Yingli Energy (YGE) has become the world's largest solar panel shipper, overtaking First Solar (FSLR) and Suntech (STP) in the most recent quarter. This China based solar module company is also one of the oldest solar companies. Yingli Energy has one of the lowest module processing costs in the industry along with Trina Solar (TSL) and Jinko Solar (JKS). It has crystalline solar wafer to panel vertical integration, as it abandoned its polysilicon operation a year ago. The company has a large market share in the Chinese solar panel market, which is set to become the biggest solar country by volume in 2013 (target of 10 GW). However, huge overcapacity in the solar supply chain is not resolving itself, due to continuous bailouts by the Chinese government.
What to like about Yingli Green Energy:
- Low cost producer of solar panels - Yingli Energy has been one of the lowest cost producers of solar panels for a long time. Yingli has managed to maintain one of the highest margins in the industry, though competitors like Canadian Solar (CSIQ) have caught up with Yingli's low costs in recent times.
- Scale Advantage - Yingli Energy has become the largest producer and shipper of solar panels in the world. The company has managed to constantly go up the ranks of solar producers, and now sits in the pole position. The advantages of scale lie in spreading the marketing and distribution costs, over larger revenues.
- Premium Pricing - Yingli Energy has managed to get higher pricing by selling high quality mono-crystalline solar panels under the "Panda" brand name. The company has historically managed to get a higher ASP for its solar modules compared to its competitors like Trina and Jinko Solar. Only Suntech has managed to get a pricing premium amongst the Chinese solar panel suppliers.
- Branding Focus - Yingli Energy was one of the first solar companies to invest time and money into promoting its brand. The company sponsored football clubs in Europe, a strategy which has been copied by many of its competitors in the Chinese solar industry.
- Expansion into new markets - Yingli has one of the largest distribution networks amongst solar companies and is constantly expanding into newer markets like Jordan and Latin America. As solar energy reaches grid pricing, more and more countries are expanding their solar capacity. Having a global footprint is necessary to diversify demand, as mature markets like Germany show decreasing demand.
- Decent Management - Yingli's management has not been as good as some of the other companies like Renesola (SOL), however they have not been as disastrous as that of Suntech and LDK Solar (LDK) either. LDK Solar has been disastrous in terms of execution, taking almost 4-5 years to build its polysilicon plant. Now the polysilicon plant does not function, as its cost structure is too high. Suntech has made numerous mistakes, like getting into wafer manufacturing, investing into thin film and polysilicon, failing to deliver on the "Pluto" technology, getting defrauded in Italy etc. In contrast, Yingli management has performed decently, though they made a mistake by getting into the polysilicon manufacturing segment earlier.
- Strong in the Chinese Market - China is going to be the biggest and fastest growing solar market, and Yingli has a significant market share in China. The company has focused on selling into the domestic market, even taking a cut in pricing. This has started to pay dividends as China is going to become the largest market in 2013 (target of 10 GW).
- Chinese government and banks support - Yingli Energy, like other big solar companies, has a huge amount of help from the Chinese government and banks. The company has managed to get both land and capital at a cheap cost. Every big solar company is supported by the government in the form of cheap land, which is even listed in the balance sheet as land rights. The government bailouts also hurt Yingli Energy, as they prop up unprofitable and nonviable capacity. As we have written earlier, Suntech and LDK would have been bankrupt if the Chinese banks were not supporting these companies. The bankruptcy of these 2 companies would have removed ~10% of the global solar capacity of solar panels. Instead, the Chinese Development Bank has given a loan of ~$70 million to LDK to upgrade its polysilicon plant, which has been closed due to its high cost structure. Even the smaller Chinese solar companies are not being allowed to shut down. For example, a local government in China went out of its way in bailing out Chaori Solar.
- High Debt - Yingli Energy has a high debt equity ratio due to aggressive expansion in the past. The company does not have a good balance sheet, like that of Trina Solar or JA Solar (JASO). The debt situation is not as bad as that of LDK Solar, but it is affects profitability as the industry continues to suffer from losses. We don't think that Yingli has any default probability given the support from the Chinese banks.
- Global overcapacity in solar panels - The solar market is not reaching equilibrium, as bankrupt companies like Suntech continue to operate due to Chinese government largesse. There is around 55-60 GW of solar panel capacity with demand expected to reach about ~35 GW in 2013. This means that 2013 will be another tough year for solar panel suppliers, though hopefully not as bad as 2011 and 2012.
- Global Solar Trade Wars - China is bearing the brunt of solar trade wars, with US already imposing duties on Chinese solar panel imports. Two other major markets Europe and India are also in the process of imposing anti-dumping duties on imports of Chinese solar cell and panels. This can badly hurt Yingli, which will have to outsource production to Taiwan and other countries.
Yingli stock performance has been average compared with its peers. YGE has outperformed solar stocks like Suntech (down ~55%) and LDK (down ~71%) over the last one year. However its negative 25% return pales in comparison to Jinko Solar (up ~17%) and Canadian Solar (up 33%).
Yingli Energy like most of the other solar panel makers has been in the red in the last couple of years. The P/S is quite low at 0.2x while P/B is also low at 0.9x. A company trading at less than book value, and a P/S of 0.2x is generally considered a good for a value stock, however these valuations are common across the solar industry. Once the solar industry comes back to equilibrium and you get more profits out of sales, then the YGE stock has the potential to really jump much higher.
Yingli Energy is not a bad investment for long-term investors in solar energy. The solar sector has been beaten down very badly due to massive industry losses. However, the sector has shown some strength in the last 3-4 months, with stocks going up by 100-200% from their all time lows. Yingli Energy too has seen a sharp price appreciation. We think that Yingli is a better investment than other big solar companies such as Suntech and LDK Solar. However, given the volatility of the sector, we would also buy other companies which are doing equally well or better. Both Suntech and LDK have higher costs and bigger debt burdens than Yingli Energy. Some of the better solar companies in our view are Renesola and GT Advanced Technologies (GTAT).