LDK Solar (LDK) – Part 3 - Outlook

LDK is valued around eighteen times this year’s earnings estimate. The basis for this valuation is that gross margins could pull back to the teens or lower in 2009 should LDK fail to produce polysilicon from their new plants. Though this is a possible outcome, its probability is very low and of the possible outcomes, many analysts are going by the worst-case scenario. Below is a look at the possible outcomes for 2009:

Gross Margin Assumption	Poly Production Assumption	Earnings/Share
10-15%*	Zero	0.85-1.7
20%**	Zero	2.55
25%***	Zero	3.4
30%	50%	4.25
35%	75%	5.10
40-45%****	90-100%	5.95-6.80

• *Assumes very high silicon acquisition costs in the spot-market along with ASP weakness.
• **Assumes the low end of LDK’s 2008 gross margin projection for 2009.
• ***Assumes the high end of LDK’s 2008 gross margin projection for 2009.
• ****LDK’s projected gross margins for 2009

The primary competition for LDK is from alternate PV cell technologies, specifically, thin-film solar manufacturers boasting a cost advantage as exemplified by the gross margins realized by First Solar (FSLR). Newer technologies that leapfrog current technologies will continue to be a threat and LDK will need to combat this by aggressively pursuing R&D moving forward.

LDK’s challenge in the short-term is managing growth, achieving polysilicon production targets, and funding capital requirements efficiently. Long-term, as alternative technologies become more profitable, a migration strategy should be in place enabling its manufacturing base to be shifted to newer technologies on an on-going basis. The company has already experienced a shift in their production base, as their recycling factory will get shutdown as the new poly production lines come online.

To recap, given the low valuation and the reasonable chance of explosive profit growth in the future, LDK Solar (LDK) is a suitable stock in the long-term growth portion of diversified portfolios.


LDK Analysis:

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

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