LDK Solar (LDK) and Trina Solar (TSL) have had a rough few quarters, posting lower-than-expected shipments and margins in the first quarter of 2012 due to seasonal and industry weakness.

LDK posted another operating loss in the first quarter, with margins at -65.5%. Sales declined by about 52% over the previous quarter to touch $200.1 million. The company's cash position continues to be precarious, saddled with high debt in tough industry conditions. And its performance was also hit by high production costs for polysilicon. LDK has ramped up its polysilicon output over the past year, which has coincided with a steep fall in polysilicon prices.

We have revised our price estimate for LDK Solar to $2.30, which is 15% ahead of its current market price estimate and our price estimate for Trina Solar to $6.20, which is slightly below the current market price. The downward revisions reflect the lower-than-expected margins in the last few quarters, which we now believe will persist in the near-term, continuing declines in the price of solar panels and wafers and falling demand in Europe. We have also adjusted our panel and wafer sales estimates for 2012 to reflect updated guidance. Our estimates reflect the view that the oversupply situation in the solar equipment industry is going to continue.

Weak quarter 

The solar industry generally witnesses weak sales in Q1 because of seasonal factors. In addition to weak demand, LDK and Trina Solar were hit by provisions for tariffs imposed on the companies' sales in the U.S. Revenues have been hit by low demand and falling prices. While some competitors have achieved cost cuts to offset the declines, LDK's costs have continued to remain high, in part because of its high production cost for polysilicon. The company has a cost of production of around $41 per KG while current spot prices are languishing around $23 per kilogram. Large players have a production cost of around $20 per kilogram.

LDK's wafer manufacturing business is also feeling the impact of the continuing slowdown in demand for solar equipment. According to the company's latest guidance, LDK will sell between 1.2 and 1.5 gigawatts of solar wafers in 2012, which is lower than its wafer sales in 2011. However, the company expects to sell between 0.9 and 1.2 gigawatts of solar panels and also increase its inverter shipments and systems installations. LDK and its Chinese competitors are shifting focus to the local market in China and growing solar markets like Japan to survive the shakeout in the industry.

Trina Solar management still confident in guidance

Despite significant weakness in shipments and margins in the first quarter, Trina Solar's management remains confident that margins will bounce back throughout the rest of 2012, and maintains 2012 shipment guidance of 2 to 2.1 gigawatts, compared to 1.5 gigawatts in 2011. The company is expecting a significant sequential increase in shipments from the 380 gigawatts in Q1. We are less bullish on 2012 shipments, forecasting about 1.8 gigawatts for the year.

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