LDK Solar Faces Tough Road Ahead, Says Analyst

A financial analyst downgraded LDK's stock out of concerns that the silicon wafer maker might not benefit from building its own silicon factories in light of the falling silicon prices on the market.

Ucilia Wang March 12, 2009

Ucilia Wang

LDK Solar is facing tough challenges ahead as it deals with customers who aren't willing to make good on making prepayments to help fund the company's factory expansion plan, said a financial analyst Thursday.

The problem of getting those prepayments as well as delays in completing a factory and other issues prompted Jesse Pichel, a senior research analyst at Piper Jaffray, to downgrade LDK's stock from neutral to sell and lowered the shares' price target from $9 per share to $3 per share.

In a research note, Pichel said the tough economic climate has led some of LDK's customers to default on making those prepayments, which the customers promised to fork over in order to secure future supplies of LDK's products and services.

LDK produces silicon wafers, which are used to make the kind of solar cells that are commonly found in solar panels today. The company has been building factories to produce polysilicon, the raw ingredient for making the wafers, so that it doesn't have to rely so much on outside vendors. The Chinese banks might be willing to step in, he noted.

"We understand that several LDK customers who had obligated prepayments are now illiquid or unwilling to part with polysilicon deposits (suppliers in Taiwan and Europe noting that Q-Cells has been its largest customer)," Pichel wrote. "LDK stated that its customers' prepayment balance would be reduced in the following quarters, and confirmed this with us after the conference call."

Pichel also questioned whether LDK would see savings from owning its own silicon factories in the near term when the silicon prices have been falling. He said the company will likely have to include more inventory write-downs in the first half of this year as a result.

LDK had to take a $216.7 million inventory write-down for the fourth quarter. The company, which reported its fourth-quarter financial results this week, said the rapid decline of silicon wafer prices caused it to take that special charge, which contributed to its net loss of $133.1 million, or $1.25 per American depositary share, for the fourth quarter.

China-based LDK joins solar energy equipment companies that have had to write-down their inventories because the market values of their inventories have fallen below costs. ReneSola said Thursday it took an inventory write-down of $137 million for the fourth quarter because of the falling prices for polysilicon, wafers and other materials. Although ReneSola, based in China, increased its fourth-quarter revenue to $158.6 million, a 65.2 percent growth from the same period a year ago, it posted a net loss of $126.6 million.

Trina Solar, which makes solar panels, also took an inventory write-down of $17 million for the fourth quarter.

LDK has completed its first polysilicon plant that can produce 1,000 metric tons per year and is producing the material now, the company said. The company is building a second, 15,000-metric ton polysilicon factory, which has been delayed. The company is currently installing equipment in the second factory.

Although spot market prices for polysilicon have fallen, they are expected to go up later this year, according to Photon Consulting. The market research firm said the spot prices are around $100 to $180 per kilogram for the first quarter, and they are likely to increase to between $125 and $350 per kilogram for the rest of the year, reported the Gunther Portfolio. Major solar wafer makers buy the raw material through long-term contracts, actually. But spot prices provide a good look at the market's volatility and influence prices for future contracts.