LDK Solar (NYSE:LDK), one of China’s biggest solar equipment manufacturers, could be poised for more difficult times ahead. Unlike many of its large Chinese peers who have seen their shipments volumes and margins rise in recent times, thanks to a jump in demand from emerging solar markets, LDK’s results haven’t mirrored these trends. The firm’s large debt load and weak operating performance underlie our $0.80 price estimate for the stock. Our price estimate represents a 50% discount to the current market price.
Struggling Operations, Negative Gross Margins: LDK’s business is largely geared towards manufacturing photovoltaic wafers, which are used to build the cells that go into solar panels. The business is largely commoditized and the products have little differentiation apart from the conversion efficiencies. LDK has been selling its wafers and panels at will below their manufacturing costs with its gross margins standing at around negative 46% during Q2 2013, leading to deeply negative cash flows for the company. Unlike its peers Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL), which have seen surging shipments and utilization rates approaching 100% in recent times, a bulk of LDK’s capacity remains unused. During the second quarter, for instance, the firm’s solar module manufacturing operations clocked less than 20% capacity utilization. Lower utilization rates translate into a weaker absorption of fixed manufacturing costs and result in lower margins.
Three Debt Defaults This Year: LDK has the most leveraged balance sheet among the Chinese solar companies that we cover, with over $2.75 billion in debt, most of which is short-term. As of the second quarter, the company’s interest costs stood at close to 50% of revenues. The company’s precarious financials have meant that it has defaulted on its debt obligations three times so far this year. In April, the firm partially defaulted on a $23.8 million bond payment and later in June, it missed a $240 million payment to some Chinese lenders. More recently, in August, the company failed to make an interest payment on some of its senior notes. While the firm has been moderately successful in negotiating with some of its debt holders who have (so far) refrained from pushing it into bankruptcy, we believe the firm faces a mounting risk of insolvency as the business continues to bleed cash. Eight straight quarters of losses have meant that the firm’s equity position has eroded to around negative $800 million and the firm’s cash position has dwindled to about $85 million as of Q2 2013. ((Form 6-K))
Offshore Debt Poses Threat: Over $2 billion of LDK’s debt comes from China’s state run banks such as the China Development bank and we believe that there could be a possibility of negotiating and restructuring this debt as it comes due over the next year. However, the firm has also issued debt to overseas lenders and this could prove to be a stumbling block since overseas lenders are unlikely to be as accommodating as China’s state run banks. While the firm recently hired Jefferies LLC. as a strategic advisor for advice it on its offshore debt payments, we believe that the firm’s options remain relatively limited. Asset are also unlikely to help finance debt payments since most of the firm’s capital is tied up in manufacturing equipment, which is likely to have little market value currently. For instance, LDK Solar sold a 2.2 GW solar cell manufacturing plant for just around $19 million this year, about 80% below book value.  While LDK has had some success in raising equity in the recent past, the amounts have been very small (around $50 million) and pale in comparison with the debt load and accumulated losses.Notes: