On May 26 we suggested to pick up a few long-term call options…
Our motivation was rather simple, the $20 target price seemed quite doable between now and Jan 2011. Yes, unlike TSL, they went ahead with their poly plants (two, actually), and despite the brave face they put on it that now seemed to have been not such a good idea.
While TSL (which used to be our favourite pick in the sector) has rallied strongly, LDK shares lingered. The capital cost of the plants especially are a bit of a burden. However, there is an upside (apart from the 16% rally today, on 3 times the average volume).
Once these poly plants are up and running fully, their poly cost will go down, perhaps as low as $30 per kilo, where spot prices are still three times that. There are two caveats though:
- Poly plants are notorious for their long suboptimal run-up times where they produce far from cost effective, there is a rather steep learning curve to climb.
- Since most cost are fixed, it’s paramount to run these plants as close to full capacity as soon as possible, that might be a bit of a problem.
However, with rising energy prices, lower panel prices and renewed incentives, solar has come back in vogue, especially on the markets. It was only a matter of time before LDK, quite a laggard the last couple of months, would make up lost terrain…
It won’t all be plain sailing from here on though, management argued in the latest conference call that they didn’t think any more mark downs of inventories would be needed, but if panel prices sink further, that might still happen, which would be a bit of a setback.
Still, we quite fancy the odds that between now and Jan 2011, these shares are going to hit $20+..