LDK Solar (NYSE:LDK) released its third quarter earnings and posted an overall set of weak numbers. The firm clocked revenues of $291 million, representing a 40% decline year-over-year while the gross loss widened to negative 11.2% compared to negative 3.6% in Q3 2011. While the solar industry as a whole faces headwinds due to overcapacity, weak pricing power and subdued demand, LDK Solar is bearing the brunt of the downturn because of its large scale and vertically integrated operations which are causing its entire supply chain to be negatively impacted.
The firm has now revised full year revenue guidance to between $950 million and $1 billion, a sharp reduction from the $2 billion to $2.7 billion guidance that was provided at the beginning of Q1. We believe that a turnaround for the firm will hinge on supply demand rationalization in the global solar market as well as the managements ability to quickly restructure debt and improve operational performance.
Overview of Operational Performance
The firm’s selling prices continued their free fall with modules selling at an average of $0.68/watt this quarter while wafer prices were $0.30/watt. In comparison average selling prices in 2011 were $1.31/watt for modules and $0.67/watt for wafers. The firm expects wafer shipments of 910 MW and 960 and modules shipments of between 500 megawatts and 530 megawatts, which are dismal considering that the firm has around 4.3 GW of wafer manufacturing capacity and about 1.7 GW (As of Q1) of solar module manufacturing capacity. 
This overcapacity has caused weak utilization levels, affecting the firm’s processing costs per watt and consequently its gross margins. To mitigate the effects of under utilization, the firm has been restructuring operations by cutting about 2500 jobs this quarter. During the first two quarters the firm axed nearly 9000 positions. 
An area where we see strong opportunity for LDK Solar is in the Chinese utility solar space which is likely to see demand grow on the back of government incentives and feed-in-tariffs. (See Also: LDK Likely To Benefit From China’s Utility-Scale Solar Push) LDK has experience in building large scale solar projects in China and could see demand for its EPC and systems business grow. For this year, the firm expects PV project sales in the region of 200 megawatts to 300 megawatts.
Plans To Improve Financial Position
LDK has one of the most leveraged balance sheets in the solar sector since most of its capacity expansion was funded through debt. At the end of Q3, the firms shareholder equity stood at a paltry $30 million while debt was over $3 billion. What is still more concerning is that about $2 billion is due over the next four quarters. 
Given its precarious operating cash flows, the firm has been selling assets and land use rights to meet the shortfall. The firm also sold a 20% equity stake to a state backed firm during Q3 to raise cash. The management said that it was seeking strategic investors and was in talks with firms from the United States and China to infuse additional equity into the company. We believe that given the depths of the firms financial troubles, it will not have much bargaining power in its negotiations with prospective buyers of its assets as well as with equity investors.
Trefis Price Revision
Following the firms earnings release, we have revised our price estimate for the company to $0.89, which is about 15% below the current market price. Here is a summary of the changes:
1)Reduced cash and debt figures.
2)Reduced average selling prices and for wafers and modules, keeping with year to date trends.
3)Reduced the wafer shipments to China and Asia Pacific for 2012.
4)Increased gross margins for wafers and selling, general and administrative expenses to reflect current trends.
5)Reduced the share count.Notes: