Following in the footsteps of sister peer Trina Solar (TSL), which yesterday warned first quarter shipments would drop by approximately 10%, Yingli Green Energy (YGE) warned this morning their first quarter 2011 shipments would decline in the low teen percentage from the prior quarter. Like many of Yingli's peers, the company cited increased uncertainty in Italian policy changes since early March, which did not get resolved until earlier this month. However, YGE did offer insight into the current quarter. Based on current visibility, Yingli expects volumes delayed during the first quarter will be shipped in the current quarter. As a result, second quarter shipment volumes should increase by over 30% sequentially.
Yingli also revised their gross margin expectations for the first quarter. Prior, YGE estimated gross margin would fall between 30-31%. The company now expects consolidated gross margin to range between 27-27.5%. Although core gross margin for internally produced modules fall within their prior guidance, the drop in blended gross margin is a bit surprising.
YGE is a fully integrated module producer with module capacity in excess of 1.7gw at the end of 2010. Yingli easily possesses quarterly production capacity in excess of their current shipment guidance and thus should not be required to procure any external wafers or cells which would dilute gross margin. The company's guidance of lower consolidated gross margin potentially suggest either a non-operating charge which would raise unit costs, or additional revenue from non-core module sales such as increased systems integration business.
Non-core revenues apart from module sales for Suntech Power (STP) averaged over $30m quarterly and at negative gross margin which diluted STP's gross margin. Mentioned in their Q4 2010 earnings report, Yingli won significant "Golden Sun" projects in China although much of the volume would be shipped in the second half of this year. Completing such projects could generate additional systems integration revenue which most likely would be at lower gross margin.
Finally, I have to revise my prior guidance for YGE to reflect today's announcement. Without knowing the exact cause why Yingli's blended gross margin is lower than their core module gross margin, it's difficult to gauge the exact revenue. Since conservatism is more warranted in light of recent news flow, I will assume the lower revenue projection. For Q1 2011, I now estimate YGE's revenues to be around $520m on shipments of 300mw. Earnings per share ("EPS") is now expected to be .26, or revised down from my prior .50 EPS estimate. Excluded from this estimate are any impacts from foreign exchange translations or any additional unannounced charges. Given the currency situation during the first quarter and assuming YGE kept the same currency and hedging exposure, I estimate Yingli could post a net foreign exchange gain of approximately $30m which would translate to about a .12 in EPS gain.
As in the case with TSL, fixed costs can quickly eliminate much of the company's earnings leverage. However, operating and net margin should recover if shipment volumes delayed in the first quarter are indeed recognized in following quarters. Similar to direct peers who have recently reaffirmed annual targets, YGE also reiterated prior 2011 shipment targets of 1.7-1.75gw. If annual guidance holds, overall annual earnings should not deviate greatly from prior estimates. In all likelihood, YGE's 2011 EPS should not decline vs. 2010 figures if this annual shipment target is met.