Yingli Green Energy: The Next Solar Power?

There have been no shortage of interesting solar companies to look at this year as evidenced by my articles on LDK Solar (LDK), Suntech Power (STP), and Trina Solar (TSL). Yingli Green Energy (YGE) certainly falls into the strong category with its savvy operational production methods and robust customer base. The company issued ADRs on the NYSE back in June and while it took a few days for the stock to trade above the $11 offer price, the trend has been positive and investors have seen solid gains.

Two weeks ago the company reported on its first full quarter after listing and the numbers were very impressive. Revenue was $170.4m which was 129.5% higher when compared to the third quarter of 2006. This translated to a profitable quarter of $0.18 per ADR but the headline numbers only tell part of the story. The company is riding the rising tide of alternative energy along with many of its solar peers, but the execution of the game plan appears to be setting YGE apart from its competitors.

One of the most impressive issues uncovered in the report was the company’s commitment to efficient production and responsible management of growth. YGE has invested in technology to reduce the amount of polysilicon or necessary in the production process. This raw material is experiencing a temporary global shortage as producers have found it difficult to ramp up the amount of poly delivered fast enough to keep up with rising demand. Although YGE has had to deal with rising costs of poly, and a slight decrease in the final selling price of its finished product, margins were actually higher sequentially for the third quarter. Operating in an efficient manner when materials are tight will help to set YGE apart from the competition.

While keeping close tabs on production expenses, management has at the same time been willing to address the production constraints and has committed new capital to increasing capacity. An additional 100 MW of annual production came online in July which was instrumental in increasing the Q3 revenue numbers. This brings the company to roughly 200MW of annual production. UBS expects capacity to double by Q3 of 2008 and then an additional 200MW will likely be available beginning Q1 of 2009. This will significantly increase the profitability for YGE over the next few years.

Most of YGE’s customers are European with a concentration in Spain, Italy and Germany. This causes most of the revenue to be in Euros, allowing the company to benefit from the trend of a strong Euro and weak US Dollar. While there is no guarantee that these trends will remain intact, the FOMC’s policy of lower rates recently may continue to offer support to YGE from a foreign exchange standpoint.

Debt is not a significant problem for YGE at this time. The balance sheet is fairly conservative as capital that was raised in the stock offering was put to work paying off some liabilities. It is almost certain that the company will need to raise additional capital to fund its massive growth plans, but there are several options that can be considered and UBS reports that the company has filed to issue additional ADR’s which could help to fill the funding gap. While the stock appears to be taking a hit from that news, dilution factors should not be too concerning given the growth plans and the stability that comes from capitalizing through equity instead of through the liability side.

Management offered a positive view on forward guidance, increasing their production numbers for the fourth quarter and pointing out several contracts signed both with suppliers as well as customers. Management has secured all the poly needed for 2007 production and roughly 60% of the necessary material for 2008 production. While there is still some uncertainty around what price will be paid for the remainder of 2008 needs, YGE has gone a long way towards ensuring a stable and profitable new year.

The stock trades at a discount to rivals First Solar (FSLR) and SunPower (SPWR) and that is likely due to the uncertainty with poly prices. Technically the stock has pushed below the 50 day which is a disappointment but will likely result in the chart forming a stable base. This is not the time to step in and make a purchase, but based on the fundamental story and the consistency of management, I will keep the name on my radar to purchase when the chart is more attractive.

Disclosure: Author does not have a position in YGE

Comments

[SHABBAZZ]

Most of YGE’s customers are European with a concentration in Spain, Italy and Germany. This causes most of the revenue to be in Euros, allowing the company to benefit from the trend of a strong Euro and weak US Dollar