Yingli Green Energy (NYSE:YGE) is one of the leading Chinese low-cost photovoltaic (PV) module manufacturers, with a vertically integrated structure making the company unique in many respects. Yingli’s value chain can be divided into three stages, namely the production of polysilicon ingots and wafers, the conversion of wafers into PV cells, and packing the cells into PV modules that are sold in the market. The company also has a limited PV systems business that operates in China. Unlike other solar firms, Yingli has increased its production capacity in these segments in tandem since it started. This vertically integrated structure makes the company less susceptible to fluctuations in input prices. Yingli’s main market is concentrated in Europe, which we expect to show low growth over the next few years because of subsidy cuts and minimal economic growth. Our $5 price estimate for Yingli is about 25% ahead of the current price. We also cover solar PV manufacturers such as Suntech Power (NYSE:STP) and Trina Solar (NYSE:TSL).
Dependence on German market
We estimate that Yingli derives 43% of its value from its sales in the German market, which is presently the world’s largest market for PV modules. Sales in emerging markets are the next biggest contributor to our price estimate for the company. The company has yet to establish a significant presence in the American market, which is an important source of value for its competitors. We expect Yingli to survive the current shakeout in the solar industry because of its low costs of production, its integrated structure and support from the Chinese government.
Sources of Value
Sales in Germany: Despite the low expected growth in this market, the sheer scale of revenues from Germany make it the most important market for Yingli’s PV panels. Germany has one of the most progressive systems in place to incentivize renewable energy projects, and the pressure on the government to reduce its dependence on nuclear energy should temper the pace of subsidy cuts. Germany is also expected to be among the first countries to reach grid parity because of the high retail price of electricity.
Sales in Rest of the World: Demand from emerging markets such as China, India and the Middle East should pick up because of the improving economics of solar power generation with falling PV prices. Because of the higher solar irradiation in many of these geographies, solar power can be generated much more efficiently there. China and India have introduced subsidy programs to kick start the industry. Yingli also has a systems business that is mainly limited to China which we include in this segment.
Yingli Green Energy’s strengths as a low-cost manufacturer and some of its technologies – such as the monocrystalline Panda modules that are more efficient in converting infrared radiation into electricity – should help the company emerge successfully from the current industry downturn.