Thinner Margins Top LDK's Self-Acquittal
LAST WEEK SHOULD HAVE BEEN A SUNNY ONE for LDK Solar. The China-based maker of silicon wafers for solar cells said last Monday that its investigation of a former executive's allegations of fraudulent inventory accounting had concluded that the books were clean. That sent the firm's American depositary shares (ticker: LDK) up 33%, to 75 bucks. On Wednesday, LDK said September-quarter revenues rose 60% sequentially, to $159 million. Earnings were up 56% quarter-over-quarter, to $42 million, or 37 cents a share. Nonetheless, LDK shares plunged 28% Thursday and ended the week at 45.
What dismayed investors were September-quarter gross margins of 30.8% -- down from 35% in June and 39% in 2006. Piper Jaffray's Jesse Pichel noted that LDK gross margins were still an inexplicable 10 percentage points above those of peer ReneSola (SOLA). LDK inventory is turning just 2.2 times a year. Pichel downgraded the shares to a Sell with a price target of 34.50.
LDK stock was at 51 when we detailed evidence of questionable inventory disclosed by LDK's former controller, Charley Situ ("China's Solar Boom Loses Its Luster," Oct. 8, 2007). He disseminated internal records showing that 284 million tons of inventory reported on LDK's books could not be found in its warehouse.
Situ willingly cooperated when he was contacted last month by a lawyer from Simpson Thacher & Bartlett who said he was working with Deloitte & Touche for LDK's audit committee. Situ says he mistakenly thought that the lawyer was assisting the U.S. Securities and Exchange Commission, which has its own inquiry underway. LDK says its investigation concluded that its inventory numbers were materially correct. It says Situ failed to count silicon held outside LDK's main warehouse.
"I'm shocked," says Situ.
LDK may use its investigation to respond to shareholder lawsuits and the SEC inquiry. On LDK's earnings call, it refused questions on the matter and neither LDK nor Simpson Thacher responded to Barron's subsequent questions. The report isn't public, so its fact-finding can't be evaluated.
But LDK's claim that Situ overlooked outside warehouses seems implausible. Before resigning, Situ spent months discussing inventory discrepancies with people from the financial chief down to warehouse personnel -- as shown in internal memos and recordings that Situ sent to outsiders. He reviewed warehouse and accounting records and explicitly counted silicon inventory held outside LDK, such as material in transit and at customers. In that time, no one said the disputed inventory was at third-party warehouses.
-- Bill Alpert