LDK Solar (NYSE:LDK) is continuing its plans to expand production capacity over the next year across its product lines despite facing declining sales and compressing margins due to reduced demand. While this could pay long-term dividends for the company, it will likely further compress near-term margins in the current sustained low price environment. LDK is bucking a trend set by competitors such as First Solar (NASDAQ:FSLR), who have been rapidly cutting capacity in order to reduce costs.
We have revised our price estimate for LDK Solar to $3.67, which is about 25% ahead of the current market price. Our revised forecasts reflect the weak near-term pricing outlook as well as the previously discussed margin compression.
Despite the rough outlook for the solar industry in general, LDK is continuing its plan to expand production capacity across product lines. The company plans to expand its polysilicon production capacity from 17,000 metric tons (MT) at the beginning of 2012 to 25,000 MT by the end of the year.  The polysilicon industry has been suffering from low spot prices as production capacity has been ramped up despite low demand. LDK’s module and cell production capacity is also likely to increase significantly in the period, despite forecasts suggesting that panel demand will fall in 2012 because of a pullback in government support in many European countries.
Players like First Solar have been taking steps to reduce production and focusing on lowering costs to adjust to the changing market conditions. According to rumors, even LDK was planning to cut its workforce to reduce costs. (See: LDK May Reduce Workforce As Industry Conditions Deteriorate) With demand across the solar PV value chain expected to see a fall in 2012, we expect that LDK’s selling prices and margins will remain depressed in 2012 and into 2013, and have reflected that in our forecasts.
Balance sheet issues
LDK’s problems are compounded by its huge debt load. The company’s high leverage will constrain its ability to raise capital if the current industry downturn persists. We expect that LDK will be able to modestly increase its panel and module sales over the next few years as low prices attract customers from emerging markets such as China and countries in the Middle East. Cost cutting initiatives should help the company improve its margins in some of its product lines. However a further degradation in the industry outlook could have a major impact on the company’s valuation and its ability to service its debt. We have factored in this financial risk into the company’s cost of capital.Notes: