.
Longer-term, we remain bullish on LDK, given it is the largest wafer company in the world, and it is the low-cost producer. As it brings its poly production on line, we think that it will achieve economies of scale promised by a vertical integration model which should drive margins higher. The problem is the near-term for the stock. We would be aggressively buying under $6 and continue to write out-of-the money covered calls when the stock pushes over $10. We last wrote September 15 (strike price) on the stock, and are feeling pretty good about that trade at this point.
LDK reported a 33.6% Y/Y decline in Q1 revenues to $283.3 million, with gross margins of 1.7% and a net loss of $22.5 million, or $0.21 per share, compared with a net loss of $219 million in the prior quarter. Total wafer shipments decreased to 206MW from 254.3MW in Q4. Wafer sales increase slightly to 170.2MW from 157.6MW in Q4. ASP per watt in Q1 was $1.54, a decrease of 29.4% from the prior quarter. The company had $184.4 million in cash and equivalents at March 31, 2009, and $114.4 million in short-term pledged banks. It also has a RMB 1 billion credit line form the Ag Development Bank of China, and a loan for RMB 200 million from China Development Bank.
In terms of updates on expansion, management said it has scaled back plans to best reflect current demand levels and focus on cost reduction. It is maintaining wafer capacity at 1.5GW. In terms of poly, it began production in its 1,000MT facility in Q1. For its 15,000MT plan, focusing on first 5,000MT train, and is on track to achieve mechanical completion by Q2, 2009. It expects the second train to reach mechanical completion by Q3, 2009. The forecast for combined 2009 production will be between 2,000 and 3,000MT of poly. Management doesn’t expect the production to have a material impact on costs until 2010.
In terms of Q2 shipments, management expects to ship between 200 and 220MW.
· Barclays – asked for additional color on gross margin and for comments on outlook for polysilicon.
A: Inventory write-downs were in Q4, 2008. Gross margins were pressured by ASP declines. Seeing price between $1.10 to $1.30 per watt. In the short term, the low price range will persist, but heading into the second half, expect prices to stabilize. In terms of poly prices, seeing price coming down to below $100 but it still at a pretty wide range.
· Morgan Stanley – wanted to understand balance sheet items, receivables, inventory… - receivables have gone up a lot. Wanted to know why AR is moving higher. On inventory, wanted to understand mix (raw materials vs. finished goods). On the receivables, customers have been challenged for working capital and LDK is selectively providing open terms for certain long-term customers. Management said AR is about $180 (roughly 2 months operations). The inventory is still primarily raw material. In terms of metric tons, it has about 1,700 to 1,800MT of raw material.
· Lazard – wanted to know price of raw materials that make up inventory, and whether there is any risk to further writedowns. Management said at current market price ($1.10 to $1.30) it doesn’t feel any need to write down any more inventory. Also asked about liquidity position of company. Management said it is working on L-T financing to replace S-T borrowings, and also working with commercial banks to replace S-T debt. Management said also, with improving market conditions, it may also issue further equity in a raise. Asked where they see wafer ASPs by the end of the year. Management said it has L-T contracts with certain prices already set up, but that they are working with their customers on pricing as well to help average down. It said its ASP is better than overall market average.
· Piper Jaffray – asked about annual audited report and when it will be available. Tomorrow. Asked also about Q4 adjustment and poly basis price before and after revision. Price was in the mid-$100 range. Asked about how much poly inventory they have. Said in the range of 1,700 to 1,800MT in inventory. Asked about whether there are any covenants associated with loans and credit line. Answered yes, and that they are in compliance, and the covenants will be published in annual report. Asked if ASP was $1.54 and costs were $1.50 and non-silicon costs were about $0.30 to $0.40…that means your poly price at 6 grams a watt was mid-$100s. Then you will have ASPs go down a bit, but what is the outlook for the poly price. Will you have to write down that inventory from $170 now to below $100 in order to maintain a break even gross margin? Answered that market price is below $100 and they are getting new purchase at such a level that they believe in next few quarters that prices will continue to drop.
Asked if we should expect to write down another $50/kg. Management said at this point, doesn’t expect further write downs based on current market price. Asked how can there not be another write down. Said price in Q1 was $1.54. Even at $100 cost, would still manage to have break even margins, but very thin, until the market condition improves.
· Needham – asked about inventory costs. Management said at end of Q1 at close to mid-$100 and right now closer to $100 and below.
· Oppenheimer – what makes you feel so comfortable about selling at $1.10 to $1.30 this year when many of your competitors are selling lower? Said that they have L-T contracts with market leaders, and products have strong quality. This enables them to have a premium. Asked about assuming macro market to remain sluggish, will the L-T take or pay contracts be renegotiated? Said contracts vary but most are priced on wafer. Asked about BP Solar deal. Said they don’t discuss specifics with contracts. Asked about how much tolling MW this year? Said about 15% of capacity.
Asked about what they expect cost/kg for poly out of the plant this year. Said still in startup phase. Objective is to move it down to $30+. But this year, in the high $80 range for poly production. Asked about, in the case that they fail to get costs down, if there are any strategic alternatives? Said this is one of the reasons that they are building the plant they are building, which will enable them to get to the price levels to be competitive in poly in markets like this.
· Soleil – follow up on production costs for poly. At $80, assumption this is fully-loaded. Answered yes. Asked to talk about what true variable cost of production will be and how this will decline over time. Answered that they have the reactors in place. Thinks they need a period of time to stabilize the process. They think they can get this process down pretty quickly and start producing poly at least at levels they are paying on the market now. Asked about capital spending for FY2009. Answered on wafer side, have 1.5GW capacity and should have sufficient capacity to run. As far as poly plant, the focus is on the first 5,000MT train and second train is almost complete. The spending here to finish this shouldn’t be too much at this point. Said capital spending could be as low as $600 million this year.
· Cowen – asked about cash flow from operations for the quarter. Answered negative $75 million.
Disclosure: Todd Pitcher is long LDK.