February 19, 2009 ndash; We have been unabashed advocates of LDK Solar (NYSE:LDK) touting it as a price maker in the wafer industry and soon to be benefactor of a vertically integrated model as it executes on its poly manufacturing facility. We have made arguments that the stock has been oversold and hasnrsquo;t gotten appropriate value given its market position and given our belief that strong growth will be a constant theme in the solar industry for the next decade.

Yesterday, management said it expects Q4 revenue of $415 to $425 million ndash; down from previous revenue guidance of $425 million to $435 million, with wafer shipments of $245MW to $255MW. It is also going to take an inventory writedown of $210 to $220 million due to the rapid downward pressure on wafer prices, which will result in a loss of $135 to $145 million for the quarter. For the year, it is now expecting revenue of $1.63 to $1.64 billion, with wafer shipments of 810MW to 820MW and a net profit of $145 to $155 million. It is delaying its wafer capacity expansion by a quarter and expects year-end capacity at 2GW, down from 2.3GW. With respect to its poly production expansion plans, it is delaying the installation of a third 5,000 ton train, and will increase production at its small poly plant to 2,000MT from 1,000MT by the end of 2009. Combined production by the end of the year will be 12,000MT, below its previous forecast of 16,000MT.

What is especially depressing about the announcement yesterday, is that only last month, management lowered Q4 guidance of revenues in a range of $555 million to $565 million to a range of $425 million to $435 million. At that point, it guided for FY09 revenues to come in a range of $2.3 billion to $2.5 million, down from pervious guidance in the range of $2.9 billion to $3.1 billion. So, in less than sixty days our expectations for Q4 revenue have been reduced by about 23% to 26%, while our expectations for FY09 revenue have been reduced by about 43% to 47%. Since that time LDKrsquo;s stock has backed off from $15.29. It has fallen by 47%.nbsp;nbsp;

The stock is now trading (assuming an $8 stock price) at 0.64x trailing 12-month sales and 2.69 trailing 12-month earnings. Looking forward, assuming sales of $2 billion this year, and income of $200 million, the stock is trading at 0.45x FY09 sales and 3.63x FY09 income.

The solar sector, as a whole, is feeling the pain of massive oversupply and those issues wonrsquo;t get fully worked out until mid-to-late 2010. This dynamic will result in a continued discount to the solar sector. Lux Research reported this week that the overall market may contract from 5.5GW and $36 billion last year to 5.3GW and $29 billion this year due to overcapacity of cells and modules (capacity may reach 10.4GW in 2009). nbsp;

To be sure, margins are compressing but we continue to point to the fact that as poly and module prices come down, the cost benefits will ultimately be passed further downstream to the end user resulting in lower costs-per-watt installed and this will be an important development for the solar industry in order to achieve a sustainable, non-government dependent set of economics to support growth. Lux thinks these factors may contribute to the market expanding to 18.5GW and $70 billion by 2013. This is still pretty impressive growth and companies that survive the shakeout.

So our opinion is that the mid-to-long-term outlook for the sector continues to look solid and we think LDK is going to come out just fine on the other end. It remains a cost leader, with lower wafer processing costs (by about 10-15% than its peers). Its backlog is impressive ndash; at about 14GW in wafer orders and 6GW in tolling. Granted, there are renegotiations under way, which will result in lower near term margins. As it comes online with its poly manufacturing this should help buttress (against downward pressure on wafer side of business), and even expand margins again.

We still think the company is in a mid-to-long-term good position given its scale, wafering cost advantage and the fact that it will soon begin reaping benefits of its vertically integrated model. The near term is going to be choppy, given yesterdayrsquo;s announcement, but at current levels we think the risk has got to be fully factored into the stock price. We have adjusted our own expectations downwards from $1.77 billion in revenue and $371 million in income for FY08 to $1.63 billion in revenue and $142 million in income. We have reduced our FY09 expectations as well to $2 billion in revenue and $250 million in income. Assuming a 1x FY09 sales multiple, and a 6x FY09 income multiple, both multiples that we think are reasonable and defensible, the stock would be trading in a $13 to $17 range.

At the current levels, and understanding the near-term will be choppy, we are comfortable accumulating into this weakness, and are inclined also to be selling some puts.

Disclosure Note: Aspire/SCPEditor is LONG LDK. The information provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance
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