Yingli Green Energy (NYSE:YGE) is set to release its third quarter earnings on Wednesday. Although the company reported strong module shipments during the first half of the year, the overcapacity situation facing the broader solar industry and the subsidy cutbacks in European markets eroded the firms pricing power, leading to operating losses over the first two quarters. The firms Q2 operating loss stood at around $51 million, widening from the $21 million loss it posted in Q1. Reflecting the poor results, the firm’s stock price has lost about 65% of its value this year.
The third quarter isn’t expected to be much better. In its Q3 pre-earnings guidance for the firm said that modules shipments would decline by about 17% sequentially, while gross margins are expected to be between -22% and -24% due to certain non-cash charges.  Excluding non-cash expenses, the firm expects gross margins to come in at around 1%, which would still be a sharp decline from the near 5% gross margin seen in Q2 2012 and 22% in Q2 2011.
Cost Control And Capacity Expansion
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The firms panels generally enjoy a 15-20% price premium over their Chinese counterparts thanks to their good conversion efficiency (average efficiency was about 17% last year). However, average selling prices have been dropping rapidly forcing Yingli to actively prune its costs. Selling prices per watt declined from $1.43 last year to around $0.95 in Q1 and are expected to fall further this year. The firm expects that by the end of the year, silicon costs will decline to about 15 cents per watt from 22 cents in Q2, while non-silicon costs could reduce to below 50 cents from 55 cents in Q2, which could partially help to offset the effect of the decline in prices.
The firm has gone against the broader industry trend of capacity downsizing, choosing to ramp up its manufacturing capacity from around 1700 MW to 2450 MW this year. It remains to be seen how well the firm utilizes this capacity going forward. Given that solar cell manufacturing has relatively high fixed costs, improving capacity utilization will be crucial to the firms profitability.
Progress In China
The Chinese government has been going to great lengths to ensure the health of its solar industry. Apart from providing funding at the company level, the government has also been taking steps to create demand for Chinese solar products in the domestic market. The federal government is offering increasingly attractive incentives for solar installations including feed-in-tariffs, subsidies for investment under the golden sun program and also recently opened up access for solar farms to the national grid.
Yingli has a stronger presence in the Chinese market than its other large peers like Suntech Power (NYSE: STP), thanks to its strong sales and distribution network. China contributed to about 22% of the firms revenues in 2011, up from about 6% in 2010 and the firm expects it to contribute to to up to 30% of its total sales this year. One potential risk that the firm could face in the Chinese market is on the price front – In spite of the subsidies, the firm estimates that the selling prices for its modules in China are about 10% lower than the international price.  This could have a negative impact on the firm’s margins in the short run.Notes: