Beleaguered Chinese photovoltaic (PV) equipment manufacturer LDK Solar (NYSE:LDK) is set to release its Q3 earnings on Monday, December 3. The firm has borne the brunt of the solar industry downturn, reporting a string of bad results. It recorded revenues of about $325 million in Q2 compared to $500 million in the same period last year while gross margins came it at an appalling -39% due to inventory write-downs compared to gross profit about 2% in Q2 2011. 
For this quarter, we expect the firm to continue the trend of weak revenues and low margins with the possibility of additional asset impairments. Some of the key trends that we will be tracking are the trajectory of LDK’s shipments and selling prices as well as its progress in the growing Chinese solar market.
Wafer And Modules – Shipments And Pricing
LDK has traditionally derived a bulk of its revenues by supplying wafers to other solar panel manufacturers. The firm has seen this business plummet this year in terms of both pricing and volumes. Price per watt for wafers declined to $0.37 from around $0.67 last year.  In Q2, LDK shipped about 316 MW of wafers, down by about 27% since last year in spite of increasing its annual wafer manufacturing capacity to 4.6 GW.  This translates to very weak capacity utilization levels which do not bode well for the PV industry, where fixed costs are relatively high. If the firm continues this trend into Q3, gross margins could be severely impacted. Cues for wafer shipments also look quite weak going forward as two of the firm’s customers in Europe and Japan have terminated their wafer supply contracts.
The modules business has clocked some solid growth this year with Q2 shipments coming in at around 136 MW (about 70% up year over year), but it still does not justify the firm’s massive module manufacturing capacity at about 1.7 GW.  Having so much excess capacity doesn’t help LDK’s pricing power either. Average selling prices per watt declined to $0.80 in Q2 compared to last year’s average price of about $1.31. These prices are below those charged by other Chinese manufacturers. For this quarter too, we do not expect much of an improvement given the oversupply of modules in the global market.
Balance Sheet Position
Weak volumes, pricing and overcapacity have taken a toll on LDK’s balance sheet, which is by far the weakest in the industry. At the end of Q2, free cash stood at a paltry $296 million while total debt was around $3.5 billion, of which $2.4 billion is current. Given that the firm has been bleeding cash through its operations, it seems unlikely that LDK can repay its debt in a timely manner. To meet the shortfall, the firm has been selling its assets and land use rights. Given the tough environment, LDK may not be able to realize fair prices on its asset disposals, and we believe this could lead the firm to book impairment charges for the quarter.
During Q3, LDK announced that it will sell a 20% equity stake to a state-backed firm and also outlined plans to divest three of its manufacturing facilities in a leaseback arrangement to raise a total of $45 million. Given the additional cash raised is relatively small in comparison to the firm’s liabilities, it will be interesting to see management’s plans to pay off the firm’s current liabilities.
Progress In The Chinese Market
Despite all the bad news encountered by LDK recently, we believe the Chinese market could prove to be a relative bright spot. The Chinese government is providing attractive incentives like feed-in-tariffs and investment subsidies to drive demand for domestic solar panels. The country had an installed capacity of about 3 GW in 2011 and the government has set a target of growing this to 21 GW by 2015. 
LDK could benefit from this demand growth as its reach into the Chinese market is quite strong with revenues from the region accounting for about 39% of total sales in 2011. The firm’s modules and systems business will directly benefit from growth in Chinese demand while the wafers division could benefit indirectly, if demand from local Chinese panel manufacturers increases.Notes: