Yingli Green Energy Posts First Operating Profit In Three Years As Costs Fall

Yingli Green Energy (NYSE:YGE) published its Q3 2014 earnings on November 25, posting its first operating profit in over three years, aided by lower manufacturing and operating costs. The company’s quarterly revenues stood at $551.5 million, down by about 7.5% year-over-year, while operating margins improved to 5.9% compared to negative levels during the last year. ^[1] However, the company’s high interest costs and a large foreign exchange charge resulted in a net loss of about $20 million. In this note, we take a look at some of the key factors that influenced the company’s earnings and the outlook for Q4.

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Japan and China Drive Shipments, Emerging Market Sales Rise

Yingli shipped a total of 903 MW of modules for this quarter, including 109 MW to its downstream solar projects. Japan and China – two markets which have been key growth levers for the company over the last two year – accounted for 27% and 22% of quarterly revenues, respectively. Yingli continues to make strong progress in both markets. For instance, it notched orders for 280 MW of photovoltaic modules from state owned enterprises in China and also secured financing from a Japanese bank for a 37 MW project. ^[2] Although we expect both markets to remain crucial for the company, growth could slow down over the long term. For example, we estimate that China will need to install 12 GW of photovoltaic capacity per year over the next 6 years to meet its 100 GW total installed capacity target for 2020. This is lower than the country’s 13 GW installation target for 2014. Japan could also see growth slow in the long run as some utility companies have been unable to accommodate new solar capacity on the electric grid, and also due to concerns that the government will scale back solar incentives. Yingli has been looking to bolster its presence in other growth markets such as Latin America and India – regions which have a high electricity costs, low quality base load supply and strong levels of solar irradiance. During Q3, the company noted that shipments to its Rest of the World segment (markets excluding Europe, U.S., Japan and China) had increased by 17% sequentially and about 400% year-over-year.

Lower Manufacturing And Operating Costs

Yingli’s gross margins stood at 20.9%, up from 15.6% during the previous quarter, aided by stable average selling prices and lower manufacturing costs. The company’s per-watt silicon costs for its in-house manufacturing operations remained sequentially flat at $0.09 while per-watt non-silicon costs fell to $0.39 from $0.40. The company also cut down on its third-party sourcing for its modules business, which helped to reduce costs and improve margins. While Yingli’s manufacturing costs have been largely on par with its competitors, its operating expenses have been meaningfully higher and have proved a significant hindrance to its return to profitability. The company has been pruning down general and administrative expenses by restructuring and streamlining operations for its international subsidiaries, particularly in Europe where demand has taken a hit, while also improving its cost management. During Q3, the company brought down operating expenses as a percentage of total net revenues to about 15.0%, down from 18.1% in Q2 2014.

Lower Margins And Shipments Guided For Q4

• Yingli expects gross margins for Q4 to decline to 15-17% levels, on the back of a lower average selling prices. ASPs are set to decline by $0.02 to $0.03 per watt, owing to a higher shipment mix to China (40% of Q4 shipments vs. 27% during Q3) , which is a lower value market. ^[3]
• The company expects to ship 880-930 MW of panels in Q4, including 10 to 50 MW to downstream projects. The company does not recognize revenues on panels shipped to its downstream projects under U.S. GAAP.
• The company reduced full year modules shipments guidance to 3.3-3.35 GW, versus its previous outlook of 3.6-3.8 GW.

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1. Yingli Green Energy Q3 2014 Press Release [↩]
2. Yingli Q3 2014 Earnings Presentation [↩]
3. Yingli Green Energy Holding’s (YGE) CEO Miao Liansheng on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, November 2014 [↩]