Yingli Green Energy (NYSE:YGE) recently released relatively strong second quarter numbers. The company’s results were aided by surging panel shipments (which touched an all time quarterly high) as well as rising gross margins, which were brought about by improved utilization rates and stabilizing panel prices.
We have revised our price estimate for the company from around $2.50 to about $4, reflecting these trends and the relatively brighter outlook for the company. Here is an overview of some of the key changes to the drivers of our model and the resulting impact on the Trefis price estimate.
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Yingli expects to ship a total of between 3200 megawatts (MW) and 3300 MW of solar modules this year, representing an increase of at least 40% year-over-year. Key markets driving growth include the United States and China which accounted for around 23% and 27% respectively of total shipments during the quarter. China is poised to become the world’s largest market for solar products this year as the country’s State Council has plans to add nearly 10 GW of solar capacity each year between 2013 and 2015. Yingli is the country’s largest solar panel manufacturer and has a relatively long track record in supplying to large-scale projects across the country. We believe that the firm will be able to increase its sales to its rest of the world segment (which includes the Chinese market) from around 1600 MW in 2013 to close about 3100 MW by the end of the Trefis forecast period (FY 2020), translating to an average growth rate of close to 10% per year.
The United States is also proving to be an attractive market for Yingli. The market is expected to account for around 23% of the company’s total module shipments for this year, translating to a total capacity of around 750 MW. Utility scale solar projects have been the driving force behind Yingli’s U.S. business with nearly 70% of the company’s sales over the first half of this year directed towards large projects.  We believe that the company could have some more scope to grow in the U.S. market given that its panels enjoy a price and performance advantage over thin-film based panels which have been relatively popular in the U.S. market. We estimate that the company’s sales in the U.S. will grow to roughly 1100 MW by the end of the Trefis forecast period.
While we expect the company’s sales to European countries to dip this year considering the weak economic environment as well as subsidy cuts in large markets such as Germany, we do not expect to see a significant decline in the European business going forward given the recent deal between China and the E.U. to resolve the solar dumping dispute. However, we remain relatively cautious about the outlook for Yingli’s sales to European countries including Italy, Spain and Germany given the fact that most of the expansion in the past was driven by subsidies which are no longer at their historically high levels. We expect Yingli’s sales in Germany, its third largest market, to dip to below 650 MW this year and then grow at a average compounded rate of under 5% over our forecast period.
Average Selling Prices For Panels
While modules prices saw a precipitous decline in 2012, falling from above $1.40 per watt to around $0.77 according to our estimates, things have been stabilizing during the first two quarters of this year thanks to the higher demand and also due to the company’s focus on higher value markets such as Japan. Yingli has indicated that its average selling prices rose by around 5% sequentially during Q1 2013 and by around 4% during Q2. Despite the sequential price increase over the first two quarters of this year, we estimate that the company’s average selling price for panels is likely to be slightly below last year’s average numbers given that panel prices were significantly higher during Q1 and Q2 of 2012, pushing up last year’s average price. We anticipate that the company’s average selling price for panels in 2013 will be around $0.72 per watt although it should improve to close to $0.80 per watt over the Trefis forecast period.
Gross Margins And Capital Expenditures
Yingli’s gross margins have been improving thanks to the effect of stabilizing panel prices, higher utilization rates and declining non-silicon based costs. Gross margins improved from around 4% in Q1 2013 to nearly 12% in Q2. The company expects to ship between 3.2 GW and 3.3 GW of solar panels this year and this means that the it will be operating its manufacturing facilities (around 2.45 GW) at well above their name plate capacity. We believe that this would allow the company better allocation of fixed manufacturing overheads and thereby improve overall gross margins. Yingli anticipates that margins could rise to as high as 15% during the fourth quarter of this year. We estimate that Yingli’s gross margins for modules will grow from around 12.5% in 2013 to close to about 26% by the end of the Trefis forecast period.
While the company doesn’t foresee any significant capital expenditures in the near term considering the firm’s rising shipments and utilization, we believe that there is a possibility that the company could see an increase in capex over the long run. We have increased our forecast for the company’s capital expenditures as a percentage of gross profits to around 26% by the end of our forecast period versus our earlier estimate for around 22%.
Impact Of Driver Changes On The Price Estimate
Our revised price estimate for Yingli Green Energy stands at around $4, up from around $2.50 previously. Breaking up the price impacts of our driver changes, the revised gross margins forecasts increased the price estimate by roughly $1.20 per share while the higher shipment forecasts raised the price estimate by around $2 per share. The higher projected cash outflows from higher capital expenditures, net working capital and other net operating assets investments impacted the price negatively by roughly $1.70 per share, resulting in a $1.50 net increase to our price estimate.Notes: