Yingli Preview: Volume Growth Unlikely To Offset Pricing Declines

Feb.21.13 | About: Yingli Green (YGE)

Quick Take

  • While shipments have shown solid growth over the past year, we expect pricing and margins to remain a concern.
  • Given the firm’s highly leveraged balance sheet ($2.5 billion debt), debt reduction plans will be closely watched.
  • Progress in China and international markets other than Europe will be crucial to long-term growth.

Yingli Green Energy (NYSE:YGE), one of the world’s largest solar panel manufacturers, is expected to release its Q4 2012 earnings soon. While the business has witnessed solid volume growth over the past year, the company’s financial position and operational performance still leave a lot to be desired. During the third quarter, revenues declined by about 28% sequentially to $356 million while gross margins dipped to around -22% due to certain non-cash charges. This quarter is expected to be marginally better with gross margins rising to between 0 to 2% (as per guidance) and stronger panel shipments. Some of the key factors that we will be tracking include the firm’s plans to reduce debt, prune manufacturing costs and its progress in the Chinese market.

Volumes Will Grow, But Pricing Will Continue To Weigh Down Performance

Yingli increased its annual panel manufacturing capacity to around 2450 MW last year. This has allowed it to ramp up sales significantly – for 2012 the firm shipped over 2200 MW of modules (37% growth over 2011) [YGE Press Release]. However, we don’t expect positive news on the pricing front given the oversupply of panels in the global market. Given the year-to-date trends, we expect the average selling price for 2012 to fall to below $1 from around $1.40 in 2011. Since manufacturing solar cells is a capital intensive activity with high fixed costs, improving capacity utilization and cutting down on manufacturing costs will be imperative.

Debt Reduction Plans

Most of Yingli’s capacity expansion has been funded by debt, which has now risen to alarmingly high levels. As of Q3, total debt was around $2.5 billion of which around $1.2 billion is current [Form 6-K Q3 2012]. Cash and shareholders equity stand at just around $590 and $570 million respectively. Given the relatively low cash flows and tight margins, it might be difficult for the firm to service its debt. We will be keen to see the managements plans to mobilize funds and cut down on debt.

Performance In China And International Markets Other Than Europe Will Be Crucial

Yingli derived over half its revenues from Europe in 2011. However, the near-term prospects in the region look quite bleak with subsidy cuts in key markets like Germany and the on-going anti-dumping investigation by the EU on Chinese solar imports. To offset the potential decline, Yingli has been shifting focus to other international markets. Over the last few months, the firm has bagged new supply contracts in Latin America and the United States. Earlier in 2012, the firm opened its regional headquarters in Japan, which is a promising market for high-end monocrystalline panels. We will be closely watching the firm’s performance in these markets.

China is becoming an increasingly attractive market for solar manufacturers with the government planning to add 10 GW of solar capacity this year (current installed capacity is around 7 GW) [PV Magazine]. Over the last few months, the government has increased it subsidies for solar power, which are likely to benefit most Chinese solar panel manufacturers.

Yingli stands to benefit significantly from the growth in Chinese demand given its greater exposure to the Chinese market than some of the other large Chinese solar firms that we cover as almost 30% of Yingli’s revenues came from China in Q3.

Disclosure: No positions