Yingli Q4 Preview: Lower ASPs, High Interest Costs Will Outweigh Benefits Of Operational Improvements

by Trefis Team
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Yingli Green Energy
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Yingli Green Energy (NYSE:YGE), one of China’s largest solar panel manufacturers, is slated to release its Q4 2014 earnings on March 25, reporting on a quarter that saw record global demand for photovoltaics and strong module exports from China. While the results could benefit from lower manufacturing costs and higher module shipments, we expect the company to remain loss making owing to sequentially lower average selling prices and higher interest costs. During Q3, quarterly revenues stood at $551 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] Here is a brief look at what to expect when the company publishes earnings.

See Our Complete Analysis For Solar Stocks Trina SolarYingli Green EnergySunPowerFirst Solar

Trefis has a $3.60 price estimate for Yingli Green Energy, which is significantly ahead of the current market price. We will be revisiting our price estimate following the earnings release.

Gross Margins Could Decline On Higher Shipments To China

Yingli has guided for shipments of between 880 MW to 930 MW for the quarter, compared to around 900 MW during the previous quarter. However, the company expects its gross margins to decline from 20.9% in Q3 to between 15% to 17 % for Q4, owing to sequentially lower average selling prices. [2] The company expects pricing for the quarter to decline by between $0.02 to $0.03 per watt, owing to a higher shipment mix to China (estimated 40% of Q4 shipments vs. 27% during Q3), which is a lower value market. [3]  Shipments to China typically peak during Q4 of every year and the trend could be more pronounced for 2014, as the country fell behind its installation target during the first half of the year. In particular, installations to distributed generation projects could get a boost, as the Chinese government moved to simplify the approval process for DG PV projects last September.

The company’s weaker ASPs should be partially offset by the higher volumes and lower manufacturing costs. During Q3 2014, the company’s per-watt silicon costs for 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 has also been cutting down on its third-party sourcing for its modules business, which should help to reduce costs. Yingli has been steadily reducing its operating expenses as well, bringing down selling, general and administrative expenses to levels of around 11%-12% of revenues down from 14% of revenues in 2013.

Weak Balance Sheet, High Interest Costs

Yingli’s high interest burden remains a key factor hindering its return to profitability. The company’s interest expenses stood at $43 million during Q3, or about 8% of revenues. The interest costs more than eclipsed the company’s operating profit of $32.5 million for Q3, resulting in a net loss. Yingli remains one of the highest-leveraged large Chinese solar companies, with a debt load of over $2.3 billion. On the other hand, the total equity attributable to the company stands at just about $50 million, and we think that the company will need to raise additional equity to better balance its capital structure and find its way out of a potential debt trap. Additionally, the company will need funds in order to expand its manufacturing capacity further and take advantage of the strong demand growth in the solar industry.

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Notes:
  1. Trina Solar Q3 2014 Earnings 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 []
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