Friday, August 14, 2009

Solar: Gloom, Doom and Despair (LDK et al)

In one of yesterday's solar posts I said "We want more downgrades. More negativity. Until that happens the risk to the downside is what I'm focusing on." Here goes, BusinessWeek via Pension Pulse:
It was a tough day watching the solar meltdown in the markets. I took a huge hit in my portfolio as I am long LDK Solar (click on image above to feel my pain). Other solar stocks also got whacked hard.

Writing for BusinessWeek, David Bogoslaw asks Why the Gloom on Solar Energy Stocks?:

The global credit freeze and a supply glut of polysilicon—the key raw material used in photovoltaic solar panels—have hurt solar-power equipment manufacturers' earnings this year. Over the long run, some analysts are hopeful the lower prices will make the technology more competitive with conventionally generated power and make these companies more compelling plays in the eyes of investors. But the road to solar riches remains bumpy.

Case in point: On Aug. 12, China-based LDK Solar (LDK) reported a second-quarter loss of $2.03 per American Depository Share (ADS) on a 48% drop in revenue, to $228.3 million, compared with a profit of $1.29 per ADS a year ago on $441.7 million in revenue. A writedown of $176.3 million on a plunge in value of its inventories accounted for most of the $216.9 million quarterly loss.

LDK, which makes multicrystalline wafers used in solar panels, also issued a third-quarter revenue outlook well below Wall Street expectations, sending its ADSs down 18% on Aug. 13.

Major Shifts in Market Share

LDK's results came on the heels of two other Chinese solar companies that disappointed the market on Aug. 12. Wafer producer ReneSola (SOL) posted a loss of 3¢ per ADS, vs. earnings of 19¢ a year ago, on a 52% drop in revenue, to $82.6 million. The company's bottom-line results beat the market's consensus estimate of a 6¢ loss but missed analysts' forecast of $90 million in revenue.

Meanwhile, solar-cell maker JA Solar (JASO) recorded a loss of 18¢ per ADS, missing analysts' estimates by 12¢. That compared with a 1¢ loss in the second quarter of 2008, while revenue fell more than 51%, to $88 million. The latest loss included charges related to stock-based compensation and a hedging loss.

The move from shortage to oversupply of polysilicon in just around 18 months has caused a major shift in business models and market share. Panel manufacturers that locked in fixed-price contracts for polysilicon, which gave them an edge over producers that had to pay much higher prices in the spot market, now have to scramble to renegotiate contracts at lower prices or write down the value of their inventories.

Hurt by Spanish Collapse

Another headwind for the industry: the unwillingness of banks to lend money needed for solar projects across much of the world. Indeed, the solar industry has taken lumps in a number of countries. For example, the market for solar gear in Spain, which had been one of the largest in the world, collapsed as a result of the Spanish government capping subsidies on solar-panel installation at 0.5 gigawatts after installations hit 2.67 gigawatts last year, according to analyst Edwin Mok at Needham & Co. in San Francisco. That severely limits the growth potential in Spain's market, since demand drops when subsidies aren't available. One bright spot: Germany's market has grown this year, though not enough to offset the contraction in Spain...

Climateer here. Bogoslaw homes in on something the analysts wouldn't address during the LDK conference call:

...LDK Balance Sheet Needs Overhaul

For all its problems with inventory writedowns, LDK Solar's primary risk is its unwieldy 86% debt-to-capital ratio, says Colin Rusch, an analyst at ThinkEquity in New York. The company needs to restructure its balance sheet if it's going to survive, he says. Jesse Pichel, an analyst at Piper Jaffray (PJC), however, has maintained a sell rating on the stock for most of the past 18 months. Pichel is bearish because he doesn't see where the company will get the hundreds of millions of dollars in financing it needs to finish building a new polysilicon plant whose 15,000 metric tons of annual production is scheduled to come online in stages over the next year....MORE, including Pension Pulse's take on the industry.

In "LDK Solar Co. Ltd. Q2 2009 Earnings Call Transcript" our comment on this issue with LDK was:

This is just brutal. The analysts seemed stunned, 2x4 to the forehead style. The stock is trading at $9.12 down $2.09 (18.64%)....

(Then followed the first questions for management. Average selling prices, market penetration in Italy. Simply obtuse and inane stuff)

...What are these folks babbling about? Q-Cells, one of the largest in the world, just this morning had to reassure the markets that they had "Adequate Liquidity".

The first questions should drill down on survivability, as in "Will the Chinese government backstop your credit lines". Jeesh.

Liquidity is expensive. Illiquidity more so.

If you don't know how to read a balance sheet and, more importantly, understand the interactions between the balance sheet and the statements of cash flows and income, you can get in big trouble.