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Investment Overview for LDK Solar (NYSE:LDK)
Below are key drivers of LDK's value that present opportunities for upside or downside to the current Trefis price estimate for LDK Solar:
- Wafers Gross Margin: The gross margins for LDK's solar wafers business declined from 5.4% in 2008 to -9% in 2009 due to a significant decline in the selling price of wafers. The company has been able to better manage gross margins despite ongoing declines in the selling price of wafers, because of which margins recovered to about 32.9% in 2010. Falling prices squeezed margins again in 2011 and 2012, pulling them down to 15.5% and 8% respectively. We forecast margins to remain flat over 2013 and increase to above 25% by the end of our forecast period. However if the company can manage its margins and improve them around 30% by the end of our forecast period it could allow the stock price to double.
- Average Selling Price of Wafers: The average price realized by LDK on the sale of solar wafers has fallen drastically from $2.35 per watt in 2008 to $0.89 per watt in 2010. Prices dropped below $0.40 by the end of 2012. While we estimate prices to stabilize at these levels, if competition intensifies and prices decline to $0.35 per watt by the end of our forecast period it could represent 70% downside to the Trefis price estimate.
LDK Solar is a leading manufacturer of solar wafers and solar modules. Solar wafers are the principal raw material used to produce solar cells, which convert sunlight into electricity. Based in China, the firm sells multicrystalline and monocrystalline wafers globally to manufacturers of solar cells and modules. The firm also sells solar materials such as ingots, and other chemicals used to produce polysilicon and solar wafers. The company also provides wafer processing services.
Most of the firm's revenues originate from Asia, with China being the biggest market. The majority of the remaining revenues come from Europe and North America.
The PV Modules and Systems segment is the company's most valuable division, followed by China Wafers.
Falling demand due to subsidy cuts in Europe
Europe has generally been the largest source of demand for the solar industry. However as various countries have cut subsidies in the wake of weak economic conditions, the demand for solar products has begun to subside. Governments have begun placing caps on PV system installation subsidies, or even cutting some subsidies altogether. This has reduced the value of the European division, while Asian governments have heavily subsidized the industry allowing demand to remain healthy.
Significant support from the Chinese government
Solar panel production is significantly cheaper outside the U.S. as a result of heavy government subsidies. Accordingly these Chinese players, such as LDK, have a substantial advantage. Foreign governments have accused the Chinese government of dumping in some cases, and as a result many Chinese players have been selling more products domestically and in the Asia-Pacific region than in the U.S. and Europe.
Higher margins for PV Systems
LDK's PV Systems business has had consistently higher margins than the wafers business, with historical margins in excess of 20%, although they dipped slightly in 2011. Because these margins have generally been higher and more consistent than the wafers business, the segment is the most valuable for LDK.
Demand for LDK's wafers follows demand for solar power
Solar power is a rapidly emerging form of energy production that converts sunlight into electricity through the use of photovoltaic (PV) cells. PV cells are typically made from multicrystalline wafers thus any demand changes in the solar industry are expected to impact LDK's business. As demand has slowed LDK has been negatively impacted. However should the industry approach grid parity more quickly than anticipated it would be a very positive development for LDK.
Environmental concerns are pushing renewable energy growth
Fossil fuels are limited in supply, with easily extractable reserves quickly being depleted due to worldwide economic growth. As the world approaches peak oil, the scarcity of new reserves will likely drive up the demand for renewable energy.
Furthermore, current energy production methods release pollutants like smog, as well as carbon dioxide gas, which contribute to the greenhouse effect and global warming. Solar energy production produces few, if any, pollution or emissions, making it one of the cleanest sources of power. Increased education on these issues is creating pressure for governments and energy companies to regulate energy production. This movement is having a worldwide impact on energy regulation in the form of global emissions caps.
Oil and Gas Prices vs. Solar Efficiency
Oil and gas prices have generally remained high of late. As rising oil and gas prices lead to more expensive commercial electricity, consumers may start to demand new, cheaper sources of power. Solar power is currently far less efficient than other energy sources, even wind. However as its efficiency improves, and should oil prices continue to rise, then demand could increase substantially.
Trefis Forecast Rationale for Systems and Other Revenues
This refers to LDK's revenues from its systems installation business, as well as some other ancillary products and services.
Revenues from system installations and other businesses increased from $22 million 2007 to $148 million in 2008. Revenues then declined slightly in 2009 pushed down by falling prices before increasing to $352 million in 2010. Revenues jumped to $406 million in 2011, driven by an increase in polysilicon production and increased activity in the systems business as well. We expect steady growth in these revenues, eventually exceeding $1 billion by the end of our forecast period.
Trefis considered the following factors in its forecast:
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- Government support
- In various parts of the world, governments have been giving subsidies and incentives to citizens who adopt solar energy usage. This has had the impact of increasing demand significantly across the globe.
- Higher number of Contracts won
- Revenues from PV Systems depend highly on the number of contracts won. As the firm expands its presence in the Systems segment across the globe, it will have a higher chance of bidding for projects. LDK's ability to manufacture at a lower cost will help it win more contracts as these cost savings will eventually be passed to end consumers.
- Solar systems are moving towards grid parity
- Grid parity is defined as the point at which solar systems can generate electricity at the going market price without government assistance.
- Some markets can be expected to achieve grid parity over the next few years depending on the retail price of electricity in the market and geographical factors such as solar irradiation. Peak rate grid parity has already been achieved in markets such as Hawaii and parts of Italy, while markets such as Germany are expected to reach grid parity over the next 2-3 years depending on the decline in prices of solar modules and the increase in the cost of traditional electricity sources.
- When peak rate grid parity is reached (and installation costs decline) we expect significant growth in solar demand.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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