Things have gone from bad to worse for Chinese solar company Yingli Green Energy (NYSE:YGE) this year. The company's stock had already declined to a great extent, and the recent second-quarter results didn't bring any relief for investors either. Yingli shares dropped as the company's results missed estimates, and it lowered its shipment guidance for the year, in anticipation of lower sales to third-party customers.
Gaining traction in the fast-growing solar market
However, management is taking this step in order to boost its gross margin. In addition, Yingli is seeing good growth in shipments already, so the company can afford to focus on higher margin orders. For example, last quarter, Yingli delivered a 41% jump in module shipments year-over-year. It shipped 888 megawatts in the previous quarter due to robust demand from Japan, China, the U.K., the U.S., and several major emerging markets.
This isn't surprising, as the solar market is growing at a robust pace. Looking ahead, the pace of growth is expected to continue, as the solar market is expected to continue growing at an impressive pace. According to a report:
At the end of Q1 2015, Solarbuzz forecasts that the 12-month total will be over 50,000 MW! For 2014, Solarbuzz is maintaining its forecast of 49,000 MW. However, it wouldn't be surprised to see the world surpass that.
Meanwhile, another market research firm, IHS, just raised its 2014 forecast to 46,000 MW following the strong 1st quarter. That would equal a 22% increase in the market compared to 2013, IHS notes. The main countries driving global installments during 2014 are widely projected to be China and Japan.
Opportunity in China
As such, it is no surprise that Yingli's shipments to China during the second quarter nearly doubled as compared to the first quarter. The company is seeing good growth in its downstream business, and the launch of utility-scale PV projects from major utility companies is also driving results.
Looking ahead, growth of the solar market in China is expected to accelerate considerably during the second half of 2014. The National Energy Administration in the country plans to connect a minimum of 13 gigawatts of PV power capacities to the grid in 2014 that Yingli hopes to tap.
To accelerate its growth, Yingli has set up 25 subsidiaries at the provincial level in China to penetrate the market further, and capture opportunities in the PV downstream business. Presently, Yingli has more than 1.2 gigawatts of utility-scale projects in the pipeline, and over 200 megawatts of DG systems under the power purchase agreement.
Yingli has also received permission for developing a total of 110 megawatts of utility-scale and 20 megawatts of DG systems. By June end, the company had overall 155 megawatts of projects under construction that include a 10 megawatt utility-scale project and a 20 megawatt DG project, developed in a joint venture with China National Nuclear Corporation. It also has a 15 megawatt utility-scale project acquired by the Renewable Energy Fund, created in cooperation with Shanghai Sailing Capital management.
Moreover, during the third quarter, Yingli plans to begin construction of overall 168 megawatts of PV projects situated in Ningxia, Shanxi, Hebei, and other provinces. This includes a 50 megawatt project developed jointly with Datong Coal Mine Group.
The company is also seeing growth on a global basis. In markets such as the Middle East, South America, Southeast Asia, Japan, and Africa, Yingli's shipments are getting better. In fact, last quarter, total shipments to these markets increased 18% year over year as its customer base doubled.
Going forward, this momentum should continue, as Yingli has closed its first EPC contract for a 2 megawatts ground-mounted PV project in Senegal in Africa. It has also signed a strategic partnership with an experienced local developer in Poland forjointly developing a 13 megawatts PV project.
In addition, there's strong momentum in the U.S. as well, while it is witnessing accelerated growth in Latin America. Overall orders from the region increased 124% and 109% on quarter-over-quarter and year-over-year basis, respectively, with the addition of 18 new customers in Latin America.
Looking ahead, the market indicators are positive for Yingli in the region. Utility project orders for Central America are forecasted to increase considerably due to an increase in growth activities in Brazil. Moreover, key leads from the company's World Cup sponsorship are expected to begin converting to sales, along with greater orders from existing customers.
Moreover, Yingli is also focusing on business opportunities in the commercial rooftop segment. It has entered into a contract to supply 400 kilowatt of peak power to a rooftop system on a warehouse in Johannesburg. Furthermore, Yingli's local team is accessing distribution channels for both on and off-grid by signing two new supply contracts with home-built material on water pump manufacturers.
Valuation and projections
Yingli, being a loss-making company, doesn't have earnings multiples to show for. However, the company looks cheap at a price to sales ratio of just 0.24 and a PEG ratio of only 0.03. The company might have faltered in the previous quarter, but it is doing the right thing by focusing on high-margin sales opportunities.
As such, it is not surprising that analysts expect Yingli's bottom line to develop 53% this year and 93% next year. Moreover, the solar market is expected to grow at a good pace going forward as we saw earlier, and Yingli's presence in markets across the globe will allow it to benefit from this opportunity. Hence, the stock's weak performance so far this year looks like a buying opportunity.
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