Wednesday, May 6, 2009

Future speculation - LDK - 5/6/09

Of course, any time you're investing money in a company, you're going to want to look at the downside risk. This is particularly true in developing industries like Solar Energy. Over time I've seen alot of claims of downside risk for LDK, and I've strongly concluded that that risk is outweighed by the upside potential. I am therefore, long LDK.

Here's one particular point that I thought I'd draw on from past debates and post here for posterity (lightly edited).

The original comment:

"Upgrading manufacturing in industries that are in rapid technological ferment is extraordinarily expensive, and the reality is we don't know if LDK has the sustainable cash flow or ability to raise capital to keep up with rapid innovation over time. The market demand must be stable enough that you can pay back the costs of building your plants. Technology changes too quickly, and today's cost leader becomes tomorrow's dinosaur, and as far as economies of scale go, LDK is still very small fish in the big scheme of things."

My response:

This isn't computer software, where an entrepreneur can write a revolutionary piece of software, and deliver it instantly to millions of customers around the world. This is Solar Energy. 1000 Watts per Meter Squared is coming in from the Sun (give or take), and impacting on semiconductor material to produce power. It's not like somebody is going to come up with some amazing technology that will allow them to bypass the massive scale required to be a significant player in the industry, no matter WHAT technology they end up developing. You could build 100% efficient devices, but you'd better be ready to build an incredibly big factory to manufacture them in, because you're still only going to get 1000W / m2 from them in ideal conditions. Building that capacity not only take time, it takes money; and in this case, it requires technology that doesn't exist yet.

Are you going to bet on technology that doesn't yet exist? Are you going to bet on technology that even if invented, will take YEARS to get to market in any significant amount? You're betting, by waiting for that ideal, while companies like LDK are building massive capacity RIGHT NOW.

Let's look at Polysilicon. It's great stuff. It's the second-most common element in the crust of the earth. LDK has a 20 Million Ton Mountain of it in their back yard. The trick is, though, that you have to process it, and that costs money, and is very technically challenging. On the other hand, we'll never run out of it like we could Indium and Tellurium. The price is going to come down to about $20-$30 per KG in the next couple years, at least for those that can produce their own supply, and even though there are numerous technologies on the verge of increasing its efficiency well above the current 15-22% efficiency, . As for Poly Production equipment, the cat is out of the bag. No longer do the "Incumbent" producers have total control of the supply and the technology. There are 3 companies out there that will build you a poly plant if you want one, yet if you ordered one today, LDK would still be EASILY two years ahead of you, and in the end, you'll be selling poly for almost no profit, while LDK will be using their poly to generate profits on their wafers.

"as far as economies of scale go, LDK is still very small fish in the big scheme of things."

In the biggest scheme of things, yes, this is true. In Solar, however, LDK is the Worlds Largest Wafermaker, and including LDK's Customer Base of cell and modulemakers, LDK's "line" of products is the largest of any other solar Company (1.46GW annualized capacity as of the end of 2008).

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