LDK: The Light At The End Of The Tunnel.

Imagine a company that is so successful that it can handpick its clients. A company with products so highly coveted that it sold out its inventory for the fiscal years of 2008 and 2009. A company that has been averaging a 200% year-over-year growth rate for the last three years. Now stop imagining: This company is LDK Solar. Since its inception in early 2005, LDK has been setting the standard for excellence in the solar sector. Through hard work, diligence and visionary leadership, LDK has become the world's second-largest producer of mono-, and polycrystalline solar wafers. Unlike some better known solar companies, such as First Solar, Sunpower, Suntech Power, or Solarfun, LDK does not produce the actual photovoltaic solar modules. The wafers they produce are critical components of any solar module that is made using polysilicon. Many analysts insist that First Solar is the best of the breed, because it does not use polysilicon wafers. This could not be any further from the truth. First Solar manufactures its thin film panels using a cadmium-telluride substrate blend. Cadmium-telluride is a combination of tellurium and cadmium. Both of these elements are very toxic and very scarce. According to the European Union's 2003 ROHS (Restriction of Certain Hazardous Substances) Directive, use of six hazardous materials is prohibited in excess of 100 PPM (parts per million). Unfortunately for First Solar, cadmium made the list. In fact, First Solar's panels use 470,000 PPMs of cadmium. As a result, the European Union could ban the use or production of First Solar's panels at any time. Because First Solar makes most of its money in Europe, this could decimate its business overnight. Moreover, tellurium is becoming increasingly expensive. Tellurium is used to produce Blu-ray discs, CD-RW discs, and various types of random access memory. Soaring demand from Blu-ray has lead to a meteoric rise in the price of tellurium. Blu-ray's long-term success was guaranteed when the Toshiba Corp. announced it will no longer develop, manufacture or market HD DVD players and recorders. The price of tellurium has risen from $10 a kilogram in 2004 to well over $300 a kilogram today. Demand is expected to continue to rise dramatically, and without a substantial increase in production, tellurium prices should go through the roof, largely eliminating First Solar's competitive advantage. While toxicity of cadmium-telluride, and the scarcity of tellurium, will continue to hinder First Solar's growth, the company's biggest problem is incredibly low conversion-efficiency rates. Compared to its peers, First Solar has one of the worst solar conversion efficiencies in the sector. At present levels, First Solar is able to convert 10.5% of the sunlight it brings in into electricity. This is significantly lower than the 13% conversion rate Sharp achieves and Suntech Power's 18%. In fact, First Solar's rates are less than half that of the market leader Sunpower, which achieves a whopping 22%. In addition to soundly beating First Solar's conversion-efficiency rates, what do these companies all have in common? They all manufacture their photovoltaic modules using polysilicon-manufactured solar wafers. Silicon is one of the top ten most common elements on the planet, so raw-material shortages should never be a problem. Analysts have been criticizing companies that use polysilicon-manufactured wafers due to steeply rising polysilicon prices. They argue that high polysilicon prices will erode profit margins for polysilicon-based solar modules. While it's true that polysilicon prices have been rising at an exorbitant rate, prices are expected to plummet in the latter half of 2009-2010 as more production comes on line (Gupta, 2008). While production bottlenecks lead to rising prices of polysilicon, raw-material shortages predominantly spur higher tellurium prices. Polysilicon prices will fall as more production comes on line, because of the abundance of the raw material. The tellurium problem is not so easy to solve. Production increases will not be able to offset rising costs. Very much like oil, tellurium production will not be able to keep pace with rising demand. During the summer of 2007, LDK Solar announced that they were partnering with Fluor, one of the world's largest, publicly owned engineering, procurement, construction, and maintenance services companies. Flour will provide engineering, procurement and construction manufacturing services for LDK's two polysilicon factories in Xinyu City, Jiangxi, People's Republic of China. When completed, these factories will be the largest in the world. Fluor uses a comprehensive EPCM (engineering, procurement, construction, maintenance) services approach that will include a trichlorosilane plant, chemical factor-deposition reactors, converters, and other necessary infrastructure and utilities. Partnering with Fluor made perfect sense for LDK. Its experience and ability to quickly construct a state of the art polysilicon factory means LDK can continue to execute its business initiatives. Upon completion of the two polysilicon factories, LDK will expand its production capacity to include three production lines. Enabling LDK to produce 15,000 tons of polysilicon and more than 90,000 metric tons of trichlorosilane. In comparison, current worldwide production of polysilicon is approximately 100,000 metric tons per year. The smaller of the two factories will intially produce 1000 metric tons of polysilicon. This factory is slated for completion by the end of the second quarter in 2008. The larger of the two factories will be completed late in the fourth quarter and it will initially produce 7000 tons of polysilicon. Depending on demand, and LDK's ability to ramp up production of its own polysilicon production facilities, LDK may need polysilicon from additional sources. However, once these two facilities are operational, LDK will reduce its raw material costs dramatically because the company will be immune to market-pricing fluctuation and they will sign fewer contractual polysilicon agreements. In the meantime, LDK's profit margins should improve modestly in the second and third quarters when the first polysilicon plant is brought on line, and an exponential rise in profit margins will materialize when the second polysilicon plant is completed by the end of the 4th quarter in 2008. Many solar companies outsource or offshore many of the stages of the production process, but in hopes of increasing overall profitability, LDK will ultimately complete nearly all of the phases of the production process in house. By the end of 2008, LDK expects more than 1.1 gigawatts of wafer capacity, and wafer shipments in the range of 560-580 megawatts. Significant progress was made in the second quarter, and LDK raised guidance from the range $960 million- $1 billion to $1.08-1.18 billion. The company also reduced wafer thickness from 200 microns to 180 microns, providing increased efficiency, and lower inventory and raw material costs. Further reduction is expected by mid year when wafer thickness will be reduced to 160 microns. Reduction to 140 microns is expected by the end of 2008. These reductions will directly contribute to the bottom line and reflects LDK's ability to execute its strategy of becoming the worlds premier providers of solar wafers. LDK also has signed six long-term contracts with some of the world's leading producers of photovoltaic products in 2008. The company signed a paramount deal with Qimonda solar that will privilege it to the excess polysilicon and damaged wafers produced in Qimonda's factories. LDK's top-notch recycling facilities will melt the broken products down and turn them into premium-grade polysilicon wafers. Other notable contracts include long-term deals with Moser Baer and Hyundai Heavy Motors. Under these agreements, LDK would receive large prepayments that usually reflect 10% of the contract's value. This will help LDK finance its polysilicon factories, purchase raw materials, and further its expansion plans. The prepayments promote shareholder value, because the necessity for equity or debt financing is reduced. On a valuation basis, LDK is also trading much more favorably then other American companies in the sector. Though LDK's revenue rivals industry leaders First Solar and Sunpower, both these companies unjustly command much higher market capitalizations and valuations. First Solar's price-to-earnings ratio is well above 100 and its market capitalization exceeds $25 billion. Sunpower's price-to-earnings ratio is well over 300, and its market capitalization is $7 billion. Meanwhile, LDK is trading at 28 times its earnings, and its market capitalization is only $4.7 billion. Its forward price-to-earnings ratio trades at an even deeper discount of 11.93. Based on these numbers, it is clear investors are willing to pay a premium for First Solar and Sunpower despite LDK's similar earnings and better long-term prospects. Soaring commodity prices and global warming will also contribute to LDK's long-term growth. According to many analysts, the solar industry will grow at an annual rate of 20% and we should expect LDK to capture a large percentage of this market. Countries around the world are curtailing their emissions of greenhouse gases and carbon dioxide because they are contributing to global warming. Solar energy is creating a feasible alternative to traditional energy sources, such as coal, oil, and natural gas. Solar panels produce electricity that businesses can use, store, and sell back to the power companies if the infrastructure exists. Once we reach grid parity-the point at which fossil fuel created electricity coincides with the price to produce solar energy-solar energy demand will erupt. In coming years, analysts anticipate solar energy prices will continue to decline. With the U.S. elections right around the corner, global warming debates are going shift into high gear. Even more energy legislation will be passed mandating lower emissions, which in turn will provide more incentives to shift to solar energy. These incentives will include tax credits, grants, and-most important- government mandates. LDK is perfectly positioned to profit off the growing demand of solar energy, because the components it manufactures are critical to any polysilicon manufactured photovoltaic. Polysilicon will dominate the solar market because of the abundance of the raw material, and the higher conversion rates. LDK will take advantage of this growth by delivering world-class solar wafers manufactured in state-of-the art facilities.