To be sure, things have been extremely difficult in the solar industry. As the largest fully integrated photovoltaic module producer in the world, conditions at Yingli Green Energy (YGE) have been equally negative. When most of the industry's participants have struggled, it has been hard to differentiate one piece of bad news from another or one money losing company from another. Despite ongoing losses at Yingli, the company has been outperforming most of its peers. After all, manageable corporate losses is still vastly better than the onslaught of weekly failures within the industry. After a solid first quarter, Yingli is set to post another quarter of incremental improvements when it reports second quarter results on August 29.
On a US GAAP level, Yingli Green Energy posted a loss of $45m in the first quarter of 2012, or -0.29 in earnings per share (EPS). Beneath these headline results, operations at the company improved dramatically on a number of fronts. Simply by excluding non-cash charges of $13.7m and $3.4m related to inventory write downs and anti-subsidy/dumping tariff provisions respectively, adjusted net loss would have been reduced to $27.9m or -0.18 in EPS vs. my $30m and -0.20 in EPS estimate.
Operationally, Yingli performed extremely well in typically the weakest quarter for the industry. First-quarter shipments rose by a staggering 44.4% on a sequential basis. Granted a portion of this quarterly surge was due to a shift in revenue recognition which moved portions of Q4 2011's shipments into Q1 2012. Nevertheless, any sequential shipment increase in the first quarter is a positive especially when most peers normally report sequential declines in shipments. With nearly 520MW of solar module sales recognized in the first quarter, Yingli most likely took the top market share position in the industry.
Additionally and unlike many less competitive manufacturing peers, Yingli's gross margin remained strong. Excluding the two charges listed above, the company's core business of fully integrated module production generated 11.5% in gross margin which was close to my 11.6% estimate. Despite slow absorption of higher carrying cost polysilicon inventory, faster than expected reduction in manufacturing processing cost to a industry leading $0.57/watt helped maintain the company's strong Q1 margins. Average selling prices (ASP) for Yingli branded modules also continued to display industry premiums at slightly higher than $0.95/watt in the first quarter, or as much as 15-20% higher than other large scale Chinese peers.
Despite a recent revision in second quarter expectations, Yingli's core business is showing significant relative strength. Unlike fellow direct peer Trina Solar (TSL) which reduced Q2 quarterly shipment expectations by roughly 20%, Yingli's revision was much more modest as it reduced sequential module shipment growth expectations from 15% to 13-14%. With continued sequential shipment growth on top of a strong first quarter, Yingli should remain the industry's market share leader while potentially setting a new company quarterly shipment record.
A good portion of Yingli's second quarter shipment strength is in part due to strong Chinese domestic demand which the company indicated should accelerate from the second quarter and strengthen through the year. China's surging demand strength comes at a cost however. According to Yingli's first-quarter conference call, module ASPs in China may be discounted by as much as 10% relative to the company's other markets. As a result, Yingli expects second quarter module ASPs to decline by 15%. Despite large quarterly ASP declines, core gross margin should remain strong given Yingli also expects to reduce total module costs by over 15% in the same period.
As experienced in the past during quarters of rapid declines in component pricing, inventory provisions often result due to US GAAP accounting standards. This has been a recurring theme for Yingli as well as all solar manufacturers since component ASPs started declining across the board since early 2011. While Yingli stated it does not expect to take additional tariff provisions for exports to the US, large declines in realized module ASPs in the second quarter will likely result in another inventory write down. Given the company's higher inventory level than direct peer Trina Solar, Yingli may book a second quarter inventory charge close to $30m vs. the $26.1m amount Trina recorded. This may be the key issue which caused the company to lower corporate gross margin expectations to the mid-single digits from its previous mid/high single digit guidance.
With these metrics in mind and based on Yingli's statements in its Q1 earnings report and conference call, a second quarter earnings estimate has been compiled below. As usual, this estimate mainly reflect the company's operational results and generally excludes unannounced non-operational gains or charges.
YGE Q2 Earnings Estimate:
- Revenues: $484m
- Shipments: 585MW
- Asp: $0.81/watt
- Unit Costs: 585 x .71 = $415m module + $12m others = $427m total
- Gross Profit: $57m - $28m inventory provision = $29m
- Gross Margin: 6%
- Operating Expenses: $60m
- Net Interest Expense: $30m
- Net Foreign Exchange Loss: $29m
- Tax Benefit: $6m
- Net Loss: -$84m
- Share Count: 156m
- EPS: -0.54
Because Yingli typically does not hedge its foreign currency exposure, large declines in the euro vs. the USD in the second quarter will result in a very large currency loss. As noted in my previous solar sector articles, net foreign currency gains or losses normally balance out over time as long as key currencies in question remain within a set range. While relative movement between the USD and the euro have been erratic in the past decade, its exchange ratio has consistently remained in the same range. As a result, annual net foreign exchange translations for Yingli have remained small relative to the company's overall revenues. Thus long-term investors should continue to discount any effects of currency translations in any given quarter.
Unfortunately for longer-term investors, short-term news flow most likely will not offer much optimism. As the saying goes, when it rains it pours and the solar industry is currently experiencing a devastating consolidation storm. Only after enough less competitive participants have been removed or until global demand can expand fast enough to absorb supply from even the least competitive producers will pricing and thus gross margin stabilize towards sustainable levels. Until this market equilibrium has been reached, even the most competitive component manufacturers such as Yingli Green Energy will find it difficult to post a positive bottom line. In the meantime, Yingli continues to take positive steps in gaining market share while operating at losses within the company's manageable limits.