Can Yingli Green Energy Survive Increasing Cost Competition?

Yingli has been posting consistent losses and has been unable to recover while its counterparts have. Low margins in the module selling business, high fixed costs, and debt servicing expenses are the main reasons for this lackluster performance. Oversupply in the market, along with the declining average selling price of modules, is also not helping Yingli's cause. Yingli is increasing shipment volumes but is lagging in terms of efficiencies and managing fixed costs.

Yingli Green Energy (NYSE: YGE  ) , a specialized semiconductor company, is a vertically integrated manufacturer of PV solar panels. The company is the world's largest manufacturer and supplier of solar panels and has a manufacturing capacity of around 2.45 GW. Yingli has more than 7 GW of panels installed around the globe.

 

Source: Yingli Green Energy

The company generates its revenues primarily through the sale of PV modules. Note that the margins in the PV module selling business are relatively lower than the margins of downstream solar businesses like utility-scale solar projects. Yingli, despite being the largest manufacturer of PV panels, has been unable to post profits. Competitors like Trina, JA Solar, and Jinko Solar turned profitable after module prices started to recover in 2013.

Persistent Losses
Yingli posted losses in the most recent quarter and is not expected to return to profitability until late 2014. Full year results for 2014 are also expected to show a loss. The projected loss estimate based on Yingli's 2014 guidance is as follows:

Calculations based on Annual report figures

Although the company is expected to post a loss this year the net loss situation is improving year over year mainly due to improved volume growth.

Source: Press release and Yahoo finance

There are several reasons behind Yingli's continuing losses. First, the industry inherently puts pressure on the average selling price of solar panels due to supply concerns. Module manufacturing costs are expected to fall to $0.36 by 2017 according to GTM Research. IHS believes that the ASP will go down by 10% this year, which will put further pressure on profit margins.

Second, as the company is vertically integrated, its overheads and fixed costs are higher than counterparts that outsource ingots and wafer manufacturing.

Third, the company has high debt servicing costs and OPEX (due to R&D) as compared to its competitors. IHS analyst Stefan de Haan thinks the cost of Yingli's debt is "the main reason for continued net losses."

Industry trend and CSF
Manufacturing costs are going down year over year and have declined at a CAGR of 16% since 2008. Costs are expected to decrease by 6% in  2014. However, as the supply is keeping up with demand, in fact surpassing it, the prices will also decline. Thus no margin improvements are expected in the near future for the PV module selling business. Following are some critical success factors that will define profitability in the business:

  • Increased volume
  • Controlled operating and fixed costs
  • Differentiated products

Note that these are the critical success factors for the PV module selling business. As an alternative a company can move downstream and win projects to be more profitable, a strategy successfully implemented by First Solar (NASDAQ: FSLR  ) .

Yingli is doing well in terms of volume. The company has shipped 3.2 GW in 2013 and is expected to ship around 4.2 GW in 2014. This is expected to grow further in the coming years as the PV industry is growing.

The company says that it is trying to improve its OPEX structure but it is already lagging behind its competitors on this front.

As far as differentiated products are concerned Yingli's roadmap predicts cell conversion efficiencies to reach 21.2% by 2017. However, Trina Solar already claims that it has achieved a cell conversion efficiency of 21%. Overseas competitors like SunPower (NASDAQ: SPWR  )  already offer leading efficiency products; First Solar has almost closed its efficiency gap and CdTe is now comparable to silicon panels in terms of efficiency. In short Yingli is in a tough position regarding its product competitiveness. If the company continues to compete on a cost basis the margins will erode further and this will not help the profitability scenario at all.

Valuations and final thoughts
The company is expected to return to profitability by 2015 and will post around $18 million in net income. This translates to a 35x P/E which is impressive in this industry. As the table below shows, Yingli is quite expensive when compared with other major industry players. Using an average P/E of 18x and giving it a 30% premium, due to Yingli's market leadership, we can reach a price target of around $2.8.

Author's calculations

Demand and supply will remain close in the coming years, and increased competition will decrease the average selling price. Companies with differentiated products and favorable cost structures and/or companies involved in downstream services, like First Solar, will be successful in this scenario. Yingli will not be able to create long-term shareholder value if it fails to alter its business model. The company has around 1 GW of downstream projects in the pipeline and should try to win more projects along with focusing on improving efficiencies to at least match what the competition is offering.

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