LDK Solar (NYSE:LDK) continues to bear the brunt of the current slump in the solar industry. The beleaguered solar firm reported another set of weak numbers for the second quarter with net sales of $235.4 million, down from $499.4 million in the same quarter last year, while net losses stood at $228 million.
We recently lowered our price estimate for LDK Solar to $0.98, factoring in the weak outlook for the year as well as the company’s high debt.
Weak Demand Outlook and Pricing Pressure
Over the last few years, LDK Solar has invested heavily in expanding manufacturing capacity, bucking the general industry trend of capacity downsizing. However, in the current scenario, it looks like the company’s large scale, low cost model is proving to be more of a hindrance than a help. LDK continues to post negative gross margins and, given the chronic oversupply of solar products in the market, we believe this trend is likely to continue into the next year.
The demand outlook appears weak for the solar wafers business as well. Due to the weak fiscal situation in Europe, several countries including Germany and Spain have been cutting back on subsidies for solar energy. The anti-dumping investigation initiated recently against Chinese manufacturers is also expected to take a toll on LDK’s European sales. In the United States, the company faces countervailing tariffs, making it more difficult to compete with local manufactures such as First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR).
LDK Solar’s guidance for its polysilicon business has also been weak. The company expects to produce between 1,100 MT and 1,400 MT of polysilcon this year, a sharp decline from 10,455 MT produced in 2011.  Part of this decline is due to retooling of manufacturing facilities to incorporate the hydro-chlorination technology.  Polysilcon prices have fallen sharply this year due to weak demand from panel manufacturers and growing adoption of alternative solar panel technologies such as thin film.
Sales of cells and modules are expected to improve marginally this year to between 550 MW and 750 MW, up from about 551 WM last year. The average module selling price, however, has plunged to below $1 per watt for the year.
Fragile Balance Sheet
LDK Solar has the most over-stretched balance sheet in the solar industry with total debt standing at about $3.5 billion, of which $2.4 billion is current. The company also faces a precarious cash situation with free cash of just $296 million. ((LDK Solar Form 6-K))
LDK continues to operate with a working capital deficit with trade accounts and bills payable at around $1 billion. Shareholders’ equity in the company has eroded, amounting to just $171 million. To survive the cash crunch, the company is actively seeking strategic investors and is also looking to sell surplus property and land use rights.
Our revised price estimate for LDK Solar is $0.98, around 10% below the current market price.Notes: