There is no doubt about the fact that the solar industry is in a rapid expansion phase. According to Statista, the global solar power market was worth $91.3 billion at the end of last year, and it is expected to grow to $158.4 billion by 2023. Asian markets such as China and Japan will be the key drivers of its growth, along with Europe. As such, Chinese solar company Yingli Green Energy (NYSE:YGE) should ideally do well in such conditions. However, Yingli's stock has dropped 50% this year as the company has failed to achieve profitability.
Improving module prices help Yingli improve
Yingli's results have been weak over the last four quarters, with the company missing estimates by big margins. The company's performance has been weighed down by oversupply in the market, along with a drop in the prices of solar modules. But then, the worst seems to be over for Yingli. According to Greentech, earlier this year, "quarterly global module spot prices hit 63 cents per watt, an all-time low." Industry watchers believe that solar module prices have hit a bottom, and things can only get better from here. According to GTM Solar:
"The fall in spot price in the first half of 2014 is not like previous years, where falling prices reflected severe upstream overcapacity. In fact, module ASPs for top-tier suppliers increased in Q1 despite declining spot prices, as high ASP regions (U.S., U.K. and Japan) provided steady demand. The downward trend in prices is likely reflective of seasonally weak prices in low ASP regions (China), large volumes of lower-priced, off-spec modules (i.e., modules with lower wattages than the industry standards), and lower-tier suppliers in regions such as Malaysia and Vietnam offering aggressive prices to gain market traction."
As a result, Yingli's performance can be expected to improve going forward. The company is focused on cutting production costs, apart from improving operating efficiency. Moreover, Yingli has a strong product pipeline, with China being its key market.
An impressive pipeline will help Yingli benefit from better pricing
At present, Yingli has a robust pipeline of nearly 1.4 gigawatts of PV projects under varied stages of approval in several provinces in China. Currently, it has 340 megawatts of solar projects in the development stage, with shipments of the projects till-date amounting to 187 megawatts. By the time the year ends, Yingli plans to bring another 60 megawatts worth of projects into the development stage.
Looking ahead, Yingli plans to develop 50 to 60 megawatts worth of projects in the first quarter of fiscal 2015. Approximately half of the projects under development are expected to be sold, of which the Hebei power plant, with a capacity of 15 megawatts, is already closed and deployed.
Further, Yingli has also won approval for an additional 120 megawatts of distributed generation PV products from the Hebei Province. It also closed some additional orders amounting to 280 megawatts at major state-owned enterprises, representing an expansion of nearly 56% as compared to second quarter.
Another important thing to note is that Yingli is aggressively focused on diversifying its geographical base. For example, in Japan, Yingli has strengthened its customer base by adding more than 30 new customers. Moreover, Yingli has entered into contracts to supply more than 100 megawatt solar panels to several Fortune 500 companies in Japan. In America and Europe, Yingli has deployed more than 2 gigawatts of power till October 2014, powering over 5,000 business and institutions and 80,000 homes.
However, there are certain negatives that investors need to be aware of. For example, Yingli has a weak balance sheet. Its debt stands at $2.35 billion, while its cash position is quite weak at $124 million. In addition, the current ratio is also pretty low at 0.73. This means that Yingli might face short-term liquidity issues. Moreover, the profit margin also is weak at a negative 11.6%, along with a negative operating margin of 4.6%.
But, as the solar market grows, Yingli's balance sheet could improve. In fact, analysts expect Yingli's bottom line to grow 47% this year and 92% next year, which should allow the company to cut debt and improve liquidity.
Yingli is strengthening its business across countries in order to make the most of the growing solar market. In addition, strength in module prices will lead to an improvement in the company's financial performance. Thus, it might be a good idea to consider buying some shares of Yingli Green Energy, and the stock's 50% drop this year provides a good window of opportunity.
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