Here’s Why We Expect LDK Solar To Report A Lackluster Q4

LDK Solar (NYSE:LDK) is expected to publish its Q4 2012 results on April 18. During the fourth quarter, an industry-wide decline in average selling prices caused most Chinese solar manufacturers to report dismal results. We believe that these lower prices coupled with declining shipments will dictate the firm’s performance for the quarter. During Q3, LDK posted revenues of $291 million (a 40% decline year-over-year) while its gross loss widened to negative 11.2%, compared to negative 3.6% in Q3 2011. For this quarter, recognizing the uncertainty in the market LDK has provided a rather wide revenue guidance figure of between $230 million to $290 million.

Low Pricing And Weak Utilization Will Hit Margins

Most of the large Chinese solar companies that we cover have had flat to growing volumes, although their revenues have declined due to lower prices.  However, LDK Solar has actually been witnessing declining volumes as well as lower price realization. During the third quarter, LDK’s modules were selling at an average of $0.68 per watt while wafer prices were around $0.30 per watt, declining by almost 50% since 2011. It is likely that prices eroded further in Q4, and we think that LDK could be impacted more severely than other companies due to its vertically integrated operations, which would cause its entire value chain to be hit. (See Also: Here’s Why We Think LDK Solar Could Be In Trouble)

LDK expects 2012 wafer shipments to be between 910 MW and 960 MW, which is 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. These numbers are abysmal given that the company has around 4300 MW of wafer manufacturing capacity and about 1700 MW (As of Q1 2012) of module manufacturing capacity. This overcapacity will cause utilization levels of less than 30%, which are very weak even by the low standards of the Chinese solar industry. The low utilization could increase the company’s processing cost per watt and also reduce its gross margins.

Utility Scale Projects In China Could Provide A Silver Lining

We see some opportunity for LDK in the Chinese utility solar space. The Chinese utility solar sector 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 engineering procurement and construction (EPC) and systems business grow going forward. In 2012, the company bagged around 600 MW worth of projects and expects PV project sales for the year to be around 200 MW. We will be keen to know of the firm’s progress in executing its existing projects as well as garnering new contracts.

We have a 0.89 price estimate for LDK Solar, which is around 15% below its current market price.

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