LDK Solar (LDK) – Part 2 – Business Issues

LDK’s wafer capacity improved from 105MW EOY 2006 to 420MW EOY 2007 and is anticipated to nearly double annually going forward. Shipments for the year 2007 stood at 260MW and again the expectation is to almost double that in 2008. Gross margin slipped from the industry leading level of 39.3% for 2006 to 32.5% for 2007 and is projected to settle on a range of 25-31% in 2008. Declining gross margins are directly related to silicon sourcing costs. Polysilicon costs increased sequentially from an average of $146/kilo for the first two quarters to $176/kilo in the 4th quarter. The company has ambitious plans to rein in those costs to $60/kilo range as poly production gets sourced internally. Gross margin is projected to reverse to the low 40’s then. However LDK is vague on the manner they arrived at these projections. The company needs to outline reasonably conservative estimates for gross margins and provide clear indications to analysts as to how they model it.

LDK’s headcount stands at 6316 at the end of the 4th quarter with previous milestones being 5409 at the end of the 3rd quarter and around 3000 at the time of the IPO. The headcount is expected to cross 10000 in 2008. This level of hiring is fast paced even for LDK’s remarkable growth projection. The growth rate on headcount has to ease going forward for gross margins to reach up to the projected range as they source polysilicon production internally.

LDK’s capital requirements for 2008 are in the range of $600-$800M. The following summarizes LDK’s current plan to meet this funding requirement:
  1. $85M cash on hand.
  2. $200M expected earnings for 2008.
  3. Customer prepayments of $400M expected for 2008.
  4. About $350M available from credit facilities. One $100M 5-year credit facility and a $500M line of credit under 1-year revolving terms from which about $250M is drawn already.
LDK has been punished on negative analyst perception. As seen in the 4th quarter analyst call, some of the analysts have been openly displaying animosity and disbelief in these calls. Further, LDK needs to spruce up the manner in which these calls are currently conducted and maintain a professional level.

Solar module pricing is expected to be slashed in the coming years as the industry strives to achieve grid parity without subsidies. The demand for PV modules tracks government subsidies and so a scenario can be visualized where margin squeezes occur following demand drop-off as subsidies get reduced moving forward. That situation should continue till around 2011 when solar module pricing starts to approach grid parity in areas that have both high-energy costs and lot of sunlight. As grid parity approaches, solar module demand should explode and LDK along with other solar businesses that survives the uncertainties should enter their explosive growth phase. That phase should last at least a decade.


LDK Analysis:

1. LDK Solar (LDK) - Part 1 - Introduction.
2. LDK Solar (LDK) - Part 2 - Business Issues.
3. LDK Solar (LDK) - Part 3 - Outlook.

Related Posts:

1. Trina Solar (TSL) - Stock Analysis - 08/08.
2. LDK Solar (LDK) - Stock Analysis - 03/08.
3. Solar Manufacturer Comparison (STP, TSL, YGE, CSIQ) - 11/07.
4. Suntech Power Holdings (STP) - Stock Analysis - 09/07.

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