LDK Solar (NYSE:LDK) has borne the brunt of the downturn in the solar industry due to its aggressive and badly timed capacity expansions, and its vertically integrated operations, which have led to its entire supply chain being negatively impacted as prices for solar power products plummeted. Now, following Wuxi Suntech’s bankruptcy, all eyes are likely to be on LDK given that its financials are actually in worse shape than Suntech’s (NYSE:STP), with higher debt and weaker operating results.
While Suntech faced its litmus test a little earlier when it defaulted on a maturing international bond payment, it remains to be seen how LDK will manage to service around $2 billion in loans that are due over the next year. We believe that the firm faces a risk of insolvency considering its precarious financials and a recent seeming lack of interest from the Chinese central government in supporting failing solar firms. We have a price estimate of around $0.90 for LDK Solar, which is a 30% discount to its current market price.
Deteriorating Operational Performance
While many large Chinese solar equipment manufacturers have seen revenues decline due to falling panel prices, their shipment volumes have held up or even grown over the past few years. This hasn’t been the case with LDK Solar as its shipments as well as revenues have plummeted. Wafer shipments for 2012 are estimated (LDK is yet to release its Q4 2012 results) to be between 910 MW and 960 MW, well below the 1540 MW shipped in 2011. Module shipments are expected to be between 500 and 530 MW, compared to around 550 MW last year. LDK’s revenues for 2012 are expected to have declined by more than 50% in 2012, to about $1 billion. The firms gross margins have also been extremely weak at around -11% in Q3 2012, due to certain write-down’s and will be just around 1% excluding these onetime items.  Like most solar companies, LDK hasn’t posted a net profit since 2010, and it seems highly unlikely that it will do so in the near future.
Capital Mismanagement – Badly Timed Investments
LDK’s capital efficiency is abysmal even if we go by the relatively low standards of China’s solar industry. The firm invested heavily on capacity expansions and now has around 4300 MW of wafer manufacturing capacity and about 1700 MW (As of Q1 2012) of module manufacturing capacity, meaning that capacity utilization rates would be well below 50% for 2012. Some of the firm’s investments have also been victims of bad timing. For instance, LDK began polysilicon production in 2009, and scaled up production to around 10,455 metric tonnes (MT) in 2011, while expanding capacity to 17,000 MT. However, in the last four years, polysilicon prices have fallen from over $100 per kilogram, to current levels of around $16 per kilogram, making it completely unviable for LDK to continue production. Last year, the firm suspended most of its polysilicon operations, choosing to retrofit its likes with new equipment to reduce manufacturing costs. We think its quite unlikely that the firm will be able to produce polysilicon profitably in the near future unless prices increase sharply.
High Threat Of Insolvency
LDK has the most leveraged balance sheet among the solar firms we cover with over $3.1 billion in debt including some $700 million in bonds raised from international investors.  More than $2 billion of this debt is due in about a year. In comparison, the firm’s unrestricted cash was just around $110 million and shareholder’s equity stands at around $30 million, and it’s quite possible that it could erode by Q1 2013, despite taking into account recent equity infusions. LDK hired Citigroup last year to help it renegotiate some its liabilities, but it remains unclear as to what progress it has made.
The firm has had some success in raising equity funding of late. During the first quarter, Fulai investments picked up a 12% stake in the company for around $25 million.  In Q4 2012, the firm sold $23 million worth of newly issued shares to a state-backed firm. We consider these deals as non-events since they do nothing to help pay off debt and are primarily used to fund LDK’s money losing operations. Given the firm’s market cap of just around $130 million, existing shareholders are seeing their stake in the firm getting diluted with every round of equity financing.
The firm has also been divesting some of its assets to free up cash. Last year the company offloaded three of its manufacturing plants for around $22 million in a sale and leaseback arrangement. We remain skeptical of how much cash the firm can free up through asset sales, since most of the firm’s capital is tied up in manufacturing equipment, which is likely to have little demand (and value) in the Chinese market, which already has an excess of solar equipment manufacturing capacity.
LDK’s hopes of getting government support to pay off debt may also be waning. China’s central government took a hard stance on funding failing solar firms. Last year the state council said that the government would stop supporting money losing solar companies and indicated that it would prevent regional governments from doing so as well. If Suntech’s case was anything to go by, it seems like the government will be sticking to its word. Suntech, which is one of the largest and most recognizable companies in the Chinese solar space, received no support from the central government and the state run banks in making its bond payments, and it seems quite unlikely that LDK will be an exception.