Friday, June 03, 2011

LDK a real solar value

Solar stocks in general, and chinese solar stocks in particular appear to be excellent values. Two of my favorites on a valuation basis are JKS and LDK (although almost any chinese solar looks cheap).

Both are selling at a P/E of 3 based on trailing earnings. LDK is scheduled to report earnings on Monday June 7 after the bell. Estimates are for ~85cents/ADR which would bring the TTM P/E well under 2.5!

LDK stock has had a terrible month of May down 30%, and is selling for about 1/2 what it sold for in early March. I have bought a couple times during the slide and I'm hoping LDK can make a V-shaped recovery. Although I guess that will depend on solar demand growing in the future. A month ago LDK guided Q1 Revs to ~750M and 30% gross margin. Assuming they can do their own math properly, it should be relatively easy to hit FY Revs of over $3B and low 20s GM. Previous guidence was for 25% GM for the year, while one Q at 30% certainly helps, I believe current pricing implies ~20% GM for the rest of the year Low 20s GM implies about 500M +/- 50M in income for 2011. Not bad for a stock with a $1B market cap (LDK also has considerable debt currently which I would view as a problem only if it cannot maintain consistent profitable operations--because China is loaning money to all solar manufacturers).

Gross margins will undoubtedly get pinched a few percent (I'm guessing GMs dip to 20% in q2) by the substantial drop in the price of eveything from polysilicon-to-wafers-to-cells-to-panels. Prices are down at least 25% since the start of the year. As the year started I expected prices to drop ~3% each quarter this year and next. Instead it looks like we've gotten 2 years of price drops in less than 6 months. So margins take a hit for 1-2 quarters while people factor in the lower pricing, and then we should see global demand for solar skyrocket.

The only serious near term risk to investors in LDK and JKS is that pricing continues to drop in the coming weeks before rebounding in the 2nd half. I'm hoping we are already in overshoot territory on prices. Another 10-15% drop in panel prices would certainly wipe out manufacturer profits...which is partially why I don't expect them to keep dropping. Panel prices below $1.5/W already imply ~$4/W average installed cost today (assuming a generous installer margin), down from well over $5/W (with panels ~$2/W) this time last year. And assuming prices stabalize $3.5W installed cost looks possible next year. Given current (reduced) incentive levels, and a global re-assesment of nuclear power, I think governments will be open to expanding the use of solar significantly.

[Since just the solar panels cost nearly $4/W in 2008, I think many people just haven't come to grips with how quickly solar is maturing--I know I'm astonished.]


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