“Robert Hsu: Red-hot Solar Profits”

by Travis Johnson, Stock Gumshoe | September 21, 2007 1:47 am

This one comes in from Robert Hsu[1], for his very popular China[2] Strategy service — I note that several folks in the forum have talked about liking this newsletter, so if you’re interested you might want to wander over there[3] and chat with some self-reported subscribers about it.

But boy, does he ever send out a lot of teaser ads. Not that I’m complaining, believe me, gotta feed the Gumshoe!

This one’s about another solar[4] company, a sector he has plumbed before several times — he has recommended Trina Solar and MEMC Electronic Materials[5] in the past, I know (and unfortunately, that MEMC recommendation must be pretty much treading water[6] for him … as are my MEMC holdings this year).

But this is one that has had a massive run recently … and perhaps for some of you who are really plugged in to this sector, that’s enough to clue you in.

For the rest of you, let’s look a little more closely.

The company went public very recently, in June.

Shares dipped significantly, which is when Hsu said he recommended a buy.

The stock is up 71% since mid-August with, in Hsu’s words, more “upside to come.”

The company is two years old, more or less, and shipped their first product about 18 months ago in April of 2006.

They are the third biggest supplier of solar wafers, and have been profitable from their first sale.

Sales have climbed dramatically — $12 million, $32 million, and $73 million in the last three quarters of 2006, and $99 million the last time they reported.

They manufacture the wafers that solar cell manufacturers use to build cells, not the cells themselves or, though as we’ll see in a moment this is changing, the polysilicon raw material.

The company’s edge, in Hsu’s opinion, is that they can reduce costs by using their “unique technology. It uses polysilicon scraps and recyclable polysilicon in manufacturing solar wafers while still maintaining high quality levels and performance.”

And of course, there’s a bit of a hard sell to close us out:

“You don’t want shares of this company to experience another run-up and leave you behind. Click here to get instant access to my detailed buy advice on this scorcher. I believe this stock could gain another 25% or more by year-end!”

So … wanna take a run at China Strategy[7] and shell out a few hundred bucks for the name of this company? Or do you just want to look into it yourself?

That’s what I thought! Excellent … in that case, I think it should be just a few moments on the thinkitationizer and, there we go! This company is clearly …

LDK Solar (LDK)

One of a wave of solar-related IPOs from China in the last year or two, this one is indeed a bit different. Unlike most high profile solar companies like Suntech, Trina Solar, Sunpower, and Evergreen Solar, LDK is not a solar cell maker.

No, as Hsu indicated, they are a step down on the food chain from the cell manufacturers — they sell the silicon wafers that are used to build cells, wafers that are extremely similar to the silicon wafers used to make semiconductor chips (like the ones inside the lovely Intel Mac I’m typing on right now).

So there are essentially three significant steps from sand to solar cell:

First, someone has to make the high grade polysilicon — this is essentially a chemical process that results in highly refined polysilicon in one of a couple different physical forms.

Then, someone has to turn that polysilicon into wafers. This means turning it into giant cylinders that are perfectly uniform and electrically tuned or tested in some way (even going that far exposes my ignorance of the process), and then slicing that polysilicon cylinder into very fine, very perfect discs.

Then, someone turns those discs into photovoltaic solar cells that absorb sunlight and turn it into electricity, through what I can only imagine is some kind of witchcraft.

At least, that’s how it works for semiconductor wafers … and the process for solar wafers is quite similar, though not identical (and thankfully for the manufacturers, it’s somewhat less demanding a process)

But anyway, to get back to brass tacks — a company like Suntech Power[8] buys those wafers from a company like LDK or MEMC Electronic Materials. And a company like LDK, at least for the moment, buys its raw silicon from a chemical company or from one of a few big polysilicon makers, including MEMC.

So essentially, LDK is in the middle of the supply chain. This, as I intimated, is changing — they are moving into making their own polysilicon, so they don’t have to rely on this very expensive and short-supplied raw material coming in at high spot prices or, worse, being unavailable at any price. There was a good IBD article about this just last week[9], and clearly this plan comes with both some great opportunities and some risks. This particular initiative is just underway, they’re starting to build the plant, which is a massive undertaking, right now. And they’re not the only ones who had this idea — as you might imagine, massive runups in polysilicon spot prices have brought potential polysilicon companies out of the woodwork with their plans for new production plants.

What else to know about them? Well, they’ve got lots of cash, thanks to their IPO. They are in China, of course, so that means they’re close to a lot of the big solar cell makers on the mainland and in Taiwan (though they’re currently selling a lot of wafers outside China). And George Soros[10] owns a handful of shares, as of his last filing, so you could be in worse company.

This one seems to me to be saddled with the same future issues that I worry about with MEMC Electronic Materials (WFR), which I’ve owned for a couple years. Absolutely everyone that can hire an engineering company or burn a pile of sand is trying to build a polysilicon plant or expand existing plants right now — not just startups, but the big players, too. WFR is the fourth largest wafer supplier, and happens to be vertically integrated and make it’s own polysilicon, too, so that’s perhaps kind of a model for LDK. But I do continue to think that there’s a real risk, in this land rush to expand capacity, that the companies will overexpand.

Overexpansion has been the problem for this industry before, back when the only customer was the semiconductor business, and it’s certainly possible that solar will now be such a big business, taking such a volume of silicon, that even full-out expansion will fail to oversupply the market. But that counts on two things: First, that solar will indeed continue to grow rapidly as an electricity source, and Second, that solar cells will remain relatively inefficient so that installations will require a lot fo cells, and most of the cells will still require a significant amount of silicon. Thin film solar, which uses a thinner coating of silicon instead of a full wafer (gross oversimplification) is one possible threat, as are non-silicon wafer makers like First Solar.

I don’t know much about the chemistry or the engineering of wafers, but I worry a bit about the market. I’m still personally holding MEMC shares, so I’m clearly not so worried that I’ve sold, but I did sell part of my holdings to take profits and reduce my risks a bit over the summer. If you’re interested in investing in any aspect of the solar industry, from polysilicon to wafers to cells, I’d urge you to learn about the current state and projections for the overall market, including the capacity ramp-ups now underway around the world, and make your own judgement about whether you think the demand will continue to outpace capacity. I’m still on the fence — which would, to be blunt, have caused me to miss out on LDK’s very impressive performance over the past month … and perhaps, if Hsu’s right, it will cause me to miss out on another 25% gain in the coming quarter.

If you’ve got feelings about the solar industry, or silicon supply, please share them … you’re among friends, go ahead and open up. Even if you think I’m an idiot (you wouldn’t be the first).

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