I was going to ignore this topic and talk more about PetroChina and Buffet's trip to China, but the increasing amount of chatter over LDK Solar Co., Ltd. (NYSE:LDK) prompted me to get on-board. I have to admit that I only know a fair amount about LDK and the renewable energy industry, but I'll put in my two cents.
WHAT IS LDK AND WHAT IS THEIR PROBLEM
If you have little to no idea what the LDK Solar scandal is, here is an in-depth summary, if you will. Basically (I'll give you my own 2-minute summary), LDK Solar is soon to become the bright future of new energy sources in China, its US-listed stock is doing well, hitting a high of $76.75, until a laid-off employee, Charley Situ, comes out of silence and sells insider information to all the big guys on Wall Street. He claims that much of LDK's assets are worthless and should be written off. Then CIBC, Barron's, Goldman Sachs, Lazard and even the Wall Street Journal took part in downgrading/verbally attacking/selling LDK.
So just how much of this is correct?
Then came the question of the $534 million between LDK and Canadian Solar Inc. (NASDAQ:CSIQ). Apparently, LDK plans to run a deal of that amount with the smaller Canadian company. But note: Canadian Solar has working capital and cash on hand that's around 20-30% of the amount. So where the heck is this money coming from?
WHY THE SELL-SIDE IS WRONG
Interestingly enough, the blogging community of professional investors are bashing the sell-side on Wall Street. Everyone seems to think that Goldman and Lazard are out to get uninformed retail investors. To quote one investor: "I did a study of QLGC one summer and determined that if you had bought at every downgrade and sold at every upgrade (for the previous 5 years) you would have been right on the direction of the stock 90% of the time. That's a powerful forecasting tool!" So maybe these bulge-bracket firms are thinking more "inside the box" and are more subjective than we'd like to believe. Therefore, in this context, maybe LDK is more bullish than what everyone else is telling us, and instead of thinking about the balance sheet glitch as Enron-esque, think of it as a reason to go long at lower prices.
WHY LDK IS A GOOD BUY
Why would I ever want to buy LDK, you tell me. Despite the financial mess, LDK is sitting on 13,000 acres of land with access to a major power plant, on which it is building renewable energy equipment using critical technology subsidised by the Chinese government. What's not to like? If, as one investor quoted Lazard as saying, there is a potential dip in short-term performance, there is definitely no problem in long-term performance: LDK is undergoing a vertically integrated model and on the path of becoming a world leader in its industry by 2009.
Moreover, the sell-side have underestimated the willpower of the Chinese government. If the state is really committed to improving sustainable energy as they say they are, then injecting capital in LDK is the way to go (as well as investing in wind power energy in Xinjiang maybe). If China wants to land of the moon, its people will get there (and they're getting there). Perhaps the sell-side analysts are too blindsighted by oil, which is okay, since solar power shouldn't pose much of a threat to the oil industry in the near future. But remember we're talking about the amount of hot money flowing in, not earnings, which is what all investors should care about in the first place. Why buy Baidu and not Google? Baidu doesn't pay dividends either and only has a foot in the door. But never forget the 1.3 billion Chinese and their government. Who knows what kind of money Baidu will make (or where it will be) in the next half-decade?
What do you think?
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