Yingli Green Energy Fueled by Strong Quarter

The stock of Yingli Green Energy (YGE) is all over the place, opening up in the $27s, then falling to the $25s and now in the $26s. This is what happens when hordes of speculators jump into a stock only for an earnings trade. I am looking over the earnings released yesterday morning and it looks quite solid to me on first glance, with the all important gross margins coming in at the 24% range. Sequential revenue growth was only 9%, but that is more of a capacity constraint issuerather than anything to do with demand.

Either way, they crushed the analysts expectations for earnings (part of it was currency exchange of course), but since they only guided "in line" for the future in terms of revenue, perhaps that is leading to the seesaw action yesterday. Who ever really knows; it makes little sense to me. The key (to me) is maintaining gross margins and profitability - on both those counts Yingli scored very well. Also nice to see some new markets open up, France and South Korea (the United States is still nowhere to be found as we are too busy promoting corn ethanol) I have cut back this position for now as its now full of speculators and daytraders, and I was able to lock in some very good profits, and moved on to other fare in the sector with better value. But I'll rebuild this position on the next selloff.

• Total net revenues were RMB 1,595.0 million (US$227.5 million), an increase of 9.8% from RMB 1,453.2 million in the fourth quarter of 2007 and an increase of 272.2% from RMB 428.6 million in the first quarter of 2007.
• Gross profit was RMB 392.3 million (US$55.9 million), an increase of 9.1% from RMB 359.6 million in the fourth quarter of 2007 and an increase of 337.8% from RMB 89.6 million in the first quarter of 2007.
• Gross margin was 24.6% in the first quarter of 2008, in line with 24.7% in the fourth quarter of 2007 and an increase from 20.9% in the first quarter of 2007.
• Net income was RMB 223.5 million (US$31.9 million), an increase of 61.5% from RMB 138.4 million in the fourth quarter of 2007 and an increase of 2,580.5% from RMB 8.3 million in the first quarter of 2007. Fully diluted earnings per ordinary share and per American depositary share [“ADS”] were RMB 1.73 (US$0.25), compared to RMB 1.07 in the fourth quarter of 2007.
• “Our results largely demonstrated the successful execution of our vertically integrated strategy at the operating level and growing demand for our products in our end markets, including Spain, Germany, the United States and Italy, as well as new and emerging solar markets such as Korea and France.
• Our commercialization of 180 micron wafers at the beginning of February 2008 illustrates our strong capabilities in R&D.” (this is key, down from 200)
  
• “I am also very pleased that our expansion plan remains on track and that we currently expect to be able to achieve production capacity of 600 MW before mid-2009, ahead of schedule.

Key comments on gross margins

• As a result of a higher average selling price compared to the fourth quarter of 2007, the lower polysilicon usage per watt resulted from successful research and development efforts and the lower processing cost attributable to continuous improvement in operational efficiency of the Company’s vertically integrated business model, the Company was able to maintain its gross margin despite an increase in the average cost of polysilicon in the first quarter of 2008.

Guidance

• PV module shipments in the estimated range of approximately 255 MW to 265 MW, which represents a 78.9% to 86.0% increase compared to 2007.
• Net revenues in the estimated range of approximately US$969 million and US$1,020 million, which represents a 74.1% to 83.3% increase compared to 2007.

And as I typed this entry, the stock is already back to the mid $27s range... daytraders are having a fun time. Bottom line for us - this is solid execution and a company following through as promised. The day to day stock machinations we cannot control.

Disclosure: Long Yingli Green Energy in fund; no personal position

Comments

[Jack Yetiv]

Agree with all you say, except that 2008 forward PE is about 22-25. Does Yingli offer anything that TSL does not?

If so, I would put my money in TSL (which I know is what you did from other articles you have written).

Basically, PE drives my decision unless something else about a higher-PE company compels me to pay extra for that company. I don't see anything more compelling about YGE than I do about TSL.

Jack

[buyforeclosures]

Better values? SOL and SOLF dont have near the market cap and trade around the same PE...What better values do you speak of? Do tell.

[TraderMark]

buyforeclosures, Jack basically picked out the name.

SOL is not a good comparison - you'd have to compare that with LDK.

SOLF and YGE and STP now trade at double the TSL valuation (using forward estimates). I'd argue TSL will have the better margins this year out the 4, yet lowest margin.

I think TSL will be showing $4+ EPS by end of year now that their polysilicon plant is off the table. As Jack said, there is no compelling technological difference that X company should trade at 2x peers. This is not FSLR where you have a unique technology.

Jack great call on CSIQ by the way. I was too busy berating management for their luxurious grants last year to come back and take another look.

[TraderMark]

sorry that should of read "TSL will have the better margins this year out of the 4, yet lowest valuation"

[Jack Yetiv]

Even if you include SOL and LDK, they still trade at a PE premium of 50% to TSL (although TSL has been closing the gap this week).

I'm willing to pay a higher PE for a better story.

Which stock has a better story at a commensurate PE premium?

My one concern about TSL is that they have not yet sent out the press release notifying of when they will release earnings. This suggests a glitch. My guess is that it's not serious, and that they will still announce well, but it's an issue.

Jack

[TraderMark]

Jack, last Q was very good performance by management but spotty record before that. I always hold my breath with these guys BUT the chart is looking like CSIQ 2 weeks ago and SOLF about 4 days ago. What a move by SOLF..... TSL getting cheaper by the minute.

I only hope this solar run is not about be done - by the time the 3rd tier junk stocks like HOKU and DSTI start running like they did today, that usually signals the sector is about topped out within a few days.

As for the PR release, again - they are Trina, what more can we say for those who follow this company for a long time.

[Jack Yetiv]

TSL now reminds me of CSIQ two quarters ago. Spotty performance, unloved, but finally getting its act together 2 quarters ago and making a few cents (I think it was 7 cents).

Here is a point a lot of investors miss: To screw up execution is easy, but doing a breakout quarter is much harder and rarely occurs accidentally. I think CSIQ's breakout quarter was two quarters ago, when they went into the positive and gross margins started moving. Once I saw that breakout quarter, I recommended CSIQ, at $18.56 as you know.

I think TSL's breakout quarter was last quarter.

What I have found is that most investors look for a SECOND breakout quarter before rewarding the share price, and I am usually in after the FIRST breakout quarter (but not before). My experience has usually been that in order to do ONE breakout quarter, the company really has to have its act together--and that usually does NOT happen by accident.

Also, keep in mind that TSL does pretty much the same business as CSIQ does, in the same markets. ASP's were really strong this quarter for CSIQ--I can't think of a reason why they won't be for TSL. And EVERY extra penny of unexpected ASP goes to the bottom line, making that revenue uniquely powerful.

Next, TSL is more integrated than CSIQ (although CSIQ is fast catching up), which has been reflected in TSL's margins in the past (much higher than CSIQ's), so it could actually do better than guidance (of 23-25%) on its margins this quarter.

Finally, I think we will hear about the positive impacts on production and focus that have resulted from ditching the poly plant. Those are not being credited AT ALL by the market, and if I am right, this could really goose guidance.

I am more concerned about the failure to let people know when they plan to announce than you are. I think at the very least it's bush-league, and at worst, it could indicate something worse (although I give that a 10% chance).

Next comment will focus on what I think the future brings.

Jack

[Jack Yetiv]

I do think this solar run will "be done" after earnings, as it often is. I think the solars will tend to slide back from the peaks they are likely to achieve next week if TSL, SOLF and STP report well next week. On the other hand, additional upgrades and maybe the passage of some tax incentives might keep the run going. It's hard to tell now, but I'll have a much better idea after TSL, SOLF and especially STP (because of its size and leading position) report next week.

But I don't think the solars will slide back as much as they did earlier this year because more of these companies are at reasonable PE's than in 2007 (there are some exceptions of course, such as SPWR and FSLR), and because I think demand for panels will continue to outstrip supply in 2008 and well into 2009.

We'll have a much better idea on 2009 as we get further into 2008, of course.

Jack

[User 194768]

YGE Highlights
First Call expects 1.33 EPS for next quarter.
The current Price Target for YGE is $237.09.

[retepog]

Why compare solar to YGE? YGE's business is mainly power grid right? so most of the solar company will need YGE for the connection. the price runs like solar does so unpredictable.

[whizkid41]

This is ridiculous. Contrary to popular belief YGE did not have a blowout quarter. Far from it actually. Sure if you glance at earnings they smoked estimates. But if you factor out the foreign currency gain (which is approximately 30% of those earnings!!!) they only earned about .18 per share, which is in line with estimates. Any time a company blows away estimates but does not raise their guidance for the year you know there is an underlying issue. With YGE the issue is the foreign currency gain/loss they suffer quarter to quarter. Last quarter they lost $4 million from foreign currency. If you factor that 4 million in to last quarters earnings they actually made more last quarter than this one. (if you factor out the 9 million gain this quarter). In the past two quarters they have acknowledged the fact that poly prices are rising. I do not see how they can keep these gross margins in quarters to come. YGE is a sell sell sell!!!

[SHABBAZZ]

YGE is around 21$ now.

YGE have a great exposure to Europe (Spain, France) and will take advantage of the catch up this country need to do.

Making Euros is not a bad thing too.

In the Long run, YGE, JASO, STP will be the survivor of this sector. IMHO