A Look At Yingli Green Energy And What’s Driving Its Performance

Yingli Green Energy (NYSE: YGE) is one of the world’s largest photovoltaic (PV) equipment manufacturers. The firm sells PV solar modules that cater to residential, commercial and utility scale applications. Like most other Chinese manufacturers, Yingli’s performance over the past year has been very poor due to the global glut in solar panels and the rising trade barriers in key markets.  Here we provide a brief overview of the company and what’s driving its business.

Snapshot of Financials and Performance

While the firm has been actively cutting down costs, the average selling price of its modules has been falling at a much faster rate. Selling prices have declined from an average of around $1.40 per watt in 2011 to less than $1 per watt in 2012. Accordingly, gross margins have fallen from over 20% in 2011 to less than 10% over the past few quarters of 2012. ^[1] Although the firm’s revenues grew rapidly from around $1.1 billion in 2009 to around $2.3 billion in 2011, for 2012 we expect revenues to contract due to the decline in selling prices.

The most concerning aspect of Yingli’s financials is its heavy debt load of around $2.5 billion, with the current portion standing at nearly $1.2 billion. ^[2] The firm has around $600 million in cash while the current market capitalization is around $440 million. Given the relatively low cash flows and tight margins, it might be difficult for the firm to service its debt.

What Are The Firm’s Products And Who Are Its Customers?

Yingli has vertically integrated operations and it manufactures polysilicon ingots and wafers as well as PV cells that are used to produce PV modules. The firm’s modules are primarily multicrystalline-based but the firm has been growing its presence in the monocrystalline PV modules space as well. The firm’s panels generally enjoy a 15-20% price premium over their Chinese counterparts due to good conversion efficiency (average cell efficiency was about 17% last year). The firm’s competitors include Suntech Power, Trina Solar and SunPower.

The firm also designs, installs and sells photovoltaic systems, which combine modules with balance of systems equipment like inverters and batteries that are outsourced from third party providers. This business primarily caters to the Chinese market and accounted for less than 1% of revenues in 2011.

Current Factors Driving The Firm’s Performance

Chinese Government Support And Industry Consolidation: The Chinese government has been steadfast in its support of the domestic solar industry providing subsidies, bank loans and incentives to the solar firms. Of late, the government has also been doing its bit to boost domestic solar installations by providing feed-in-tariffs and investment subsidies. The government is targeting cumulative photovoltaic installations of 21 GW by 2015 (total capacity was 3 GW in 2011). Yingli stands to benefit significantly from the growth in Chinese demand given its greater exposure to the Chinese market than the other large Chinese firms. The firm’s business from China has been growing steadily from around 5% in 2009 to around 22% in 2011. Yingli also has a stronger distribution presence in China compared to peers like Suntech Power.

Last month, the government doubled its subsidies to solar projects to around $2 billion and announced intentions of bringing about mergers in the solar sector. Although Yingli has a relatively weak balance sheet, it is comparably better off than other large firms like LDK Solar and could be in a position to acquire weaker solar firms with government support.

Capacity Expansion And Operational Efficiency: Given that manufacturing solar cells is a relatively capital intensive activity with high fixed costs, improving capacity utilization is crucial to boosting profitability. Yingli went against the broader industry trend of capacity downsizing, choosing to ramp up its manufacturing capacity from around 1.85 GW to 2.45 GW in 2012. While shipments have grown since the expansion (Yingli expects to ship around 2.1 GW of modules in 2012 vs. 1.6 GW in 2011), it still does not entirely justify the additional capacity. This could cause utilization levels to decrease in the near term, negatively impacting margins.

High Performance Modules: Yingli forayed into the monocrystalline panel segment with its ‘Panda’ product lineup, which offer higher conversion efficiency and a lower performance degradation.  While these panels account for just around 12% of the firm’s shipments, they represent an important part of the firm’s product portfolio since they find favor in the lucrative rooftop solar market which requires compact and high efficiency panels. Monocrystalline panels command a price premium over polycrystalline panels and could help to increase margins going forward.

Shifting Mix Of Markets: Yingli derived over half its revenues from Europe in 2011. However, the near-term prospects for these markets look weak with subsidy cuts in key markets like Germany and Spain and the on-going anti-dumping investigation by the EU on Chinese solar imports. To offset the effects, the firm has been shifting focus to other international markets. Over the last few months, the firm has bagged new supply contracts in Latin America and the United States. Earlier in 2012, the firm opened its regional headquarters in Japan, a booming market for high efficiency panels.

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1. Form 20-F [↩]
2. Form 6-K Q3 2012 [↩]