XINYU City, China ( TheStreet) -- LDK Solar ( LDK)disappointed in its earnings release on Tuesday morning. The backward-looking earnings shortfall, though, was less significant than a set of questions that dogged LDK Solar long before Tuesday, and that seemingly linger after the give-and-take between LDK management and analysts on the Tuesday conference call.

LDK shares ended down 7.8% on Tuesday, on close to triple the Chinese solar company's average trading volume -- 6.5 million shares traded versus 2.5 million shares.

It's possible that, given the general outperformance by many solar stocks in the fourth quarter, investors might have had unrealistic expectations for LDK. LDK gross margins were 9.9% in the fourth quarter -- half the third-quarter gross margin level of 20.1%.

Nevertheless, to put the weak fourth quarter into perspective, Gabelli & Co. analyst Hendi Susanto said he actually expected the gross margins reported by LDK to be worse than the actual margin deterioration.

What's more, ReneSola ( SOL - Get Report), LDK's closest competitor among publicly traded Chinese wafer makers, also reported lower than expect margins in the fourth quarter.

ReneSola dipped beneath the $5 share-price mark in the week after its earnings disappointment, but its shares have benefited in the recent solar rally, back up to $5.92 at the close on Tuesday. ReneSola benefited specifically from a price target hike from $5 to $7 issued by Barclays Capital on Monday.

LDK's debt-laden balance sheet and its strategic initiative to move polysilicon production in-house are more of an overhang on LDK Solar shares. LDK is still working through a historical inventory of polysilicon that is significantly more expensive than polysilicon prices in the spot market -- $70/kg for LDK versus spot poly prices that some analysts expect will hit $45 this year.

What's more, LDK indicated on the call that it will need more financing and continues to work with Chinese banks to transition short-term debt to long-term debt. LDK had more than $69 million in short-term debt at the end of the fourth-quarter.

The Street was looking for more clarity from LDK as the Chinese solar company's management set a target of 15% to 16% gross margins in 2010.

Gabelli & Company analyst Hendi Susanto said gross margin guidance was a debatable point, and he described LDK's target of 15% to 16% near-term gross margins as "aggressive," given the issues it has to work through.

Gabelli's Susanto -- who had a sell on LDK before the most Tuesday's earnings -- said after the earnings call with LDK management that his biggest doubt remains the impact of the fixed costs associated with the poly plant ramp-up period on LDK's balance sheet and cost structure.

What's more, even if LDK is successful in bringing its poly plants up to its target of 11,000 metric tons produced by year-end, the Gabelli analyst noted that LDK has to run the poly plants at close to full utilization to have an effective cost-structure. Otherwise, the capital depreciation from the fixed costs associated with ramping up the poly plant will continue to exact a negative toll on a per watt cost basis.

LDK said it still plans to spend as much as $200 million to $300 million in 2010, and that the lion's share of the spending will be to ramp up the poly plant.

LDK indicated it would produce polysilicon at an internal cost of $35 by year-end, which would be below spot-market prices. However, Susanto pointed to the case of MEMC Electronic Materials ( WFR), which, even after years of operating polysilicon plants, still encountered technical problems that were a drag on utilization and margins . Problems at MEMC's Pasadena plant in the third quarter took gross margins all the way down to 6.6%.

"There are still multiple variables controlling when LDK can get to the below market price, internally produced poly costs," the Gabelli analyst said, adding that the majority of LDK's polysilicon is still within this high-cost inventory, as opposed to its internally produced poly. LDK said it will still take a few quarters to finish working through all of the high-cost $70 polysilicon inventory.

There was also a new wrinkle on another nagging question related to LDK's plans to sell off stakes in its polysilicon plant business, or even potentially pursue an initial public offering for a spun-off poly plant business.

Analysts hadn't had the chance to question LDK regarding how its debt load would be spread across its existing balance sheet, and any joint ventures or spun-off plant business, since the first outside investment stakes sold by LDK took place after the third quarter earning calls.

Morgan Stanley's Sunil Gupta asked LDK about this issue, and the responses from LDK ranged from boilerplate to vague. Gupta asked for an update on plans to find more outside investment for the poly plant business which LDK previously indicated that it was pursuing. LDK would only say that "everything is moving on the expected schedule."

When Morgan Stanley's Gupta asked specifically about the debt restructuring and how much of LDK's total debt was related to the poly plant, LDK officials only allowed that "we are doing some restructuring," and that most of the capital for the poly plant has been injected from LDK, and now LDK is restructuring to move some debt into the polysilicon unit. LDK management said that negotiations are ongoing with banks, as well exploration of other options, including a spinoff, to "enhance the value" of the business.

Gabelli analyst Susanto said the debt conundrum for LDK is still a major concern, and the fact that LDK hasn't figured out yet how to spread the debt around could have been a surprise for some investors looking for more clarity. He noted that if LDK were to pursue an IPO for the poly plant business, the debt riddle would have to be solved.

The future financing of the poly plant was far from the only gap between analysts on the call and LDK management.

LDK said it has visibility into the third quarter 2010 that average sales prices will remain stable, an outlook that some analysts, including Gabelli's Susanto, found hard to accept based on the feed-in tariff reductions in Germany. Susanto said it's not a surprise that pricing would improve for the second quarter, and, in fact, other solar companies have already reported that fact.

Cowen & Co. analyst Rob Stone noted on the call that the strong unit demand that LDK was focused on in its bullish outlook did not take into account pressure on module pricing. This LDK opinion may, more or less, represent the fact that at every point on the solar chain, companies expect the other points on the solar chain to bear the brunt of the price reductions.

Moon Capital's Marianne Dolan, whose questioning ended the call, asked LDK Management if its capacity ramp up remains stable, does LDK only benefit from a stable ASP and cost reductions?

On this point, LDK was not vague. "Yes, that's way we look at it for the next few quarters. The price of silicon comes down, and ASPs are stable or improved, and we are ramping up wafer production capacity," LDK management said.

Still, it was clear at the end of the call that analysts' questions centered on some of the assumptions in LDK's final response. The price of silicon is coming down, but when does LDK actually reach an internal cost below spot prices? Also, how can LDK have confidence that ASPs will be stable beyond the second quarter?

Moon Capital's Marianne Dolan signed off by saying to LDK management, "Good luck!"

Was it a "sign-off" from investment in LDK after another set of mixed signals from the Chinese solar wafer maker?

Moon Capital's Marianne Dolan was mum when contacted by TheStreet as to her opinion on LDK, saying she does not speak to the press.

Investors, on the other hand, may have evinced a "good luck" sign-off sentiment, as it relates to LDK Solar, by their selling action on Tuesday.

-- Reported by Eric Rosenbaum in New York.


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