LDK Solar (NYSE:LDK) which used to be the biggest solar wafer producer has completely stopped production of polysilicon and sharply reduced shipments to preserve cash. The company is effectively bankrupt and surviving due the largesse of state owned Chinese banks which have given $3 billion in loans to the company. LDK has almost no chance of paying down this monstrous debt given that it has been operating on negative gross margins for the last few quarters.
LDK cost structure is way too high compared to its competitors
LDK has a much higher cost structure in most solar segments. Its wafer processing cost is 25c/watt compared to 12c/watt for Renesola (NYSE:SOL), its polysilicon cost is around $30/kg compared to $23/kg for Renesola and $17/kg for GCL Poly. Given that even Renesola and GCL are making losses, the situation for LDK is dire. LDK has diversified into production of cells, modules as well as solar plant construction. However these efforts like the others have also failed spectacularly with its German acquisition also near bankruptcy.
LDKs Giant Polysilicon Plant stops Production
LDK’s biggest failure has been in building up its polysilicon production. The plant took too much time and too much money to get built and never managed to reduce its costs to a competitive level. Despite building a plant with 15000 tons of capacity making it one of the top polysilicon players, the company has never managed to ramp production to make decent profits. Not its plant lies idle as polysilicon prices have crashed to $15/kg almost half that of its cost of $30/kg. It remains to be seen whether this plant will ever restart. The only chance for it to do that is if the Chinese government imposes duties on imports of polysilicon.
LDK Management has no clue what to do
The Management of LDK Solar has performed disastrously right from building the polysilicon plant to diversification into thin film solar panels (Best Solar), acquiring solar system companies (Germany, USA), managing debt etc. They kept on spending money and building capacity even as the whole house of cards collapsed around them. Even as recently as last year , they signed a deal to build a massive polysilicon plant in China’s Inner Mongolia province even as they could not run their poly plant profitably. The company had forecast more than $2.5 billion in sales at the beginning of the year and now they have reduced it to less than $1 billion.
LDK has fired thousands of employees this year and will continue to do so
The company in its latest quarterly results reported a sharp decline in cash as the company continued to burn cash. LDK management has fired 2500 workers as its utilization fell sharply and has fired almost 9,000 workers or 40% of its workforce this year. Given its uncompetitive structure, the company will continue to fire workers. LDK has almost 4 GW of wafer capacity and has used less than 50% of that capacity this quarter.
LDK is Bankrupt but the Chinese Government does not want to let go
LDK is bankrupt and one can easily make that out going through its balance sheet. The company has almost $3.7 billion of plant assets which in reality are of much lower value. If the company takes even a 10% asset writedown of its PPE, it will have a negative worth given that it has only $50 million of equity listed on its balance sheet. LDK has more than $3 billion in loans and it has been reported that a small bank Shanghai Rural Commercial Bank for overdue loans worth 100 million yuanhas already sued LDK to recover that loan. LDK recently sold a 20% equity stake for a pittance to a state owned vehicle Heng Rui Xin Energy and changed its management structure. The Xinyu government has also given it a grant. But given its massive problems all loans and grants will only prolong the pain given that LDK has no chance of coming out of this downturn unless a miracle happens.