Yingli Q2 Preview: Manufacturing Costs and OpEx In Focus

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Yingli Green Energy

Yingli Green Energy (NYSE:YGE), one of China’s largest solar companies, is expected to publish its Q2 2014 earnings on August 27. Although the company has seen its volumes soar over the last several quarters, it remains one of the few tier-1 Chinese panel manufacturers yet to return to profitability. We do not expect to see a turnaround this quarter either, despite the fact that the company has guided sequentially lower operating expenses and higher shipments, given that manufacturing costs and average selling prices (ASP) could be less favorable. During Q1, the company’s revenues remained relatively flat at around $432 million while operating losses decreased by nearly 60% to around $20 million. Here is a brief look at some of the trends that will drive the company’s quarterly results.

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Trefis has a $3.75 price estimate for Yingli, which is slightly ahead of the current market price.

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Higher Manufacturing Costs, Lower ASPs Could Reduce Gross Margins: Yingli has been making some meaningful progress on the cost front of late. For instance, as of Q1 2014, the company’s core panel manufacturing costs stood at around $0.52 per watt, which marks a 12% decline compared to a year ago. However, we believe that the company may not be able to sustain the rate of cost reductions that it has been able to achieve in the past, since the savings have largely come from a drop in raw material prices and tighter controls of its supply chain. Such improvements may be difficult to replicate going forward as the solar market has been seeing strong demand of late. For instance, the prices of polysilicon – which accounts for close to 20% of the company’s core manufacturing costs –  is expected to rise by roughly 15% this year, driven by higher demand. [1] Additionally, we do not expect to see very meaningful cost reductions via process improvements, given that Chinese manufacturers such as Yingli lack significant intellectual property to bring down manufacturing costs.

During Q1, Yingli’s panel ASP’s benefited from a favorable sales mix, with just about 23% of total shipments directed to the Chinese market (where average selling prices are often lower) while the company saw better sales to markets like Japan, where average selling prices are among the highest in the world. However, we do not expect this sales mix to replicate into Q2 as the company expects higher shipments into China and this could potentially reduce ASPs for the quarter. For this quarter, Yingli has guided gross margins of between 14% and 16% and we believe that margins could be lower than the 15.7% reported during Q1. [2]

Lower Operating Expenses: Yingli’s s operating costs, which include selling general and administrative expenses and research and development, have typically ranged from 15% to 20% of revenues, which is quite high compared to some of its peers. For instance, Trina Solar’s operating costs stand at roughly 11% of revenues. However, Yingli expects its operating expenses to decline by around 12% to 15% sequentially for Q2 and this could positively impact operating margins. The company also intends to contain its FY 2014 operating expenditures (in dollar terms) at their 2013 levels, despite the fact that shipments are poised to rise by as much as 30% this year.

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Notes:
  1. Global polysilicon market on course for 15% increase, PV Magazine, May 2014 []
  2. Q1 2014 Earnings Supplementary Presentation, Yingli Green Energy, June 2014 []