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Yingli Green Energy Holding Company 2009 annual report & 2010 first quarter analysis

|Includes: Yingli Green Energy Holding Company Limited (YGE)

 Yingli Green Energy suffered through a tough 2009 fiscal year. The company posted a considerable net loss as it recognized several one-time items that helped push the company’s earnings into the red. The first quarter of 2010 showed promise with improvements across the board, including positive operating cash flow, the highest gross margin in the past eight quarters and a positive net income margin. The company currently trades at 12.7 times 2011 earnings estimates.

 
The company’s 2009 annual report was released June 25, 2010, 109 days after the 2009 fourth quarter earnings release on March 8, 2010. The company revised its fourth quarter 2009 earnings release to include an increase in bad debt expense of ¥145.5 million. The net loss for the fourth quarter and full year 2009 were increased by ¥61.9 million. A 13.5% increase to the previously reported net loss for the fourth quarter of 2009. This correction was reported as part of the first quarter 2010 earnings release May 24, 2010. We believe this is a material correction to previously reported earnings.
 
Despite a poor fiscal year 2009, many of the company’s rankings are near the top of its peer group, including operating cash flow-to-net income (2nd), cash conversion cycle (4th), gross margin (6th), research and development (9th) and SG&A expenses (7th). Significant capital expenditures and an acquisition force free cash flow-to-net income to number 20 among the peer group. The lack of clear disclosure of the amount of receivables sold leaves us unable to quantify the enhancement of the cash flow-to-net income ranking and the cash conversion cycle.  The company relies heavily on debt to finance its operations and expansion, which contributes to the company’s number 28 ranking in debt-to-equity and number 29 ranking in cash-to-debt.
 
The company provides limited information in quarterly filings. It does not provide full footnote disclosures or a statement of cash flows. This is a common practice among Form 6-K filers. Furthermore, the company does not provide total megawatts sold or produced in its quarterly filings and many of the key performance indicators are only found in annual filings. Warranty and allowance for doubtful accounts data can only be found in annual filings. Governance is below average because three of the company’s seven directors are not independent. One director serves as the chief financial officer while another director serves as the vice president of the company. Furthermore, the financial controller serves as the internal audit manager and assistant to the chief financial officer.
 
We calculated an average cost per watt of ¥10.39 for fiscal year 2009, down from ¥20.30 in fiscal year 2008. Annual cost per watt is calculated using solar module cost of goods sold (COGS). The company makes the statement that its production capacity was at 130% in the first quarter 2010, based on 600 megawatts of capacity. This translates into production of 195 megawatts in the first quarter 2010. Using this figure, first quarter 2010 cost per watt is ¥8.20. Quarterly megawatt shipments are never explicitly stated, but the company claims that it expects second quarter 2010 shipments to increase from the first quarter 2010 by “high-single digit percentage.”
 
In 2009, the company received government grants related to the acquisition of assets for the polysilicon plant of ¥122.1 million and recognized the entire amount as a reduction in the cost of the assets. The grants represented approximately 5.4% of 2009 capital expenditures, which will reduce depreciation expense on those assets by 5.4% when put into production.
 
The company does not provide statements of cash flow in its quarterly Form 6-K filings. This seems to be the norm among fellow Form 6-K filers. Of the available earnings call transcripts, the company only discloses its operating cash flow in the second quarter 2009, claiming it generated a positive operating cash flow of ¥600 million. For the fourth quarter 2009, the company claims to have generated positive operating cash flow of more than $200 million (¥1.4 billion). For the remaining transcripts available, the company only claims to have achieved positive operating cash flow. Quarterly cash flow disclosure is grossly inadequate.
 
In 2009, the company entered into agreements with several Chinese banks to sell without recourse certain accounts receivables. The exact dates of the sales were not disclosed. The accounts receivable were considered sold and were therefore derecognized. The company received net proceeds from the sale totaling ¥1.7 billion and is included in the net cash provided by operating activities section of the statement of cash flows. This amount represents 23.4% of total revenues recorded in 2009. The company recorded a loss on the sale totaling ¥5.9 million and is included in the general and administrative expenses section on the income statement. The exact impact on operating cash flow and free cash flow cannot be quantified. The company’s CFO indicated on the 2010 first quarter earnings conference call that receivables were also sold during the first quarter. The amount and timing were not disclosed.
 
In 2009, the company capitalized ¥144.2 million in interest costs for the cost of construction in progress. This represented 6.4% of 2009 capital expenditures, 27.7% of total interest costs incurred and 5.7% of assets under construction in 2009. Total interest expense increased to ¥91.2 million in the first quarter 2010, compared to ¥80.8 million in the fourth quarter 2009. The increase was due to an increase in short-term borrowings from ¥3.5 billion at year-end 2009 to almost ¥4 billion as of March 31, 2010, not including the current portion of senior convertible notes.
 
In November 2008, the company paid a deposit of ¥171 million for its acquisition of 100% of Cyber Power, a development stage enterprise, with plans to begin production of solar-grade polysilicon in 2010. At the time, it was controlled by Miao, the chairman and chief executive officer of Yingli Green Energy. On Jan. 7, 2009, the company completed the 100% acquisition of Cyber Power for a total consideration of ¥544.2 million. The company acquired ¥837.3 million in assets, including ¥642.3 in PP&E, ¥78.8 in land use rights and ¥116.2 in other assets. Total assets represent 37.1% of 2009 capital expenditures. The company assumed ¥293 million in liabilities, including ¥266.2 million in accounts payable and ¥26.8 million in other liabilities. The acquisition price was determined based on an approximate 4% discount to the net tangible book value of Cyber Power as of Nov. 30, 2008. No discussion was provided regarding the fair value of Cyber Power.
 
At year-end 2009, Tianwei Baobian owned a 25.99% equity interest in Tianwei Yingli, one of the company’s principal operating entities from which it derives the majority of its revenue and earnings. By December 2009, Tianwei Yingli had built 400 megawatts of production capacity and Yingli China had built 200 megawatts of production capacity for each of multicrystalline polysilicon ingots and wafers, solar cells and solar modules. Two-thirds of the company’s total production capacity is attributable to the joint venture.
 
The United States and other countries maintain economic and other sanctions against several countries. Baoding Tianwei Group Corporation (Tianwei Group), the parent company of Tianwei Baobian, was acquired by China South in March 2008. The company states in its 2009 Form 20-F it has been reported that China South, Tianwei Group and Tianwei Baobian conducted construction activities in or exported transformers to some sanctioned countries, including Iran and Sudan. Additionally, China North Industries Corporation (Norinco), an affiliate of China South, was designated by the U.S. State Department as engaged in the transfer to Iran of equipment and technology having the potential to make a material contribution to the development of weapons of mass destruction. Norinco also was reported to have had activities in and exported products to some sanctioned countries, including Iran, Sudan and Syria.


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