On Thursday, PV Magazine reported that, according to two of its independent sources, Yingli Solar (NYSE:YGE) halted production when talks with creditors failed. The stock fell on this news from about $1.04 to $0.82 before recovering to $0.92 when Yingli's CFO Yiyu Wang apparently refuted the production halt claim. He is quoted as saying, "In response to recent rumors that Yingli has halted production, I can confirm that this is untrue. We are in production today and are continuing to meet our customers' needs."
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So, what is the truth here? Did PV Magazine get this completely wrong?
Parsing the language of the PV Magazine claims and Mr. Wang's statement, and considering what we already know about Yingli, it appears likely that there was probably a basis for the story.
It is well known that Yingli has debt problems and the Company has outlined several initiatives to improve the short term and long-term metrics. These include selling projects, land, land rights, equity investments in JVs and raising capital. The Company also plans to reduce its 2015 opex by 20% compared to the 2014 levels.
The Company has fallen behind on vendor payments and we believe it is likely that the Company's vendors will start tightening the credit terms and likely start demanding advance payments. As we have written in the past, the Company is susceptible to a supplier driven production crunch.
The Company has guided investors on how it plans to improve its cash flow and tackle the upcoming debt payment in October. The main tool at the Company's disposal in this context is selling of the lands/right sales it already announced in the past. The Company expects the land sales to commence in the middle of the current quarter. It expects to get cash in late August or early September, in time for October payments.
In the past, we have written that the management is being optimistic and, in spite of the positive commentary, the underlying trends are far worse than what the management indicates.
Firstly, we believe that the Company's already reduced Q2 guidance, at 720 to 750 MW, is suspect. With lower shipments, the Company is also likely witnessing a significant down draft in the gross margins compounding the cash flow problems.
It does not help that polysilicon prices have not seen a rebound since the first quarter. This is something we predicted in the past but many companies have been optimistic about the poly rebound. What the low poly prices could essentially mean is that some of Yingli's polysilicon production is likely burning cash and needs to be taken offline.
On the module front, we believe the dynamics are a bit better due to the stable module ASPs. However, even here, a lower business level in the quarter means the Company was either operating below capacity or was building inventory - neither of these are good options for a cash strapped company.
Secondly, the macroeconomic situation in China has worsened significantly since the Company communicated its plans. China is going through a major correction in equities and the government has moved aggressively in ways to curtail investor freedom. What this effectively means is that, in China, many companies and investors do not have the access to capital markets that they did until recently. What this means to Yingli's planned land sales and vendor relations is anyone's guess.
With China's capital market tightening up, the Company's need for aggressive actions to conserve cash is even more imminent. Consequently, we would not be surprised if Yingli has idled a significant amount of polysilicon and module production.
We suspect that PV Magazine's sources may have gotten wind of these types of developments and PV Magazine went with a story without doing sufficient verification and due diligence.
It is very interesting to note the CFO's language in response to the PV Magazine article. The language simply states that the Company is continuing to produce and fulfill customer orders. The limited scope of what is being said certainly leaves open the possibility that PV Magazine got the basic story right but missed out on the scope of the problem.
We do not mean to condone the inaccuracy in PV Magazine's story in this regard since stories like this can have a dramatic impact on the Company's stock price and its future. The reporting here should clearly have been better.
This news report also came in at a time the Company was experiencing a rare positive development on the tariff front earlier this week. Under the revised US tariff regime, the Company's tariffs are now lower than that of its key competitors by about 9%. While this benefit is temporary, it is still a much needed reprieve and can help the Company secure some low volume residential or light commercial business heading into the second half of the year.
In spite of the tariff benefit, we continue to believe that the management commentary is not reflective of the odds. We continue to see the Company as an excellent short sale candidate until the Company is profitable or until the debt is restructured.
In summary, we believe there was likely some suspension or decommissioning of capacity and until the Company clearly indicates otherwise, the CFO's comments should be viewed in the narrowest sense.
Our View: Sell Short
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