Lazard's Sell & $25 Target on LDK Solar (LDK, WFR)

Lazard Capital Markets has maintained its sell rating on LDK Solar Co. (NYSE: LDK) despite a 22% rise in the stock today.  LDK signed a 10-year "take or pay" contract to supply multicrystalline wafers and polysilicon to Q-Cells.  LDK will deliver more than 6GW of multicrystalline solar wafers to Q-Cells AG over a 10-year period starting in 2009.  The contract has two parts: silicon agreement and wafer processing. Under the silicon agreement, LDK will supply Q-Cells with 1,000 MT in 2009,increasing to 3,500 in 2010, 4,000 in 2011, 4,500 in 2012, and 5,000 from 2013 to 2018. LDK will also process this silicon into solar wafers for Q-Cells.

Lazard’s Sanjay Shrestha said in his report, "We understand that silicon pricing is set for the first two years and is subject to negotiation based on market pricing thereafter. Q-Cells will make prepayments on the order of 10% of the silicon value, or more than $200 million, to assist LDK with financing the expansion required to supply these volumes. LDK is required to supply the silicon from its internal production or external sourcing. We believe this contract announcement provides a validation of LDK’s wafering capabilities and, more importantly, represents an inflow of much needed cash, which helps to reduce near-term financing risk…..

Shrestha says this is a necessary and an incremental positive for LDK, but it does not change his long-term thesis on the company.  "We believe that LDK shares are assuming a best possible and overly optimistic outcome for the company’s capacity ramp and pricing, and the broader sector clearly has a strong positive bias. However, we remain cautious on pricing and the ramp and maintain our SELL rating.   Our $25 price target reflects a low-teens multiple on our 2009 EPS estimate of $2.00. While solar multiples have been somewhat arbitrary as of late, we note that MEMC (NYSE: WFR), a silicon provider with a long track record, is trading at 17x, suggesting to us that LDK should not garner anything more than 15x on 2009E EPS, indicating a $30 stock In the event LDK is successful, a best-case scenario for EPS is likely around $3.00, suggesting the shares are fully valued at $45."

Shares of LDK are up some 22% today at $55.90 and have already traded one and half times normal volume. Also in recent alternative energy calls:

• See Hoku’s financing 
• Lazard on Capstone & First Solar
• Lazard defended Itron
• Chinese alternative energy IPO FILING

Jon C. Ogg
December 10, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.