Yingli Green Energy (NYSE:YGE), the world’s largest solar panel manufacturer, has signed a framework agreement with local municipal authorities in the Yunnan province in Southern China that could see it supply as much as 3 GW of panels to solar projects in the region through 2016.  The company may also take up the role as a co-developer in the projects.  While the financial terms and a definitive date for the commencement of the projects haven’t been announced yet, working on contracts of such magnitude would definitely be a shot in the arm for Yingli. If things go as planned, this could also be one of the largest deals in the solar industry.
How The Deal Could Impact Yingli
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Improves utilization and revenue stability: Yingli increased its annual manufacturing capacity from around 1.7 GW in 2011 to around 2.45 GW last year. This contract could keep the company’s factories busy, boosting capacity utilization rates in the medium term. ((Yingli SEC Filings)) Additionally, the large volumes would allow for economies of scale and also help isolate Yingli from any volatility in solar panel prices, resulting in revenue stabilization.
Vote of Confidence In the Firm’s Abilities: Customers typically seek suppliers with strong balance sheets when they enter into large or long-term contracts. While Yingli doesn’t exactly qualify as a healthy company (it has debt load of around $2.5 billion with negative operating cash flows), its prospects have been improving with new orders and Chinese banks have also been increasing their funding for the company, potentially viewing it as a survivor even if there is consolidation within the Chinese solar industry. (Related Read: Stabilizing Prices And New Funding Could Help Yingli) Signing projects of such magnitude can be viewed as a vote of confidence in the company’s abilities to execute on large contracts.
Reinforces Yingli’s Position In China: China is expected to become the world’s largest market for solar panels this year, and Yingli stands to benefit on its strong track record and relationships in the country. Yingli has been one of the most active participants in China’s Golden Sun program, having supplied panels to nearly a quarter of all projects under the program until now. The firm won a contract last month to supply around 220 MW to the government-owned China Power Investment Corporation. This deal reinforces the firm’s position as one of the largest players in the Chinese solar market.
Pricing Will Be Important: The average prices of modules have remained relatively stable over the last quarter due to the shake-out of some uncompetitive production capacity as well as due to increasing demand for solar panels worldwide. Yingli actually saw its average prices increase during the last quarter as focused on more lucrative markets such as Japan. However, average selling prices for panels in China are known to be slightly lower than the rest of the world, and we will be interested to see the sort of pricing the firm is able to realize on these contracts.Notes: