Why We Cut Our Price Estimate For Yingli Green Energy To $2

by Trefis Team
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We are cutting our price estimate for Yingli Green Energy (NYSE:YGE)  from about $3.60 to around $2.20, owing to concerns over the company’s lack of profitability, its high debt load and manufacturing capacity constraints. Our price estimate is slightly ahead of the current market price. Below is a brief overview of the rationale behind our price revision and some of the key changes to our valuation model.

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Profitability Remains Elusive: While solid demand and smaller declines in ASPs have helped most tier-1 Chinese solar players return to quarterly profitability as early as 2013, Yingli still remains unprofitable. Although Yingli’s manufacturing costs are roughly on par with large Chinese solar players ($0.48/watt in Q4),  the company’s higher operating costs and meaningfully higher financial leverage have weighed on the bottom line. Additionally, the company’s manufacturing cost reductions could slowly be leveling off, since a bulk of the cost reductions in the past have come from the supply chain (such as the sharp decline in polysilicon prices) rather than from meaningful operational and technological improvements. Supply chain related cost reductions may be harder to replicate going forward as demand rises in the global solar markets.

High Debt Load, Interest Burden: 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 has deteriorated to a deficit of about $35 million. The company’s interest expenses stood at $43 million during Q4 2014, or about 8% of revenues.While the company has about $550 million in unused short-term lines of credit and another $550 million committed long-term facility, we believe that it will need to raise additional equity to better balance its capital structure and find its way out of a potential debt trap. The capital constraints have also meant that Yingli is refraining from expanding capacity and its capex guidance for 2015 (about $50 million) is likely to be largely related to maintenance.

Yingli Missing Opportunities As The Market Expands: The fundamentals of the solar industry have been improving on the back of solid demand growth. However, Yingli looks poorly equipped to take advantage of the situation, owing to its capacity constraints. Global PV installations are also expected to rise by 20% to about 58 GW for 2015, according to Bloomberg New Energy Finance. The company, on the other hand, has provided subdued guidance of 3.6 GW to 3.9 GW of panel shipments (400 MW- 600 MW towards internal projects) for 2015,. This translates to a shipment growth rate of just 11%. In comparison, key rival Trina Solar‘s (NYSE:TSL) guidance of 4.4 GW-4.6 GW for 2015 marks a 23% jump over its 2014 numbers. Additionally, many competitors have indicated that they are looking to build manufacturing plants overseas that would not be exposed to U.S. and European tariffs. Yingli may be unable to follow suit and this could put it at a disadvantage in these two high-value markets.

Key Changes To Our Model: We have reduced our panel shipments forecast to about 4.7 GW in 2021 from a previous estimate of about 5 GW. We have also reduced our average selling price forecast for panels from levels of above $0.60/watt towards the end of our forecast period (2021) to about $0.53/watt. This is driven by the possibility of a greater sales mix to lower value, emerging solar markets such as China and India and also due to the continued decline in global ASPs. We have also increased our forecast for SG&A expenses to about 40% of gross profits by the end of the forecast period ($330 million).

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