http://seekingalpha.com/article/59015-ldk-solar-constructing-a-bright-future?source=yahoo
On Wednesday morning, LDK Solar (LDK) management released 2008 forecasts along with a high level '09 business outlook. While analysts from Piper Jaffrey and Goldman Sachs were quick to publish research notes reiterating their sell ratings and calling into question LDK's ability to meet their aggressive expansion plans, the press release allows us to do some more intelligent work with regards to LDK's valuation and address some of the analysts concerns regarding manufacturing polysilicon.
The release calls for LDK to book '08 revenues between $960mm and $1bn on 510MW-530MW of wafer shipments. Also included are some tepid figures that has LDK producing between 100mt-350mt of polysilicon. Management has stated the polysilicon they produce will exclusively be used to manufacture wafers, so we can therefore expect about $1.88/watt ($1.88mm/mw) for their wafers in '08. We'll come back to this number in a bit.
As LDK will need to source close to 7,000mt of polysilicon in '08, their gross margins are forecasted to be in the 26%-31% range. Using recently published data, LDK's net margins are approximately 9% less than gross, meaning the net will be in the range of 18%-23% for 2008. Being ultra-conservative and taking the low end of all the numbers ($960mm in rev, 26% gross margin, and 18% net margin) LDK will book net income of $173mm in '08. With 112mm shares currently outstanding, LDK should, in a pretty bad scenario, earn $1.54 per share, which correlates to a 2008 P/E of around 32. While trading at a significant discount to its solar peers, it seems fair with nothing else considered. Keep in mind this is the absolute lowest end of guidance, so a PE of 32 is ultra-conservative and I expect them to perform better than this, especially if poly prices stabilize.
If the 2008 forecast was the only data that LDK provided, I would have been slightly concerned, but it was the business outlook for '09 that really stands out. Let's dig further.
LDK expects to ship between 1,050mw-1,150mw of wafers in '09 (100% increase from '08) and expects to produce between 5,000mt-7,000mt of polysilicon (20x-50x '08 production). While they didn't surround the '09 outlook with any revenue targets, they did add that margins would jump back up between 42%-50% as the inhouse production of polysilicon allows them to reduce their greatest uncertainty regarding margins. So doing some quick math, and again using the lowest numbers from their release, we have:
Wafer Revenue - $1.88mm/mw X 1,050mw = $1.97bn
Gross Margin - 42% X $1.97bn = $830mm
Net Margin - 34% X $1.97bn = $671mm
Net per share - $671mm/112mm shares outstanding = $6
2009 P/E - $6/$49.50 = 8.25
Skeptics may question these numbers, but anyone who has closely followed LDK understands that most of their contracts have fixed pricing through 2009 at a minimum, so there should be a lot of comfort in wafer pricing through 2009. With expected growth like this and a forward P/E just north of 8, is it sensible for analysts to remain so bearish on LDK and their expansion plans? Let’s take a look at this a bit further.
2008 will be a very important year for LDK as the focus moves away from their sales capabilities (they are sold out) and squarely on their ability to manage the critical construction projects and an employee base that has grown from 2 employees in 2005 to over 5,400 as recently reported during Q3 results. The aggressive expansion plan, funded to date without any share dilution, has forced LDK to get into the tricky polysilicon production business. Manufacturing polysilicon is a very complicated process compared to making solar wafers, and management is well aware of this fact. Nick Sarno, LDK's Head of Manufacturing and ex-MEMC guru, has compiled a leading team of engineers and polysilicon experts from around the world to help make the LDK vision a reality. They have also contracted Fluor to build the polysilicon plant and will rely on Fluor's industry leading expertise in building high-tech manufacturing facilities. LDK keeps a construction progress page on their website you can visit here.
CNBC recently aired an interview special with Warren Buffett, and a good portion of the show profiled his acquisition of Iscar Metalworking and a trip he was taking to see the new factory in China. During his visit, Buffett was visibly surprised by the lightning fast completion of Iscar’s state-of-the-art factory and expressed amazement in the speed and quality in the Chinese construction efforts, along with the work ethic of the people. In Buffett's candid way, he explained that a project with deadlines like that could have only been completed in China. While the entire western world deals with long lead times for construction projects due to government issues, labor issues, and cost overruns, the Chinese have consistently proven their ability to exceed expectations during an industrial boom that is providing new jobs and exciting opportunities. LDK, and it's deep partnership with the Jiangxi government, are determined to do whatever it takes to make this project work, and betting against them seems like a dangerous proposition.
With the right management team, the right partners, and strong government support, it seems that LDK is well positioned to deliver on many of their expansion commitments. Even if they don't reach their goals and come close, their stock is currently significantly discounted compared to 2009 plans, especially against industry peers like MEMC. LDK has already delivered on their bold commitments in 2007, look good for 2008, and should get a lot more credit for pulling off their plans for the future.
LDK is still controversial amongst the investment community, but if they are able to successfully manage their projects and meet customer deadlines, the controversy will finally be over with very attractive results for investors.
Disclosure: Author has a long position in LDK
