Yingli Green Energy’s (NYSE:YGE) business has expanded rapidly over the past year with record panel shipments which have catapulted the firm into the worlds largest solar panel manufacturer. Despite the volume growth, the stock has witnessed a lot of volatility over the past few months due to weak Q4 2012 earnings as well as loan defaults by large Chinese photovoltaic firm’s such as Suntech Power (NYSE:STP) and LDK Solar (NYSE:LDK) which have turned the spotlight onto Yingli’s over-leveraged balance sheet. We have a price estimate of around $2 for Yingli which is around 10% less than the firm’s current market price. Here are some of the trends and factors that we believe will influence the stock in the near term.
Volume Growth Is Expected To Continue, With A Possibility That Pricing Could Stabilize
In 2012, stronger brand recognition and lower prices helped Yingli’s module shipments grow by around 43% year-over-year to around 2,300 megawatts. While this brought about better capacity utilization rates and cost absorption, it didn’t do much to help gross margins which fell to around negative 3 percent as average selling prices (ASP) plummeted. Over 2012, Yingli’s ASP fell from $1.43 per watt in to around $0.77 per watt. However, there have been indications from the management as well as some industry sources that selling prices witnessed some stabilization towards the end of the 2012 and in early January. Whether this trend will persist going forward remains to be seen, given the structural overcapacity that exists within the industry.  For 2013, shipments are expected to grow further to between 3,200 MW and 3,300 MW, on the back of growth from markets like Japan and China, which should further boost utilization as well as improve gross margins.
Chinese Demand Will Drive Growth
China is expected to become the world’s largest solar market this year and Yingli could stand to benefit due to its distribution network in the country. During the Q4 2012, China accounted for almost 44% of Yingli’s sales overtaking Germany to become the firm’s single largest geographic market. Chinese demand for solar products is expected to be strong in the medium-term, driven by new utility-scale and distributed projects. The country is targeting around 21 GW of solar installations by 2015. The utility scale sector presently receives attractive feed-in-tariffs (FIT) and the FIT regime could be extended to distributed projects as well.  To further the adoption of smaller scale solar projects, China’s state electricity grid announced plans allowing projects with capacities of under 6 MW to be connected to the grid without paying any extra infrastructure cost.  Yingli has also been an active participant in China’s Golden Sun program, having supplied panels to nearly a quarter of all projects under the program until now. In the second round of the program which was announced late last year, Yingli won contracts to supply around 10% (around 288 MW) of panels for the projects, making it the single largest supplier.
Weak Balance Sheet , But Recent CDB Loan Shows That The Government Could Continue Support
Most of Yingli’s capacity expansion was funded by debt, which has now risen to very high levels. Total debt stands at nearly $2.5 billion of which $1.2 billion is current.  Cash and shareholders equity are just around $490 and $377 million respectively while margins and cash flows continue to be negative. However, it seems that the firm’s bankers aren’t so worried. The state backed China Development Bank, which already has significant exposure to Yingli’s debt, recently extended the firm a one-year loan of $110 million and a three-year loan of $55 million to finance working capital needs and help with the procurement of raw material. This is quite a positive development and could indicate that the Chinese government has confidence in the firm’s future.Notes: