LDK has been having a few problems of late, just like most thin film and solar wafer manufacturers. The market for solar panels is down overall. Competition is substantial and pricing for all solar photovoltaic products keeps falling. Meanwhile, the overall economy keeps sliding and the pricing of fossil fuels (particularly oil) is down substantially from its peak last year.
Enter into this equation LDK. This company builds solar wafers based on polysilicon components. They are not a thin film manufacturing firm, but they are a low cost solar wafer company.
Today might be the beginning of the end for this company. Their largest customer, Q-Cells, has determined that LDK has violated the terms of their long-term contract and has declared that the contract between the two has been broken.
This is incredibly bad news for LDK. The contract was to have run through 2018. A big portion of LDK's revenue stream has gone away. The company does have other customers but none as large or as commited to LDK as Q-Cells had been. Rather than a customer, Q-Cells was more like a partner to LDK. From the inception of the major contract (which was to have run from 2008 through 2018) the two firms worked together in technological collaboration and adjustments, so their relationship was more than just a supplier and a consumer.
To make the situation more ugly, Q-Cells is looking to reclaim a large initial payment it made to LDK. This was back in early 2008, when LDK received a payment of more than $244 million. Q-Cells is going to try to recover part or all of this initial payment. Even if they only get a percentage, this would be devastating to LDK's balance sheet.
Solar wafer and solar cell producers have been under pressure from lack of new orders, canceled orders, growing inventories and a generally less enthusiastic interest in the technology, especially when compared to 2008. When gas was over $4 a gallon, everyone was talking about an alternative energy source. Wind and solar were the two big stories.
LDK stock was trading at over $56 per share in late 2007. By August of 2009, the stock price was down to about $11.50 per share. As of today, 11/2/09, LDK closed at $5.23 on the NYSE. The problem for LDK is that there is no good news that appears to be possible at this point.
The technology in the solar cell market is so diverse, and so rapidly changing, that no company would be interested in an acquisition. And even if they were, most solar companies are already pressed financially. There wouldn't be the capital or the financing in place for the majority of firms to create a deal.
LDK doesn't appear to be poised for any new customers, at least no major deals like the one they just lost with Q-Cells. The economy is down in general, and the excitement over solar energy has been grinding of late. A few big names (First Solar and NanoSolar) are taking-up most of the headlines.
LDK may have a large lump sum payout back to Q-Cells. The institutional owners of LDK have a decision to make. They've watched this stock lose more than 50% over the last 90 days. Now with the major blow from Q-Cells, what prospects can the professional investors use to justify holding this company in their portfolios? Most likely the mutual funds will begin to exit this stock. They won't want to hang around and here an awful conference call. And if there is any whisper of financial difficulties, or trouble with debt loads, then it will lead to another big hit to this stock.
The problem here is the bad news may become a catch-22 for the company. No new customers will want to do business with a company that was fired by Q-Cells. There will be a fear to use LDK as a supplier when they may fail somewhere in the middle of a deal. Not many lenders will want to provide credit to a company that could be burning through capital and not establishing new clients. Money managers and stock analysts won't have a reason to invest or follow LDK as a company. Too much risk, and not enough reasons to explain why the invested in a $5 company that may go below $2 a share.
No new prospects for customers, no interest in the stock, no banks looking to loan. At the same time, we know the company will have less revenue, we know they may have to pay a big chunk of money out for no return, and the market knows that the stock has tanked over the last two years.
Even though LDK may stagger onward, this is most likely the beginning of the downward spiral. November 2nd will be the day that LDK started the slide towards a penny stock. A lot of people on Wall Street (a number of analysts and Forbes) said there would be a big shake-up (and shake-out) in the solar cell arena. This is part of that shake-up and eventual consolidation which has to happen.
The irony is that it doesn't matter whether or not LDK performed to the specifications of the contract. They claim they did. Q-Cells obviously disagrees. But for the investor the story is over, the stock is on the way down.
