NEW YORK (TheStreet) -- Shares of LDK Solar (LDK) received the biggest boost on a bullish Monday for solar stocks to start the new year's trading. It was another "balance sheet" boost for LDK, the perennially balance-sheet-stressed Chinese solar company.
Every time LDK Solar announces any event related to removing balance sheet stress, shares pop.
On Monday, it was the news from LDK Solar that it had sold a stake in its polysilicon plant business which led to the rally.
LDK has been working to unlock the value in its capital intensive polysilicon production business for the past year, and on Monday, the Chinese solar company announced that it had agreed with a set of strategic investors to offer 18.5% of the polysilicon plant in a preferred share deal. The ultimate goal is to take the polysilicon plant public in the next few years.
LDK shares ended Monday up 5.5%, the biggest gain among the major solar stocks. More notable was that LDK Solar trading volume was more than twice its average daily volume on Monday, with more than 8 million shares traded. While many solar stocks were in the green on Monday, few were above or even at average daily volume.
Earlier this year, LDK shares were popping from a much lower share price when the China Development Bank announced a loan financing package for LDK. LDK also had a few positive earnings surprises to help spur a rally, as solar demand during the second half of 2010 buoyed its business and cash flow. Yet balance sheet issues have never left LDK even as 2010 demand shored up the short-term outlook for LDK shares.
Now the solar demand outlook is less certain, and LDK is trading at a much higher level than its 52-week low. It's still nowhere near its high of $14, but was still at the $10 mark before its 56 cent per share gain on Monday.
The news that LDK Solar had reached a deal to sell to the China Development Bank, among other partners, the 18.5% stake in the polysilicon plant seems, on the surface, reason for optimism. Yet the deal left at least one LDK balance sheet hawk, analyst Paul Leming of Soleil Securities/Princeton Tech, with several questions.
For one, LDK had to buy back a 15% stake in the polysilicon plant that it had sold last year in order to sell the 18.5% stake it sold on Monday. For another, LDK Solar really only sold 3.5% more of the polysilicon plant than it had sold previously. Yet those are the minor points for the Soleil analyst. The real issue is that it seems that LDK has sold the 18.5% stake at a lower price than the 15% stake it sold last year.
The Soleil analyst says the implied value of the LDK polysilicon plant in last year's deal was $1.5 billion -- it sold the 15% stake for $219 million. On Monday, LDK announced $240 million in preferred share purchases for the 18.5% stake. This deal pricing implies a lower total value for the polysilicon plant of $1.3 billion. Granted, the euro exchange rate and price of polysilicon on the spot market have to be taken into account when comparing deals for similar assets priced a year apart. However, Leming says that in the final balance sheet analysis, the difference between the 15% stake that LDK just re-purchased and then re-packaged into the 18.5% stake means that it picked up a marginal amount in new cash.
Additionally, LDK has to reach a target investment return of 23% for these investors in fiscal 2010 and 2011, or compensate investors with cash.
"Why bother doing that?" the analyst asked. "At first blush, without more details, this is expensive money and it doesn't look to be a significant amount of new cash, so I don't fully understand what LDK accomplished here," Leming said.
LDK investors have already seen in recent history how the "pay LDK now and LDK pays you later" financing works. LDK Solar recently announced an offer to holders of $300 million in convertible notes a cash sweetener if the investors decided to not take advantage of a cash-out provision coming up in April 2011. LDK is on the hook to pay investors $300 million in cash, since the convertible note is nowhere near the strike price set years ago, of $38. Only $30 million of the $300 million in convertible note holders agreed to LDK's offer, and even that was a sweetened offer from the original offer made to convertible note holders.
In any event, Soleil's Leming says that investors can leave the convertible situation -- still a balance-sheet issue for LDK in 2011 -- to the side when looking at Monday's news, and still be skeptical. "I don't think there is any connection between the transactions, but the convertibles continue to speak to the stained quality of LDK's balance sheet, and in their attempt to retire the convertible issue, they got less rather than more, " the analyst said.
The ultimate issue for investors is that LDK's deal with investors has the provision that LDK must complete an IPO for its polysilicon business in 2011 for investors to not be able to take advantage of a cash repayment provision. It's no news that LDK wants to spin-off the polysilicon business; it's wanted to do this for some time already.
The issue is that 2011 may not be the most attractive year for an IPO in the solar market. With major markets in Europe aiming to slow solar growth and many expecting a solar industry that is oversupplied in 2011 -- either majorly or at least to some degree -- an IPO of the LDK poly plant is no slam dunk, according to Soleil's Leming.
In a less-than-perfect set of 2011 conditions for LDK, margins come down, earnings are squeezed, and that's on top of an already strained balance sheet. There is still a window for an IPO of the LDK poly business in 2011, but how long that window remains open is hard to peg. "I put it at a 50/50 chance that LDK gets the IPO done before the window closes," the Soleil analyst said.
All of this leaves the LDK analyst saying at the end of a bullish Monday for shares of the Chinese solar company, "the move on this news was massively overdone. I don't think today's move makes sense."
-- Written by Eric Rosenbaum from New York.
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