Despite posting a US GAAP net loss of almost $600m in the fourth quarter of 2011, operations at Yingli Green Energy (YGE) were not as dire as the headlines may have suggested. Out of the $599.4m quarterly loss, $573.8m resulted from four charges, mostly non-cash in nature. Excluding these charges, Yingli lost $25.6m in the final quarter of 2011, which was slightly better than my revised $37m loss estimate.
For fiscal 2011, Yingli posted a US GAAP net loss of $509.9m. Excluding non-cash asset impairments and a provision for supply purchase commitments totaling $540.2m, Yingli Green Energy was one of the few solar companies that would have posted an operational income for 2011.
Fourth quarter results were not surprising after Yingli announced preliminary results. Quarterly revenues of $408m and a gross profit of $12.3m were almost inline with my $407m and $12m estimates, respectively. Although Yingli did not disclose exact figures, I estimate the company shipped 356MW in Q4 with module average selling prices(ASPs) of almost $1.12/watt - which was slightly higher than my original $1.10/watt estimate. Unlike many peers, which sold under $1.00/watt reflecting spot market trends during the quarter, Yingli's brand and high efficiency product mix generated a significant pricing premium.
Despite the large absolute dollar amount of Yingli's fourth quarter charges, it is important to understand the legacy aspect of these items. With the exception of a smaller $43.4m goodwill impairment, the company's two largest charges reflected decisions made prior to the industry's dramatic correction since mid-2011. The largest charge was a $361.5m asset impairment of the company's polysilicon plant initially purchased in late 2008. With the dramatic decline of polysilicon ASPs from over $100/kg in late 2008 to under $30/kg in Q4 2011, combined with Yingli's slow production ramp at higher-than-expected initial costs, this asset write down was essentially an admission reflecting both an investment mistake, as well as failed execution in bringing manufacturing costs in-line with current market conditions.
The $135.3m provision for purchase commitments on long-term polysilicon supply contracts reflect a more recent mistake for which Yingli was not entirely at fault. Polysilicon is one of the company's critical procurement inputs, which until the beginning of the fourth quarter 2011 remained at levels between $50-80/kg during the past two years. In order to secure long-term supplies at below higher spot market pricing, Yingli signed a series of large long-term contracts in the past two years. Following in the steps of downstream verticals, polysilicon ASPs finally collapsed to levels even below fixed long-term contract rates. This provision merely reflects the difference between Yingli's contracted rates versus current spot market pricing should the company fail to renegotiate lower contract pricing with its suppliers.
Yingli's kitchen sink disposal closing out 2011 should help improve the company's results moving forward. The polysilicon plant asset write down should remove fairly high depreciation expenses, while its contracted polysilicon supply provision should help lower realized procurement costs moving forward. Although investors should view inventory provisions as operational expenses because it is a reflection of a company's inventory management, Yingli's $33.6m Q4 inventory provision will also help the company realize a lower blended unit cost moving forward. Finally, the company's revenue recognition adjustment, which resulted in lower-than-expected Q4 2011 shipments, will help boost its Q1 2012 volume in a quarter typically weakest for the industry.
Despite these potential benefits, Yingli's costs still require more time to blend lower towards current real time procurement levels. The company's fourth quarter 2011 realized silicon costs were above $55/kg when spot market pricing averaged below $30/kg. In its Q4 earnings conference call, Yingli indicated its blended silicon costs should be reduced to $35-40/kg, which was still considerably higher than first quarter spot market averages of $25/kg or less. As a result, and combined with significant expected module ASP declines in the mid-teens percentage, gross margin was guided to be around 10% for the first quarter 2012.
On the positive side, Yingli expects shipments to increase 30% sequentially. While higher shipments should help the company post better sequential operating results, YGE should still post a US GAAP loss in Q1 2012. A first quarter estimate has been compiled below, based on Yingli's guidance as well as statements made in its previous earnings conference call. As usual, this estimate generally reflects operational results and exclude any potential non-operational gains or charges such as the myriad of large charges announced in the prior quarter. Although these charges outside of a potential smaller inventory provision are unlikely to recur, Yingli's extremely high US exposure in the first quarter may result in tariff provisions like peers Trina Solar (TSL) and Suntech Power (STP) have already announced as a result of the U.S. Department of Commerce's recent anti-dumping ruling.
YGE Q1 2012 Earnings Estimate:
- Revenues: $447m
- Shipments: 460MW
- Asp: $0.95/watt
- Unit Costs: 460 x .83 = $382m module + $13m others = $395m total
- Gross Profit: $52m
- Gross Margin: 11.6%
- Operating Expenses: $74m
- Net Interest Expense: $27m
- Net Foreign Exchange Gain: $10m
- Tax Benefit: $6m
- Minority Interest Benefit: $3m
- Net Loss: -$30m
- Share Count: 152.5m
- EPS: -0.20
As long as the solar industry continues to consolidate, forcing non-competitive companies out of business, operations even for the most competitive companies such as Yingli Green Energy, as well as other large scale integrated Chinese producers will remain under pressure. Yingli has one of the industry's lowest production cost structures, but the company is still a couple quarters removed from reaching normalized unit costs, reflecting current market polysilicon procurement pricing. If conditions can reach a state closer to normalized levels in the second half of 2012, Yingli, like many direct top-tier peers, should be able to generate a US GAAP profit sometime in the second half as shipment volumes accelerate in Q3 and Q4.
While Yingli has not disclosed much detail on its systems business, downstream integration into solar projects is a natural evolution that larger industry participants have already begun. The company expects over a third of its 2012 annual shipments to be derived in China. If its exposure to China's accelerating solar demand can be more project based, as several US-listed Chinese peers have already disclosed, incremental gross profit from solar project development and sales could boost YGE's bottom line considerably above pure solar module sales.
Yingli has already captured the largest market share in China, which makes this wildcard potentially a large boon overly discounted by current market valuations. Based on a 5.6m share repurchase in the fourth quarter, Yingli's management appears to believe the company shares represent a discount to longer-term potential.
Additional disclosure: No position in STP.
