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LDK Solar: Too Big, Too Fast?

LDK Solar is moving into solar cell and solar module production, the latest Chinese solar player to seek a bigger piece of the solar supply chain.



) --

LDK Solar


is planning to build a solar manufacturing facility with 1 gigawatt of solar cell and 500 megawatts of solar module capacity. The manufacturing facility is expected to begin production in the second quarter of 2011, backed by $368 million in financing for up to three years from a Chinese lender.

Many of LDK Solar's Chinese peers are ramping up capacity and moving to a more vertically integrated model. Therefore, it's not a surprise that solar wafer maker LDK would be looking to branch out on the solar supply chain. However, LDK's plans are complicated by three factors: 1) its ongoing polysilicon plant ramp, 2) its balance sheet issues, and 3) potential oversupply in solar.

LDK just came off a solid second quarter, during which the Chinese solar wafer maker improved its balance sheet to an extent that LDK hadn't been able to achieve in the past two years.

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With $433 million in cash balance at the end of the second quarter, LDK seemed to buy itself some breathing room versus critics who worry that the company remains overstretched as it ramps up its polysilicon plant. One major negative in the recent earnings was that the polysilicon plant ramp schedule, already delayed many times, seemed still behind schedule, even as it showed signs of progress.

"Certainly, in a traditional Wall Street sense, you would like to see LDK get the poly plant up and running and get the debt from the poly plant construction paid down before moving on to the next large scale program," said Soleil Securities analyst Paul Leming. "It's very clear that LDK knows only one speed, and that's 'damn the torpedoes, full speed ahead,'" the analyst added.

Solar is a commodity business and increasing market share means engineering lower costs. LDK is merely moving in the direction of all the Chinese solar players, whether it is a solar cell player like

JA Solar


moving into solar modules, a solar module leader like

Yingli Green Energy


moving into polysilicon production, or a relatively new entrant like

Jinko Solar

(JKS) - Get Free Report

moving out from polysilicon production to all aspects of the solar supply chain.

LDK purchased a solar module maker earlier in the year, and signaled at its last analyst meeting that it would be looking to further vertically integrate. With polysilicon production at one end, wafers in the middle and solar cell and module production at the other, LDK would be in a position to achieve cost efficiencies across the solar supply chain.

The need to vertically integrate is a reason that an investor can't rush to quick judgment on LDK's decision to make another major capital commitment, even when the jury is still out on its last commitment. "There are aspects of this decision that get a thumbs up and others a thumbs down. It's not cut and dry," Soleil's Leming said.

The vertically integrated solar model makes sense, but strategy is only one half of the equation, and LDK will need to execute. In the least, manufacture of solar cells and modules is less capital intensive and less tricky than the raw polysilicon operations.

The LDK decision to plow ahead to 1 GW of solar cell capacity and 500 MW of modules at a time when there are fears of potential oversupply in 2011 does circle back to the biggest debate in solar: Are the Chinese solar companies overproducing and setting up solar for a major oversupply in 2011? And if LDK is even on schedule with its second quarter 2011 cell and module manufacturing, could it be selling into a glut?

Investors skeptical that demand will stay strong in 2011 as the German market slowdown plays out -- and other European nations reduce feed-in tariffs -- might think that it would be wiser of LDK to wait out any solar demand lull before putting its capital into the ground, so to speak. However, if demand does not slow in 2011, then it's the solar companies with the boldest plans that will benefit the most from economies of scale offered by vertical integration.

At present, the overcapacity issue is part of a larger debate impacting all solar companies, and for LDK the immediate and more interesting question is the financial capability to keep building at a fairly high rate.

-- Written by Eric Rosenbaum from New York.


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