LDK Solar Releases Guidance

This morning around 3:00am (LDK's typical press time), LDK management released 2008 forecasts along with an '09 business outlook. While the sell-side analysts from Piper Jaffrey and Goldman Sachs were quick to release research notes calling into question LDK's ability to meet their aggressive expansion plans (see yesterday's post below), this press release allows us to do some more intelligent work with regards to LDK's valuation.

The press release calls for LDK to book '08 revenues between $960mm and $1bn on 510MW-530MW of wafer shipments. Also included are some tepid figures that has LDK producing between 100mt-350mt of polysilicon. As their polysilicon will exclusively be used to manufacture wafers, we can therefore expect about $1.88/watt ($1.88mm/mw) for their wafers in '08. We'll come back to this number a bit later.

As LDK will require close to 7,000mt of polysilicon in '08, their gross margins are forecasted to be in the 26%-31% range. Using recently published data, LDK's net margins lead to another 8% reduction, meaning the net will be in the range of 18%-23% for 2008. Being ultra-conservative and taking the low end of all the numbers ($960mm in rev, 26% gross margin, and 18% net margin) LDK will book net income of $173mm in '08. With 112mm shares currently outstanding, LDK should, in a pretty bad scenario, earn $1.54 per share which correlates to a 2008 P/E of around 32. While trading at a significant discount to it's solar peers, it seems fair with nothing else considered. Keep in mind this is the absolute lowest end of guidance, so a PE of 32 is ultra-conservative.

If this was the only data that LDK provided, I would have been slightly concerned, but it was the business outlook for '09 which really stands out. Let's dig further.

LDK expects to ship between 1,050mw-1,150mw of wafers in '09 (100% increase from '08) and expects to produce between 5,000mt-7,000mt of polysilicon (20-50x '08 production). While they didn't surround the '09 outlook with any revenue targets, they did add that margins would jump back up between 42%-50% as the inhouse production of polysilicon allows them to reduce their greatest uncertainty regarding margins. So doing some quick assumption math, and again using the lowest numbers from their release, we have:

Wafers - $1.88mm/mw X 1,050mw = $1.97bn
Gross Margin - 42% X $1.97bn = $830mm
Net Margin - 34% X $1.97bn = $671mm
Net per share - $671mm/112mm shares outstanding = $6
2009 P/E - $6/$49.50 = 8.25

Skeptics will question these numbers, but anyone who has closely followed LDK understands that most of their contracts have fixed pricing through 2009 at a minimum, so there should be a lot of comfort in wafer pricing through 2009. With all of this being said, a 2009 P/E of just north of 8 for LDK seems way too low compared to it's competitors. Again, this is using the lowest end of their guidance and leaves a lot of potentially good news out of the fold.

LDK is on the right track and I expect the shares to significantly appreciate as management continues to execute on their commitments.