European Austerity Means a Cloudier Forecast for LDK Solar

LDK Solar (LDK) and other solar plays like First Solar (FSLR), Suntech Power (STP) and Sunpower (SPWRA) have traditionally been dependent on demand driven by government subsidies. This has made these companies vulnerable to government policies, especially as countries like Germany, Spain and Italy have made budget cuts to their solar subsidies. LDK in particular has seen large swings in its stock over the past year and a half, which rose from $5.20 in July 2010 to a high of $14.55 in February 2011 before declining to around $6.61 at Thursday's close.

We have revised our estimates for LDK Solar based on recent developments and guidance from the company. We lowered our price estimate from $16.09 to $12.26, which is still meaningfully above the market price due to our constructive view of LDK Solar and the industry's long-term fundamentals.

Below we highlight the short-term factors that have weighed on the stock and the factors that shape our long-term thinking of the stock.

Recent Developments Concerning the Market

1. The revision of European solar subsidies in key markets

As a result of the financial crisis and the worsening debt situation in Europe, several large nations were forced to reevaluate the subsidies they extended to the solar industry. Earlier this year, the German government announced its plans to cut subsidies by 15% in 2011. More recently, the Italian government announced its plans to reduce feed-in tariffs.

The Italian government plans to progressively lower its subsidies to the solar industry. LDK depends on the Italian market due to its controlling stake in Solar Green Technology, whose revenues are highly dependent on growth opportunities in Europe.

In addition to the government cuts, demand has not matched the ramp up in supply of PV modules, so solar manufacturers like LDK Solar will need to reduce prices significantly to drive demand. According to a recent report by Bloomberg New Energy Finance, monocrystalline cell prices slumped 7.5% to $1.14 per watt in May from the previous month and multicrystalline cells were down almost 9% at $1.09 per watt.

2. Credit crunch impacting solar industry

The outlook for the solar industry has also dimmed as a result of the credit crunch. While credit conditions have improved since then, project financing has been a challenge as lenders view solar projects as risky due to the uncertain nature of the business and reliance on government support. Banks that are engaged in project financing are preferring to fund smaller projects, which has led to excess capacity in the PV space.

3. Solar companies lower guidance

On April 26, LDK lowered its first quarterly revenue guidance for revenues and shipments. Revenues are expected to range between $745 million and $755 million compared to its previous guidance of $800 million to $850 million. While part of this decline may be attributed to a delay in shipments to customers in Japan, the bulk of it is due to the uncertain environment in Italy regarding subsidies for the solar industry in the future.

A number of other solar players have also lowered guidance in the first quarter, among them Yingli Green Energy (YGE) and Trina Solar (TSL). Both companies said that declines in shipments were due to the uncertainty in Italy.

Long-term Fundamentals Remain Compelling

Despite these headwinds, we believe that governments will not abandon solar altogether, and that business and industry fundamentals justify a higher valuation.

1. Government subsidies expected to continue although at declining rates

Despite the short-term headwinds that the solar industry faces, the room for growth is almost unlimited. According to data collected by Eurostat, Spain's solar energy production as a percent of total electricity production amounted to only 2.13%. This is in comparison to Germany's 1.11% and 0.03% in the US. This clearly indicates the large potential in this space.

The Italian government still has an overall target of 23 gigawatts of cumulative installations scheduled for completion by the end of 2016. In addition, we expect the shortfall in European demand will be compensated by increased growth in solar installation in Asian and the Middle East as a result of increased demand for energy.

2. Demand for solar remains

Following the crisis at the Fukushima Daiichi nuclear power plant, the Japanese Prime Minister laid out a new energy plan seeking to increase the share of alternative energy to 20% of the total power supply by the early 2020s.

He also aims to put solar panels on 10 million houses by 2030. China recently announced its latest five year plan to increase the country's solar power target to 10,000 MW by 2015 and 50,000 by 2020. This should help benefit local Chinese manufacturers like LDK Solar, JA Solar, Yingli Green Energy and others.

The outlook globally still remains murky for traditional energy sources, which has driven renewed interest in the alternative energy space. Factors such as geopolitical uncertainty in the Middle East have helped drive oil prices significantly higher in the earlier part of 2011.

In addition, many countries are reevaluating nuclear power after the crisis in Japan. The Italian government recently won a vote of confidence to shelve plans to build new nuclear power plants, and Germany also announced the temporary closure of its two oldest nuclear power stations and suspended plans to extend the life of its remaining plants.

3. Falling wafer prices will stimulate demand

The decline in prices as a result of excess solar capacity and the reduction in demand due to the removal of government subsidies has resulted in pricing pressures for solar modules.

This has been exacerbated by the fact that solar energy is still quite expensive compared to traditional forms of energy production. This supply and demand imbalance is eventually expected to result in a situation where prices will decline to a level such that solar energy becomes affordable without the need for subsidies. This point is often referred to as "grid parity."

See our full analysis for LDK Solar.

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Cool One

If green energy worked well, energy companies all over the world would jump on the bandwagon to make profits. Every car would have solar panels and every house a windmill on the roof. Obama giving billions of our taxpayer money to George Soros' oil company in Brazil and telling them we will be their biggest customer is outrageous!

May 30 2011 at 6:16 PM Report abuse +2 rate up rate down Reply
1 reply to Cool One's comment

Obama can't "spend" tax money. Spending money is strictly done by Congress. It is their job to budget and spend. The president signs bills, he does not initiate them. Last I heard, congress is fully in the hands of the Republicans.

Brazil is getting IMF money. This is not a free thing, it is basically a bank loan and must be repaid with interest.

And finally, where would you want "your" tax money to go? Once you give it to the Treasury Department, it is no longer your money, and they will spend it as congress sees fit, not what you think might be fitting. If you don't like it, then vote your congress person out at the next election. That is your only right. Turn off Fox Noise, they are totally confusing you.

May 31 2011 at 3:12 PM Report abuse +1 rate up rate down Reply


May 29 2011 at 7:16 AM Report abuse -1 rate up rate down Reply

Both Chernobyl and Japan were failures in old/cheap technology. More people die from coal mining that nuclear accidents. More people die from automobiles than from nuclear accidents. US nuclear plants have gravity fed cooling water. The plant in Japan was dependent on electricity and backup generators. Get the picture? We can make safe nuclear plants. The disposal of waste is already solved - but the eco-nazis won't let it be used. Where are you going to get the electricity to build the windmills and the solar panels? Aluminum is very wasteful of electricity. Electric cars can't run without huge powerplants and grids. I thought it was about global warming? Greenhouse gasses - isn't that it? Nuclear energy is the only green energy that can possibly satisty your fantasy of electric cars and electric mass transit. A single windmill takes more energy to make than it will every generate. Look it up. You can't produce at a net loss of energy and solve anything. You can pick nuclear vs. coal fired plants and fuel oil plants. Solar and wind are next to worthless in the long run. They are only good if you are in a place that isn't on the grid.

May 28 2011 at 2:54 AM Report abuse +2 rate up rate down Reply

Nothing like a little spin. Solar companies have not be "traditoinally" tied to government subsidies, they are creatures of government subsidies. That's because the technology isn't viable at the moment. If anyone wants to do something productive, the would consider finding out what it would take to make an air-conditioning unit a stand-alone. If the government wanted to do some mandatin' they could force power companies to come up with a uniform plug on every electrical box that would allow you to put a standard solar voltage/amperage/plug into it and automatically take a load off your house. Right now, 70% of the cost of taking my house solar would be paid by my neighbors. How is that helpful? The only people getting rich off of "green" energy are policitians and contractors. They still only generate a miniscule amount of energy and the panels start dying the moment you start using them. Oh, don't forget dust. In Arizona it is not a joke. Dust collection on the surface diminishes output. Guess what you have to have to get rid of the dust? Water. Guess what we don't have in the desert? Water. So, the places with the most sun are the places with the most dust and the least water. Get the drift?

May 28 2011 at 2:48 AM Report abuse +2 rate up rate down Reply

All energy forms should stand on their own. If a new source is viable the market place will exploit it. EXPLOIT is not a bad word. Right now, we are being foolish not drilling here and now. We have to oil to take care of our needs. However, Obama gave George Soros' oil company in Brazil $2 billion to drill there. I think that exceeds foolish into stupidity. We are playing aministration games with ourselves creating the difficulty getting our own oil. The goverment will not let us drill where oil is and criticizes oil companies for not drill where oil is not. We could put our people back to work and reduce our dependency on countries that would love to kill us.

May 27 2011 at 7:46 PM Report abuse +2 rate up rate down Reply
Steve Schoenewal

We have enough energy in this country to last another century or more. Coal,oil,natural gas, oilshale ,nuclear and so called green energy. We are the Saudi Arabia of energy by far and could be energy independent easily. We need to carry on full force and still refine thewsolar energy and wind till the price comes down. If everyone was to drive a electiric car our power grid would go beserk. It is not ready. Plus what do you do with the batteries? The cost needs to come down and the power grid needs to be readied. Why not use all are technologies or are the evironmentalist threatened. The world will not end today. It will not end tomorrow. The beat goes on and so will the country.

May 27 2011 at 5:51 PM Report abuse +2 rate up rate down Reply

If it has to be subsidized by my tax dollars it is not economically viable. Corn is over $7.50 a bushel because of ethanol subsidies, it has been proven over and over that ethanol uses more energy to produce and transport than it creates.

May 27 2011 at 5:47 PM Report abuse +4 rate up rate down Reply
1 reply to lynette's comment

Just another example of progressive liberals trying to control the world through legislation and regulation. The Democratic progressives are thought by many to be the party with a "conscience" (saving the planet and all the little people from the evil Republicans), but are instead the party of unintended dire consequences.

May 27 2011 at 11:47 PM Report abuse +4 rate up rate down Reply

This is why Solar is not a viable option it cost to much and the payback is dismal.

May 27 2011 at 4:33 PM Report abuse +3 rate up rate down Reply

With nuclear accidents that have happened at Chernobyl and most recently in Japan. I don't think we can afford not to move more towards alternative forms of energy like solar and wind. Nuclear power is too dangerous, not to mention all the radioative waste they produce. Solar power plants could be built in Arizona, Nevada, the desert of California (actually, anywhere where it is sunny most of the year) which could help power the nation. We have solar panels that are battery backed up on our home as well as a solar hot water heater and we love it. We plan to add more solar panels to our home in the future.

May 27 2011 at 4:19 PM Report abuse -1 rate up rate down Reply

Dear President Obama,
I need to talk about solar energy that reall works or which doesnt. I have a very simple concept that has not been tried by anyone but those few as shown on It has the potential to cut down demand on traditional fuels considerably for less money than would be the case with photovloltaics .

May 27 2011 at 4:19 PM Report abuse rate up rate down Reply