Chinese solar equipment manufacturer LDK Solar (LDK) may be considering reducing its workforce, according to some reports. With solar panel prices continuing to fall and governments cutting back on support to the industry, debt-laden companies such as LDK Solar will have to reduce costs and become more efficient in order to survive the downtrend.

LDK has about $3.36 billion in debt in comparison to its present market cap of around $432 million. According to news sources, the company will be firing and reassigning workers from its wafer division. Shares of LDK Solar and other Chinese players like Suntech Power (STP) fell Monday in response to the news.

We have a $4.46 price estimate for LDK Solar, which is at a 35% premium to its current market price.

Challenging conditions

Estimates suggest that the solar industry may install about 24 gigawatt (GW) of capacity worldwide this year, with capacity to produce around 40 GW of solar modules annually. Excess capacity is pulling down prices and forcing companies to operate on razor thin margins. Overcapacity has become a problem in almost all stages of the solar panel value chain.

LDK Solar's polysilicon production and wafer manufacturing businesses have been hit particularly hard by the industry downturn. Firing employees could help the company control costs and increase efficiency to remain competitive in the challenging industry conditions.

LDK's heavy debt further exacerbates its problems. Analysts have long suspected that the Chinese government has intervened in the past to purchase the company's debt and saving it from going bankrupt. (See: LDK Solar Should Survive Downturn With Government Help)

LDK employs around 25,000 workers and is reported to be among the largest employer among the Chinese solar companies. Around 40% of these workers work in the wafer manufacturing plants. The planned layoffs could help the company keep its margins from deteriorating further. We will look further into LDK Solar's latest results to understand the impact of such layoffs on its operating margins and profitability.

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• Rising Polysilicon Prices Lift LDK's Outlook as China Curbs Production (trefis.com)