Cowen’s Raj Comments on LDK Solar

Apr 17, 2009
Author: SCP Editor

April 17, 2009 – Analyst Comments –  Cowen & Company’s Raj Seth maintained LDK Solar (NYSE:LDK) this morning at a NEUTRAL commenting that “estimates continue to look too high” and he is “adjusting for lower ASPs.”

Key Takeaways

·         Seth says “LDK is well positioned to prosper in the long-term but first has to battle through what continues to look like a very tough CY2009 characterized by falling demand, renegotiations of many of its contracts to accommodate lower industry pricing, a shifting (slowed) internal poly ramp, etc.”

·         Seth expects another inventory write-down due to declining poly prices

·         “Given recent industry dynamics and pricing trends, we believe that it’s prudent to moderate estimates to better reflect ’09 shipment growth and somewhat lower industry pricing (wafers) than previously assumed.”

·         Modeling CY09E of $0.47 on $1.24 billion, with expectations of H2:09 shipment ramp to 23-25% sequential growth and ASPs to $1.39. Modeling GM of 13.4% in FY09.

·         Note: After inventory write-down in Q1, LDK was carrying 2,3000MT at an average cost of $175/kg. Spot poly is now at $80-$100.

·         CY10E EPS is $1.09 with assumed shipment growth of 40% at ASP of $1.20. GMs modeled at 18.5%. Assumed blended poly costs of about $100/kg.

·         Long-term contracts being renegotiated will continue to be a fluid process. 

·         LDK trades at 8x Seth’s CY10EPS, 1.6x EV/09 revs and 1.2x TBV.

We agree with Seth’s instincts that more write-downs are on tap – for the entire sector. The last round of write-downs for solar companies on inventory came when poly prices were in the $150-$175/kg range and now spot prices are trading in the $80 to $90kg range so the writing is on the wall, in our opinion.

For this reason, we think solar stocks in general will see pressure in the near term, including LDK. That being said, we continue to believe that LDK, as a low-cost producer of wafers, the largest in the world, is well positioned to weather the pricing pressures in the industry. Seth’s comments seem to reflect the same.

LDK’s backlog is massive. It has more than 14GW through 2018, with down payments from customers and another 6GW of wafer processing orders. Granted, as Seth notes, this backlog will get renegotiated – but it still provides for long-term visibility.

While we do expect weakness in LDK’s stock, we think that the current prices are overly pessimistic given the long-term outlook for the solar sector in general, and LDK’s leadership position. Seth’s revenue target of $1.24 billion this year is truly pessimistic; representing what would be a 24% Y/Y decline. We just don’t see things winding down that much for the business. Moreover, the recently announced Q-Cells (QCE.DE) teaming agreement should help compensate for revenues pushed out from other customers dealing with credit issues and project delays.

Given the tough Q1 and continued challenging credit conditions, we have reduced our revenue target on LDK to $1.4 billion for this year, and net income to $98 million. Based on our estimates and on assumptions of a 1x sales multiple (FY09) and 9x income multiple, we arrive at a target trading range for the stock of $7.40 to $11.40.

However, since we do agree with Seth that more write-downs will be announced (throughout the sector, not just with LDK) and likely there will be some reductions in guidance, we think that the near term response from the Street will put pressure on LDK’s stock. We see this as an accumulation opportunity and would look for opportunities also to sell puts on the stock into weakness as well as an opportunity to get put the stock at a more favorable price.

Important Disclosure: The SCPEditor is LONG LDK. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.


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