LDK Solar (NYSE:LDK), China’s third largest photovoltaic (PV) products manufacturer, could benefit from the Chinese government’s move to provide subsidies for solar power plants and open up access for solar farms to the national grid. The measures are part of the government’s initiative to boost domestic demand for Chinese solar products, gradually weaning the solar manufacturing industry off its dependence on export markets. At present, about 90% of China’s solar panel production is exported, but the government is seeking to change that by outlining an ambitious target of increasing domestic solar installations to 21 GW by 2015, up from 3 GW in 2011.
Grid Connectivity Will Encourage Investment
China’s National Energy Administration (NEA) is pushing for growth of distributed solar farms by providing subsidies. Although the financial details of these incentives are not available, sources peg them at about 0.5 yuan ($0.08) per kWh, which are quite attractive.  Distributed generation plants are smaller in terms of capacity and are located closer to customers, resulting in lower transmission losses compared to centralized plants.
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The biggest obstacle facing solar power developers in China has been the lack of access to power grids. Grid operators have been apprehensive of connecting to solar plants given the unstable, weather dependent nature of their output. Now, the State Grid Corp of China (SGCC), China’s largest utility firm, is supporting the NEA’s plan by providing distributed solar power plants (with capacities under 6 MW) the ability to access its transmission grid. Power producers will also get free support services and can expect to be connected within 45 days. Getting connected to the national grid would enable access to a wider market to sell solar generated electricity, removing a significant roadblock for utility scale solar projects in China.
LDK Solar Can Gain
Among the major Chinese solar firms, LDK solar could benefit the most from the government’s actions. The company has a strong presence in the Chinese market and has experience in building, contracting and selling solar projects in the country. LDK’s revenues from the Chinese market stood at $833 million or about 39% of total sales in 2011. Earlier this year, the firm bagged multi-year contracts to construct 600 MW of solar projects in China. As per guidance provided in Q2, the firm mentioned that it was on track to achieve between 110 and 150 MW of project related sales for this year. The firm’s polysilicon and wafer businesses could also receive a boost from demand from domestic panel manufacturers.
One issue that LDK faces is its weak financial position. LDK Solar is burdened with over $3.5 billion in debt and has a very tight liquidity position. Customers of EPC services are increasingly concerned about the financial stability of the contractor as it is imperative for the smooth execution of projects. However, the firm has been making efforts to shore up its balance sheet by issuing equity and selling some of its manufacturing facilities in a leaseback agreement.
We have a price estimate of about $1 for LDK Solar, which is around 10% ahead of the current market price.Notes: