In an earlier Seeking Alpha article, I had given a number of reasons to buy Chinese solar company Yingli Energy (YGE). The investment case for Yingli Energy has become even stronger since that time, with a number of positive developments taking place both for the company as well as the broader solar industry. In addition to the earlier reasons I had given for investing in YGE, I am now listing out four more reasons.
The solar industry has seen a dramatic shift, with the Chinese government allowing the bankruptcy of one of its biggest solar panel companies Suntech (STP). This company has been the worst managed company in the Chinese solar industry (though LDK gives it a close competition). However, despite being effectively bankrupt for the last year or so, the company has managed to continue due to the benevolence of the Chinese government and state owned banks. As the solar industry downturn shows no signs of ending and as the solar companies keep bleeding hundreds of millions of dollars in losses, patience seems to have finally run out. Top Chinese government officials ruled out a bailout of Suntech and that drove the final nail in Suntech's coffin. The company defaulted on a $541 million convertible debt payment on March 15. The Chinese banks consortium filed a suit for the bankruptcy of the local operating subsidiary of Suntech in Wuxi and the company management meekly accepted. This is a huge step in bringing the global solar panel industry to some sort of supply demand balance. Currently, the supply is almost twice the global demand.
Four More Reasons to Buy Yingli Green Energy
- Bankruptcy of one of its main competitors: While there is no clarity on what will happen to Suntech's manufacturing operations and its 10,000 employees, Suntech will no longer be as competitive as it was before. Also this will set precedence so that the other weaker solar companies will start shutting down instead of getting bailouts. Yingli Energy had already overtaken Suntech and First Solar (FSLR) to become the world's biggest panel shipper in Q4 2012. The company plans to increase shipments by almost ~40% in 2013, which will give it a ~10% market share of the global panel market.
- GCL Poly partnership: Yingli Energy is one of the lowest cost manufacturers of solar panels in the planet. The company has signed a three-year strategic agreement with the world's biggest wafer producer GCL-Poly, to buy wafers and polysilicon and sell its modules for GCL's solar power plant business. While the agreement details are not known, Yingli will manage to get lower prices for the raw materials, which will allow it to gain a bigger cost advantage over other solar panel competitors. It will also get a big customer for its silicon solar panels. Yingli is now using its scale advantage to reduce costs and boost sales.
- Stock price decline improves the investment case: Yingli Energy stock has declined by ~21% in line with the solar industry stocks in the last one month. The stocks have declined due to negative news about possible Europe/China solar trade war, bad earnings results from solar companies as well as negative news around Suntech. However, the fundamental case around Yingli has not changed much and the price decline has improved the investment case for YGE. I think that YGE will be one of the survivors, if not the leaders of the solar industry coming out of the current downturn. Its sharp shipment growth and the GCL Poly partnership indicate its growing stature in the industry.
- 40% shipment growth in 2013: Yingli Energy managed to grow solar panel shipments by more than 40% in Q4 2012 and total 2012 shipments reached 2.3 GW. The company expects to grow shipments to more than 3 GW in 2013 and growth in China alone is expected to be 40%.
- High debt: As I mentioned before, Yingli Energy has a large debt load (~14 billion yuan debt). While I do not think Yingli will face STP difficulties in managing debt repayments and rollovers, there is some risk if the Chinese banks decide that YGE is not a good investment anymore (which they did in case of Suntech). Note that LDK Solar with a much higher debt/equity ratio and worse fundamentals has managed to get both debt and equity support from the Chinese government entities and the banks. Yingli Energy like other solar panel players continues to suffer from losses as irrational pricing plagues the whole industry. However, as capacity gets reduced, it is expected that the solar pricing decline will stop, if not increase in 2013. This will allow Yingli and other companies to return to profitability.
- Europe and China solar trade war: China is at the center of the global solar trade wars taking place. Europe is readying itself to impose high duties on the Chinese solar panel imports and has already starting to track the imports of Chinese solar modules into the EU. Canadian Solar (CSIQ), which is another large Chinese solar panel manufacturer, hinted at expecting Europe to go ahead with the duties which will impact its sales. China exports more than $20 billion dollars of solar panels into Europe annually. Any duties will severely impact the Chinese solar industry. Yingli is better positioned than the other players because of its strong presence in the domestic market, which is expected to become ~30% of the global demand in 2013.
Yingli Energy trades at very low multiples as the whole solar industry is mired in huge losses. The company trades at a P/S quite low at 0.2, while the P/B stands at less than 1. I expect that these multiples will increase quite substantially, as the solar industry comes back into equilibrium and the companies start to post profits on a sustained basis.
As I have written earlier, the solar industry will keep growing as the solar energy price reaches electricity grid parity in more and more places in the world. Solar Energy has been showing the sharpest cut in costs compared to other forms of energy, which have been showing a rising cost trend. Analysts have massively underestimated solar energy growth, as solar energy has reached a cumulative 100 GW of capacity in 2012. The industry is expected to keep growing in high double digits and the cumulative capacity will double to 200 GW by 2015. While most of the existing solar companies will not survive, those who do will give multi-bagger returns to investors. Yingli Energy currently looks well positioned to survive and thrive as the industry comes out of the downturn. The valuation is not expensive and shipment growth will be more than 40% in 2013. I would look to build a position in YGE here.