LDK Solar’s Q1 Shows Operational Gains But Debt Remains A Concern

LDK Solar (NYSE:LDK) released its first quarter earnings on June 11, posting a lackluster set of numbers. Quarterly revenues stood at around $104 million down by almost 50% year-over-year while operating losses narrowed to around $93 million from $135 million. ^[1] While there were some positive developments such as a smaller decline in selling prices as well as progress on the cost reduction front, the company’s debt situation and deteriorating financials continue to be a worry. Here are some of the key takeaways for the company’s earnings release and how it could impact its stock going forward.

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Prices Decline At A Slower Pace, But Under-Utilization and Write-downs Hit Margins

Like most other Chinese photovoltaics manufacturers, LDK’s average selling prices (ASP) for panels and wafers declined at a slower rate compared to the previous quarter and its production costs fell at a faster pace than the ASP. However, gross margins remained weak at around negative 57% due to inventory write-downs. ^[2] Low utilization rates also continue to be a key issue for LDK since they have led to poor cost absorption.

On an annualized basis, LDK has a panel manufacturing capacity of around 1,700 MW while wafer manufacturing capacity is around 4,800 MW. This means that capacity utilization for Q1 was less than 20% considering that wafer shipments were around 240 MW while cells and module shipments were around 31.4 MW. However, LDK has been focusing on cutting down productions costs, laying off around 1,600 workers (more than 15% of its total workforce) over the first quarter. Additionally, LDK has also been focusing on its higher efficiency wafers, which could help improve price realizations going forward.

China And Emerging Solar Markets

Europe and China have traditionally been LDK’s largest markets each accounting for nearly one-third of overall revenues. However, business in the E.U. could be challenging going forward as the company’s products currently face anti-dumping duties of around 11%, and this could rise to as much as 55% beginning August. In order to offset any negative impacts from the European market, LDK is focusing on markets such as China, the United States and India to drive growth. China is expected to become the world’s largest market for solar equipment this year and the Chinese government provides attractive incentives for solar installations. Besides supplying wafers to solar modules manufacturers in China, LDK also builds and sells solar farms and could see this business grow as the Chinese government has set a target of installing 10 GW of solar capacity this year.

Debt Situation Is Troubling, Government Support Will Be Essential

While the progress on the operational front is mildly encouraging, we believe that the key issue that the company faces at the moment is the heavy debt load and the precarious liquidity position. At the end of Q1, total debt was around $2.9 billion, out of which $2.8 billion was short term debt, most of which is due next year. Additionally, LDK missed its payment of a $240 million loan that was due last week and is currently in negotiations with its creditors (primarily state-backed banks) to restructure. ^[3]

LDK had some success in raising equity over the last two quarters, but the proceeds have been less than $50 million which is quite trivial in comparison to its operating needs and debt position. Asset sales 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 considering the current industry conditions.

Given LDK’s precarious cash flows and a seeming lack of alternatives to raise funds, it seems almost certain that it will be dependent on the Chinese government for its survival. In December, the Chinese state council indicated that it will push for consolidation within the solar industry with only the largest and healthiest firms surviving. From the looks of it, the government seems intent on supporting LDK. In January, LDK received a $70 million loan from the state backed China Development Bank to upgrade its polysilcion manufacturing facilities. ^[4]

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1. LDK Solar SEC Filings [↩]
2. Seeking Alpha [↩]
3. Bloomberg [↩]
4. PV Magazine [↩]