Yingli Q3 Preview: OEM Play In Focus As Panel Shipments Continue Descent

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Yingli Green Energy (NYSE:YGE) will publish Q3 earnings on December 2, reporting on a challenging quarter that is likely to have seen the company divert some resources away from core manufacturing operations to manage its debt payments, while playing a larger role as an OEM vendor to other solar firms. The company has already provided preliminary results for the quarter, projecting sequentially lower panel shipments and slightly higher margins. [1] Yingli will also be recognizing a non-cash impairment charge of $581.3 million for the quarter to account for under-utilized production facilities. Here’s a brief look at what to expect when Yingli reports earnings Wednesday.

We have a $0.50 price estimate for Yingli, which represents a discount to the current market price.

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Shipments To Decline Despite Strong Global Solar Demand Growth

Yingli’s high debt load is forcing it to divert resources away from core manufacturing operations towards debt payments. The company paid down a $193 million tranche of medium-term notes in May, restructured a payment due in October and is preparing to pay off (or restructure) tranches due in May 2016. This has put pressure on the company’s liquidity position, hurting its ability to fund its working capital requirements and run operations. During Q2, shipments fell 20% year-over-year to 727 MW, and the company indicated in its preliminary financial results that shipments for Q3 could decline even further to between 450 MW to 460 MW. This is in sharp contrast with key rivals such as Trina Solar (NYSE:TSL) who have been witnessing record high-shipments (1.7 GW) amid strong demand from China – where the government recently raised its solar target for 2015 – and the United States, where the impeding expiry of the solar Investment Tax Credit is resulting in strong installation growth. (related: The Opportunities And Challenges In The Chinese Solar Market).

Yingli’s OEM Play

However, the company could indirectly benefit from global demand growth by acting as an OEM module manufacturer for some other Chinese solar vendors. Under these agreements, customers provide the company necessary materials to produce panels, while Yingli will only incur costs such as electricity and labor. Although this might not be as profitable as its branded panel manufacturing, it is less risky and allows the firm to manage its capacity utilization and drive incremental cash flows. The company had estimated that these orders would account for roughly 20-30% of its total production capacity for Q3. ((Yingli Green Energy’s (YGE) CEO Liansheng Miao on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, September 2015)) This could be the reason why the company expects total net revenues for Q3 to remain roughly in line with previous expectations ($340 million to $350 million), despite the decline in shipments. Separately, the company is also likely to see a slight sequential improvement in gross margins (8% to 9% vs. 6.3% in Q2) owing to an increase in average selling prices and a decrease in module manufacturing costs.

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Notes:
  1. Yingli Press Release []
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