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We Think No Stock is More Attractive than LDK Solar (NYSE:LDK) at Current Levels

Nov 14, 2008
Author: SCP Editor

November 14, 2008 – LDK Solar (NYSE:LDK) one of our favorite companies to tout on the Small Cap Pulse, tipped to a lowly $12.40 in yesterday’s session before closing back up to $14.32. The management took the time this week to remind the Street that its fundamentals remains strong, despite a challenging global economic environment: secured contracts of 1.8GW for 2009, more than 100% of current planned output for the year; operating at full capacity; strong cash position of $460 million with available line of credit for another $430 million. At current levels, we think the stock is ridiculously oversold and represents a huge upside – near and long term. Here is why:

At yesterday’s closing price, the stock is trading at a P/E ratio of 5.26x trailing-twelve months’ earnings and a P/S ratio of 1.49x trailing-twelve months’ sales. We are forecasting FY2008 revenue of $1.8 billion and profit of $324 million; and FY2009 revenue of $2.9 billion and profit of $580 million. This represents Y/Y revenue growth from 2007 to 2008 of 243% and Y/Y profit growth from 2007 to 2008 of 132%. LDK has $4.32 in cash per share.

The company is a leader in a massive growth market – solar. Global photovoltaic (PV) demand is expected to grow from 2.8GW in 2007 to 8.9GW in 2010 to 15.9GW in 2012. Currently, installed solar on a worldwide basis is about 0.1% of total global electricity consumption. In addition to the support solar is getting on a legislative basis from governments around the world, efficiencies are getting better, technologies are evolving and solar is getting closer to hitting grid parity – which means that within the coming years solar will be able to compete with conventional energy sources without subsidy. This ultimately will make solar more competitive and will drive consumption.

LDK’s Expansion and Outlook

·         Wafer Capacity Expansion – Forecasted at 1,100MW in 2008 to 2,000MW in 2009

·         Strong Backlog – 11,872MW through 2018

LDK is fast evolving its business upstream to become a leading player in the poly business with its polysilicon project in China – a 15,000 t/a project which is China’s largest poly project. It will begin operation in early 2009 with planned production of 5,000 to 7,000 tons of poly.

This is going to give LDK stronger margin control through vertical integration of its midstream and upstream businesses – an important factor in the current environment which expects margin pressure midstream due to module oversupply and margin pressure upstream due to a massive amount of poly coming online in the industry beginning in 2010. But then again, if we are right about demand, and with only 0.1% penetration in terms of solar’s contribution to the global energy grid, we think that demand and higher efficiency will more than compensate for the increases industry-wide in terms of supply.

Getting back to the financial metrics – at yesterday’s closing price, the stock is trading at 0.85x this year’s forecasted sales, and 0.53x FY2009 forecasted sales; and it is trading at 4.73x this year’s forecasted earnings and 2.63x next year’s forecasted earnings. This is remarkable, given the business’ fundamentals and outlook! At a modest 10x P/E against this year’s forecasted earnings, the stock would be trading at $30. At a 7x P/S against next year’s forecasted earnings, the stock would be trading at $38.00. We think these multiples are extremely defensible, and are calling for the stock to climb back to a multiple of 13x P/E as the markets stabilize at some point by mid-2009. This would put us at a projected price target within 12-months of $70. At yesterday’s closing price of $14.32, we think this represents one of the most compelling opportunities out there.

Important Disclosure: 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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