Mounting Debts, Declining Margins for This Solar Stock
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Solar stocks have something in common with web/social media stocks. Both the sectors are darlings with investors, but most of the stocks operating in these sectors have failed to perform. In the past two years, a number of solar companies floated their IPOs and the initial investors are still trying to recoup their investment, forget about making profits. Older companies are failing to provide returns as well. As an example, LDK Solar (NYSE: LDK) not only lost 50 percent of its value in 2012, but was also on the verge of getting delisted from NYSE due to constant deterioration of its price.
LDK Solar deals in photovoltaic products. While, thanks to growing environmental awareness, the demand for photovoltaic products is increasing, the benefit is not accruing to solar companies. Due to intense competition, prices are constantly under pressure and the effect is visible on the strained bottom line of solar companies. LDK Solar suffered $32.5 million worth of gross loss for the third quarter of fiscal 2012, up from a $17 million gross loss it had suffered in the third quarter of 2011. Its gross margin also dropped from -3.6 percent in Q3, 2011 to -11.2 percent in third quarter of 2012. The company also slashed its outlook for the full financial year and is looking to earn Q4 revenue in the range of $230 million and $290 million.
Declining margins and suppressed pricing have directly contributed to higher borrowing needs. LDK Solar, like most other solar stocks, is saddled with debts. According to a recent report, the top 10 Chinese solar companies have more than 110 Billion Yuan in collective debt. LDK Solar hired Citigroup to re-negotiate some of its debt and also sought its investors’ approval to take on more debt. The company currently owes more than $3.1 billion to its creditors.
The company is facing troubles on other fronts as well. It recently lost an arbitration case filed by its supplier Beijing Jingyuntong Technology Co for the company’s alleged failure to complete purchase orders. LDK Solar has been ordered to pay $52 million in compensation and legal fees to JYT. The company had failed to take delivery of its ordered furnaces. The case directly points to the dire market conditions faced by the solar company.
LDK is facing a tough macroeconomic environment also. Its finances are further likely to deteriorate due to new duties imposed by the US government. Late last year, the US government announced the imposition of a 15.24 percent countervailing duty and 25.96 percent anti-dumping duty on solar products made exclusively in China. However, LDK is not the sole casualty here. Its competitors like Trina Solar are also expected to be negatively impacted by new duties.
LDK Solar is also taking steps to divest its loss making units. It has struck a collaboration with Shanghai Qianjiang Group for disposing its LDK Anhui unit. The sale is expected to infuse about $58 million to LDK’s net asset position.
Despite the soft solar energy market, a major fillip for the industry came in the form of a recent Warren Buffett nod of approval. Buffett’s Berkshire Hathaway (NYSE: BRK-A) bought SunPower Corp. (NASDAQ: SPWR) through its MidAmerican Energy. The investment has been taken positively by the markets and major solar stocks responded by making positive price moves. Though the financial prudence of the transaction has been questioned, it is expected to draw positive interest in the solar sector.
LDK Solar is also likely to benefit from new subsidies announced by the Chinese government. The government has come up with over $10 billion worth of subsidies to promote domestic demand for solar kits. While major Chinese companies including LDK Solar export a major part of their production, the new subsidies may help them to grow demand in domestic market. The program is also expected to blunt the impact of higher duties charged by the US government on imports.
But the big question remains whether these macro factors will help LDK Solar to break its losing streak? The company has provided lackluster guidance for its fourth quarter as well as the full financial year. It is also trying to curtail costs by slashing its workforce. Its peer stocks including Trina Solar are also plagued with similar problems. Trina Solar is said to be carrying $14 billion worth of off-balance sheet liabilities, while its balance sheet shows $1.9 billion in liabilities. The company also has a negative gross margin. Given the internal inefficiencies and build up of excess capacity in the solar sector, LDK Solar is unlikely to bring any good news to its investors.
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