Is Yingli’s Follow-On Offering A Good Idea?

Yingli Green Energy (NYSE:YGE), the world’s largest solar panel manufacturer by volumes, is planning a follow-on public offering to sell about 25 million American depository shares. The company said that as much as 60% of the net proceeds from the issue would be used towards its downstream solar business, while the remaining funds will be used for general corporate purposes. ^[1] While the issuance could bring in much-needed capital for the company to expand its solar projects business, the timing and investor interest in the issue could be questionable, since Yingli’s stock is currently trading near its six-month lows, and the company has yet to return to profitability after nearly three years of continuous losses.

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Trefis has a $5 price estimate for Yingli, which is about 18% ahead of the current market price.

Funding Downstream Projects

Yingli and other Chinese solar companies have been doubling down on the downstream solar business in recent quarters. The downstream business, which involves building large-scale solar power plants, has healthy margins compared to the solar panels business, since it involves providing value-added services such as design, construction and procurement. At present, Yingli says that it has a pipeline of around 1 gigawatt (GW) of solar plants under development in China, plus another 200 megawatts (MW) under development internationally. Given that the downstream solar business is quite capital intensive and Chinese banks have been cutting back on their loans to the solar sector, Yingli has been focusing on securing funding from alternative avenues. Last week, the company said that it would be forming a 1 billion yuan ($160 million) fund along with a private equity company, Shanghai Sailing Capital Management, to primarily invest in its solar projects.

Is The Timing Right?

We estimate that the company would be able to raise about $110 million through its secondary offering, assuming that the issue is priced at around the current stock price of around $4.50. However, the timing of the issue could be questionable, since Yingli’s stock is currently trading at near its six-month lows. Additionally, the company isn’t exactly in the best financial position at the moment. Yingli remains one of the few tier-1 Chinese manufacturers that has not returned to profitability, after posting nearly three years of continuous losses. The company expects to report a profit by the third quarter of this year. Yingli’s peers such as Trina Solar (NYSE:TSL), JA Solar (NASDAQ:JASO) and Jinko Solar (NYSE:JKS) all reported quarterly profits during 2013. Yingli is also one of the most leveraged companies in the Chinese solar industry, with its total debt standing at around $2.4 billion, of which around $1.1 billion is short term. ^[2]

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1. Yingli Press Release, PR Newswire, April 2014 [↩]
2. Yingli Green Energy Holding Company Limited Form 20-F [↩]