Yingli Green Energy (NYSE:YGE) is China's largest solar panel manufacturer by volumes. Although the company has seen its volumes soar over the last few years, driven by burgeoning demand for solar panels worldwide, it remains one of the few tier-1 Chinese panel manufacturers yet to return to profitability. Moreover, we see the company facing some near term risks to driving its earnings, owing to its high operating and interest costs, its limited scope for further reducing its manufacturing costs and some headwinds in key markets such as China and the United States. Considering this, we are revising our price estimate for the company from around $5 to about $3.75, which represents a 13% premium to the current market price.
Manufacturing Costs Could Be Bottoming Out
During Q1 2014, Yingli's core panel manufacturing costs declined by around 12% year-over-year to around $0.52 per watt. However, things were less encouraging on a sequential basis, as both non-silicon and silicon based manufacturing costs remained flat at around $0.42 per watt and $0.10 per watt, respectively. We believe that the company may not be able to sustain the rate of cost reductions that it has been able to achieve in the past for two reasons. Firstly, the cost savings that the company has realized of late have largely come from a drop in polysilicon prices and tighter controls of its supply chain. Such improvements may be difficult to replicate going forward, as the solar market improves with escalating demand. For instance, Bloomberg New Energy Finance estimates that polysilicon prices could rise by over 15% this year, driven by higher demand from China and Japan. Additionally, we do not expect to see very meaningful cost reductions via process improvements, given that Chinese manufacturers such as Yingli lack significant intellectual property and largely rely on similar manufacturing equipment and processes.
Operating and Interest Costs Remain High
Yingli's operating costs, which include selling general and administrative expenses and research and development, have typically ranged from 15% to 20% of revenues, which is quite high compared to some of its peers. For instance, Trina Solar's (NYSE:TSL) operating costs stand at roughly 11% of revenues. Yingli's interest costs have also remained stubbornly high, standing at close to 10% of revenues. The company's total debt load as of Q1 2014 stood at around $2.4 billion, which is among the highest for tier-1 Chinese manufacturers.
Concerns in China, U.S.
During the last year, Chinese solar installations stood at roughly 12 gigawatts (GW), growing by over 200% year-over-year. This led to surging demand for Yingli and other Chinese manufacturers. However, things could be different this year. While China's National Energy Administration announced that it would provide incentives for the installation of about 14 GW of new solar capacity, it seems likely that the target will be reduced due to significantly lower than expected installations in the distributed solar market. Yingli could be impacted by these reduced government targets, given that China is its single most important market, accounting for about one-third of its sales.
Yingli could also face some issues in the United States, which is its second largest market. In June, the U.S. government decided to apply preliminary duties on Chinese solar equipment imports while closing a loophole that allowed companies to circumvent the previous duties imposed in 2012. Yingli faces duties of around 26.9%, and this could drive up the company's landed costs in the U.S. market, potentially impacting shipments.
Summary Of Key Model Changes
We have reduced our forecasts for Yingli's shipments to the Chinese market from around 1.7 GW by FY 2020 to around 1.6 GW. (-5% impact on price estimate). We have also reduced our long-term forecasts for the company's gross margins to around 24% from over 25% previously (-4.5% impact). We have also marginally increased our SG&A forecasts for the company (-5% impact). Other changes include a slight reduction in U.S. module shipments over the long term and a marginal increase in working capital related outflows.
Disclosure: No positions