LDK Solar Preview: Margins Can Show Cost And Utilization Improvements

LDK Solar (NYSE:LDK) is expected to release its Q2 2013 earnings shortly. The company has reported eight straight quarterly losses beset by low prices, a massive debt load and excessive capacity. During Q1, revenues stood at around $104 million, down by almost 50% year-over-year while operating losses narrowed to around $93 million from $135 million.

Things have been looking a little brighter for LDK in recent months as it has seen stronger demand from the Chinese market coupled with some price stabilization, and the management has mentioned that the firm could possibly return to profitability this year. ^[1] The firm has guided revenues of between $100 to $150 million for this quarter and we also expect to see better margins compared to Q1 since we do not expect the firm to take significant charges against its inventory as it did during Q1. Additionally, the firm’s utilization rates have also been improving, which could potentially help margins.

See Our Complete Analysis For LDK Solar Here

Price Stabilization And Better Utilization Will Help Margins

LDK primarily manufactures solar wafers which are an input used to build solar cells and panels. The firm has an annualized wafer production capacity of around 4.5 gigawatts (GW) and during the first quarter it shipped about 240 MW of wafers and mentioned that manufacturing capacity utilization rates were around 30%. ^[1] For this quarter, the company is expecting wafer shipments to improve slightly to between 250 to 300 megawatts (MW) although utilization rates could see a strong jump as the firm’s production lines are currently running at nearly full capacity. ((Bloomberg)) Chinese manufacturers appear to be seeing0 signs of stabilizing average selling prices (ASP) as well with prices falling at a slower pace over the past two quarters. LDK expects prices to actually improve during the second half of this year.

The firm had some inventory write-downs last quarter resulting in gross margins of around negative 57%. However according to the company’s president, it has not been maintaining much inventory over the last two quarters, and we do not expect to see significant write-downs of this nature during Q2. During the first quarter, LDK has been focused on cutting productions costs and lowering its headcount by around 1,670 (more than 15% of its total workforce). ^[2] These cost reductions should reflect positively on LDK’s second quarter margins.

Progress In China Is Important

The Chinese solar market has been growing fast and is expected to become the world’s largest solar market this year. LDK expects China to account for around half its total annual sales. Besides supplying wafers to module 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 35 GW of solar capacity by 2015, which translates to an addition of around 10 GW of capacity annually between 2013 and 2015. ^[3] The company has plans to develop around 600 MW of solar power plants this year after it secures buyers. ^[1]

We currently have a price estimate  of around $0.80 for LDK Solar, which is about half its current market price. While these recent developments and indicators from the management are definitely encouraging, we remain cautious in our outlook for the company given its massive debt load (about $2.9 billion) and a weak balance sheet position. We will be closely watching the firm’s second quarter numbers before we make any meaningful changes to our estimates.

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