LDK Solar (LDK), a well known Chinese Solar Company, invested (since summer 2007) in a very ambitious plan that almost cost them their future: Build an in-house Poly Plant to build the polysilicon needs for their Wafer Production.
Why that plan? Well, Polysilicon is a major cost component of a Wafer and at the time of the project decision (that the market warmly welcomed), the price of polysilicon was rising constantly.
The project was clear at that time: To produce (by mid 2009) polysilicon at a price of 35$/kg or something around that price level. (It was a very positive comment considering that the Poly price was above 250$/kg when the project began).
But many unexpected events occurred:
- Due to the crisis, Poly prices dropped to 50$/kg
- The ASP of solar panels dropped quicker then expected
- The poly plant in-house didn't meet the time target (New target Date: 2011) and cost more than expected (Total cost approx $1.5 billion)
- The value of their Poly plant is dropping below the price of investment since the poly spot price dropped to range very close to their target in-house production price.
- LDK had to write down the price of inventory for their polysilicon, which hurt their balance sheet
- The company had to rely on short term debt to fund their development because of a weaker balance sheet.
With all those elements, LDK was in very bad shape and could be in a dangerous position financially. And now here comes the great deal: An investment group, close to the province of Jiangxi, agreed to purchase 15% stake of the poly plant for a cost of $219 Million.
That deal is very interesting because:
- The real value of the Poly plant is pretty low for an external investor. Why?
Because the Plant has only one v: Provide at the cost of production the poly to LDK in order to build their wafer at the lowest price possible. So owning a share of the plant isn't that sexy of an investment.
- It isn't a very sexy investment, but it still prices the poly Plant at a total price of $1.46 billion, which is roughly the amount LDK invested in it.
- It provides fresh cash, needed by LDK to support their company.
But the implication of the deal is deeper, first for LDK :
- LDK receives fresh Cash to their balance sheet which secures the company at least for the near term and allows them to continue their aggressive expansion plan.
- The Deal allows LDK to price their Poly plant in their balance sheet at a value of $1.5 Billion. Roughly, what does it mean? They can easily convert some of their short term debt from the Chinese Bank to long term debt, with their poly plant factory value as collateral. They can also rely on long term debt with it too.
In other words, they are able to clean up the balance dramatically with that deal.
- Remember: there is still 34% left on the poly plant (in order to let LDK keep the majority ownership on the plant) that could be sold to the same investment group to support the growth of the company.
To me the message is clear:
- China wants to support the solar industry in any way possible. Since LDK is a major company in the sector, China found a very clever way to fund their growth without attracting any negative comments from Europe or the USA since it is a very well built investment.
- LDK probably has a bright future (at least they probably won't go under) since China's support is now very clear.
- The beginning of an international Solar fight begins now
From an investment point of view, is that deal enough to warrant buying LDK shares?
Here are my quick thoughts on it:
On the bad side
- LDK still has some issues concerning the credibility of their management. Now they learned to be less rosy and more prudent but we need more time and proof that now they really have a prudent approach to their business.
- There are more and more players in the solar industry that produce their own Wafers, which reduces the market potential of LDK a little.
- Evergreen Solar (ESLR), which has the best technology to produce Wafers, could try to adapt their technology to become a Wafer producer which would seriously hit LDK. But it is still far from happening.
- The Q-cells conflict could be the beginning of new conflict with the customer. We need to be sure that LDK handles their customer very well and that the Q-cells story is just a one-time story and will be solved.
On the positive side
- The LDK development plant through the poly plant factory could very well pay over the long term if you think Poly prices will rise over time (which is something that wouldn't shock me at all). Now that we know China will allow them to finish their project and if the pricing of poly increases, LDK will have a major competitive advantage that would put them at the top of the solar chain. On the other hand, if the poly prices don't increase, that investment reduces the effect of their choice and the only way they would lose out would be if: If poly prices drop below their in-house price, which is very unlikely.
- LDK has so far the best cost structure to produce Wafers (if you exclude Poly Price and Evergreen Solar) which gives them a competitive advantage over the long term now that we know the company should be financially secure and has clear Chinese support.
- The solar industry still has a very bright future, especially with the will of a major government to develop renewable energy with solar at the top of the chain.
To sum up, I would keep LDK in my radar, as well as many other solar stocks. That deal provides an interesting message to the market: LDK is supported by China. I would probably consider buying some stock of LDK as soon as I have some more facts concerning the Q-cells conflict and the credibility of the management (that they are trying to regain).
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