Yingli Plummets After It Says It Has “Substantial Doubt” About Its Future

by Trefis Team
Yingli Green Energy
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Yingli Green Energy (NYSE:YGE), the world’s second-largest solar panel manufacturer, saw its stock price plummet by over 37% on Monday (12 % during regular trading and about 25% after hours), after it said in its 2014 annual report, which was filed after the close last Friday, that there was “substantial doubt” about its ability to remain in business. The company cited recurring losses, negative working capital, net cash outflows and doubts related to its ability to service debt as reasons for the uncertainty. Yingli hasn’t posted a quarterly profit since Q2 2011 and remains one of the most indebted firms in the solar industry. The remarks cast a shadow on the company’s future at a time when the outlook for the broader solar sector remains largely positive, with global installation growth expected to come in at over 20% for 2015.

Trefis has a price estimate of about $2 for Yingli Green Energy, which is significantly ahead of the current market price. We will be revisiting our price estimate to account for the recent developments.

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High Financial And Operating Leverage

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 remains unprofitable and continues to burn cash. Although Yingli’s manufacturing costs are roughly on par with large Chinese solar players ($0.48 per watt in Q4), its higher operating costs and meaningfully higher financial leverage have weighed on its bottom line. The company posted a net loss of about $209 million in 2014. Yingli also remains one of the most indebted solar companies, with a debt load of over $2.3 billion ($1.57 billion in short-term borrowings, $276.1 million in medium-term notes and $460.7 million in long-term debt) as of Q4 2014. 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 a massive 8% of revenues.

The company will need to quickly raise additional equity to balance its capital structure and find its way out of a potential debt trap. While the Chinese government is known to have supported troubled solar companies in the past, it has taken a tougher stance more recently, indicating that it would instead push for consolidation within the industry. That said, Yingli’s sheer size and the fact that its core business is still seeing solid demand and volumes growth could allow it to be an exception. However, even if Yingli is able to raise additional equity from investors or receive a government bailout, there is a possibility that common stockholders and ADS holders could get somewhat of a raw deal. Considering the low value of the firm’s stock, a bulk of their equity in the company would be diluted.

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