Death Spiral Continues for LDK Solar

There doesn't seem to be a shortage of bad news for LDK Solar (NYSE: LDK  ) lately. The company defaulted on loans earlier this week, bringing on concerns of a pending insolvency or bankruptcy, and today released some dismal earnings numbers. 

LDK isn't reporting first quarter earnings like the rest of the report on the wires; it's reporting results from all the way back in the fourth quarter of 2012. By the look of it, things aren't going well at all for this Chinese solar maker. Sales fell 53.4% sequentially, to $135.9 million, and net loss jumped more than five fold, to $514.7 million. 

The downward trend for LDK Solar has been steep, and the red ink has been flowing for well over a year. You can see below that sales have cruised lower over the past year, reaching an unsustainably low level in the fourth quarter. 

 

Q4 2011 

Q1 2012 

Q2 2012 

Q3 2012 

Q4 2012 

Net Sales	$420.2 million	$200.1 million	$235.4 million	$291.5 million	$135.9 million
Gross Margin	-65.5%	-65.5%	-39.1%	-11.2%	-60.5%
Net Loss	$564.6 million	$185.2 million	$254.3 million	$136.9 million	$517.0 million

Source: Company earnings releases.  

Solar companies have reported losses for some time now, but LDK Solar has more debt than most companies, and won't be able to survive with such feeble numbers. At the end of 2012, debt stood at $2.8 billion, and we know now that the company ran out of cash just this week. There's no way LDK Solar can survive on just $135.9 million in quarterly revenue and that kind of debt level. 

 

A problem across solar

High debt loads and feeble margins aren't a challenge faced by LDK Solar alone. Suntech Power gave in to these pressures last month, defaulting on its own debt. Yingli Green Energy (NYSE: YGE  ) is now the most indebted Chinese solar company, with $2.5 billion in debt, and I wouldn't doubt if they're not far behind LDK and Suntech. The defaults of Suntech and LDK has to be concerning for all of Chinese solar, especially if banks don't keep the free flow of funds that have powered a rapid expansion in production. 

 

Balance sheets matter
What's becoming clearer and clearer every quarter is that balance sheets matter, not just for investors, but also for solar installers. Solar modules come with warranties, sometimes stretching as long as 25 years, and if a customer questions whether a company will be around in only a year or two, they may choose another option. Since Chinese modules vary very little from a performance perspective, the customer may choose a better-capitalized company like JinkoSolar instead of Yingli or LDK, or even move to a U.S. company like First Solar (NASDAQ: FSLR  ) or SunPower (NASDAQ: SPWR  ) . As financial conditions get worse at these companies more and more customers leave and the problems get worse, creating a downward spiral. LDK and Suntech are the poster children for this and are a major reason investors need to stick with quality in solar.

 

I've been down on LDK Solar since I began predicting its failure in 2011. Investors interested in getting into the industry should focus their attention on high quality names like First Solar and SunPower, who have a competitive advantage, stronger balance sheets, and are seeing margins head in a positive direction. First Solar's move to buy TetraSun gives it a path into the commercial and residential markets along with its industry lead in the utility space. SunPower has the most efficient modules in the industry and has the backing of Total, an oil giant with the balance sheet to make sure it can fund growth in the future.

 

These are two companies to look at in solar; just stay away from the likes of Suntech, LDK, and Yingli. The end won't be pretty for highly leveraged solar companies in China.

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