LDK Solar Q2: Margins Remain Weak As Liquidity Position Deteriorates

LDK Solar (NYSE:LDK) released its Q2 2013 earnings on Tuesday August 27, posting its ninth straight quarterly loss. While some large Chinese solar companies have been reporting significantly better margins thanks to stabilizing prices and higher demand, LDK’s results failed to mirror these trends as margins remained deeply negative due to poor capacity utilization and high fixed costs. Quarterly sales grew by around 10% sequentially to about $115 million while net loss narrowed slightly to around $165 million from $187 million in the first quarter. ^[1] These results include a loss on recoverable VAT of around $19.5 million and inventory write-down of $3.7 million.

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Things looked worse on the balance sheet front as the company’s cash and cash equivalents fell to their lowest level in nearly four years, and as a result, the company was unable to make an interest payment that was due on Wednesday. Despite the weak results and deteriorating financials, LDK expects things to get better in the second half of the year on higher demand from China and some manufacturing cost improvements. Here are some of the key takeaways from the company’s earnings release.

Small Improvement To Wafers Business, But Module Business Has A Long Way To Go

LDK primarily manufactures wafers which are an input used in producing solar cells and panels. The company shipped around 304 megawatts (MW) of wafers this quarter, up from around 240 MW during Q1. The average selling prices for the company’s wafers declined at a slower pace falling by just about $0.01 since the first quarter to $0.22 per watt. This could be because the company has been focusing on manufacturing a more efficient variety of wafers. Things looked slightly better on the manufacturing cost front for wafers as well. Gross margins for wafers came in at around negative 11.6%, an increase from negative 16.5% in the first quarter. The firm is likely to see better sales for its wafers going forward as the demand from Chinese manufacturers could grow. China is poised to become the world’s largest solar market this year and the Chinese government has set a target of installing around 35 gigawatts (GW) of cumulative solar capacity by 2015, which works out to an addition of roughly 10 GW annually between 2013 and 2015. LDK has guided Q3 wafer shipments of between 350 MW and 450 MW.

Cell and module sales remained lackluster at around 35.3 MW, exhibiting only a small increase over Q1. Module prices also fell sharply from about $0.69 per watt in the first quarter to around $0.54 per watt. ^[2] On an annualized basis, LDK has a module manufacturing capacity of around 1400 MW (as of May 2013) and this means capacity utilization based on the quarterly sales was less than 15%. ^[3] The weak utilization coupled with the price decline has taken a toll on LDK’s gross margins for modules, which came in at around negative 36% for the quarter. Although the firm expects to ship between 60 MW and 80 MW of cells and modules during the third quarter, we do not expect this to have a very meaningful impact on margins given the current level of average selling prices and the amount of excess capacity available within the company.

Debt Woes, Missed Interest Payment

LDK has the most leveraged balance sheet among the Chinese solar companies that we cover with over $2.75 billion in debt, a majority of which is short-term. The firm’s interest costs (including  amortization of discount and issuance costs) alone stand at a whopping 50% of revenues. LDK’s cash position this quarter dwindled to about $85 million from $174 million in Q1 and the company mentioned that it did not have sufficient liquidity to make an interest payment on its senior notes that were due on Wednesday. The notes, which mature in February, have a face value of around 1.2 billion yuan ($196 million) and have a 10% coupon which is required to be paid semiannually.  ((Reuters)) This will be the second time this year that LDK is defaulting on a debt payment. In April 2013, the company missed a $7.2 million bond payment. While the firm has had moderate success in raising equity in the recent past, the amounts have been very small (around $50 million) and pale in comparison with the firm’s debt and accumulated losses.

We are maintaining our $0.80 price estimate for LDK Solar, which is roughly half the current market price. We note that any of our estimates with respect to LDK Solar should be taken with caution given the company’s distressed financial position.

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1. LDK Solar Press Release [↩]
2. Seeking Alpha [↩]
3. Form 20-F [↩]