LDK Solar - On the Right Path

There is a lot of investor emotion surrounding LDK Solar on both sides of the equation. The shorts still have credibility questions and fresh concerns about margin health. The longs point to major contract awards in the billions for their wafers and soon to be manufactured polysilicon. The volatility in LDK just compounds the emotion as the 3 month chart looks like a tug of war while many of their sector peers (JASO/YGE/SOLF) enjoyed relatively smooth rides up as solar stocks explode around the world.

What makes it even more interesting is that you have analysts at Piper Jaffrey and Goldman Sachs with extremely negative sentiment (sell ratings and $30-$35 estimates) while analysts at UBS and Needham are extremely positive (buy/strong buy ratings and $75-$95 price targets ). While the Charley Situ accusations of inventory fraud seems to now be behind LDK, the negative analysts still have a lot of skepticism, and this is exemplified by their lack of faith in LDK executing on their very aggressive growth plans.

2008 will be a very important year for LDK as the focus moves away from their sales capabilities (they are sold out) and squarely on their ability to manage the critical construction projects and an employee base that has grown to over 5,400 as reported during the Q3 results. The aggressive expansion plan, funded to date without any share dilution, calls for LDK to have capacity in excess of 6,000mt of polysilicon by the end of 2008 and 15,000mt by the end of 2009. Manufacturing polysilicon is a very complicated process compared to making solar wafers, and management is well aware of this fact. Nick Sarno, LDK's Head of Manufacturing and ex-MEMC guru, has compiled a leading team of engineers and polysilicon experts from around the world to help make the LDK vision a reality. They have also contracted Fluor to build the polysilicon plant and will rely on Fluor's industry leading expertise in building high-tech manufacturing facilities. LDK keeps a progress page on their website you can visit here.

CNBC recently aired an interview special with Warren Buffett , and a good portion of the show profiled his acquisition of Iscar Metalworking and a trip he was taking to see the new factory in China. During his visit, Buffett was visibly surprised by the lightning fast completion of the state-of-the-art factory and expressed amazement in the speed and quality in the Chinese construction efforts, and the work ethic of the people. In Buffett's candid way, he explained that a project with deadlines like that could have only been completed in China. While the entire western world deals with long lead times for construction projects due to government issues, labor issues, and cost overruns, the Chinese have consistently proven their ability to exceed expectations during the industrial boom that is providing new jobs and exciting opportunities. LDK, and it's deep partnership with the Jiangxi government, are determined to do whatever it takes to make this project work, and betting against them seems like a dangerous proposition.

With the right management team, the right partners, and strong government support, it seems that LDK is well positioned to deliver on many of their expansion commitments. Even if they don't reach their goals and come close, their stock is currently significantly discounted compared to 2009 plans, especially against industry peers like MEMC. LDK already delivered on their aggressive commitments in 2007, look good for 2008, and should get a lot more credit for pulling off their plans for the future.

LDK is very controversial right now, but if they are able to successfully manage their projects and meet customer deadlines, the controversy will be over with very favorable results for investors.