The Bottom-Line Concerns for Solar

The solar industry has shown solid growth in the last couple of years, and this growth is expected to continue. Oversupply will continue to be a problem, and average selling prices, or ASPs, are expected to decline further. A large share of solar growth is expected to come from China, the U.S. and the emerging markets. As the difference between manufacturing cost and ASP is not very high in the Chinese market, the strategy to compete on a price basis will further erode margins. Yingli Solar (NYSE: YGE  ) is facing stiff competition from companies like Trina Solar  (NYSE: TSL  ) , Jinko Solar  (NYSE: JKS  ) , First Solar (NASDAQ: FSLR  ) , and SunPower (NASDAQ: SPWR  ) .

Figure 1 Source: Company website

Industry prospects
Last year was a recovery year for the solar industry. Demand grew and the top 10 PV manufacturers supplied around 18GW of PV modules, representing a 40% increase as compared to 2012. Overall the manufacturers installed 37.5GW of panels worldwide last year, up 22% from 2012. This double-digit growth is expected to continue this year, according to IDC. Global installations are expected to be in the range of 40-45GW in 2014. From a regional perspective China, Japan, and the U.S. are expected to install 10.5GW, 7GW, and 6GW, respectively, during the year.

Source: Mercom Capital Group

China will lead the growth in demand, followed by the U.S. However, in absolute capacity terms, the U.S. will trail Japan.

As far as the supply is concerned, Yingli leads with a capacity of around 3.2GW, which is expected to increase to 4.1GW, a 31% increase, in 2014. Capital spending is expected to rise to $3.3 billion, a 42% increase, according to IDC. Therefore, capacity is also expected to increase this year.

Historically, the cost of manufacturing panels has been declining at a steady rate. PV wafer manufacturing costs have declined at a CAGR of 16% since 2008 and are expected to go down further. An approximately 6% decline in costs is expected by the end of 2014. Companies like First Solar and SunPower expect cost reductions of around 21% and 35%, respectively.

Prices are also expected to go down in the years to come. Demand is definitely increasing, but companies are also increasing their capacity. This will lead to a lower ASPs in 2014 and beyond. GTM Research expects the ASP to fall to $0.36 per watt by 2017, it is currently around $0.60-$0.70 for a commodity solar panel. IHS believes that the average selling prices will go down by 10% this year, due to persistent manufacturing overcapacity. The long-term projection of prices and costs by IHS predicts a 40% decline by 2020.

Figure 2 Projections based on IHS estimates

Selling prices and costs will decrease, while margins are not expected to improve. Capturing market share based on differentiated products will be critical in the future. Gaining market share via indulging in price wars will not be constructive for the industry as a whole and will result in eroded margins.

Yingli updates
Here's a look at the 2014 outlook for Yingli:

  • 4.0-4.2 GWs of shipments are expected in 2014. China, the U.S., and Europe will contribute around 29%, 16%, 15%, respectively, while the rest of the world will make up 40% of shipments.
  • Yingli has around 1 GW of local and 200 MW of overseas projects in the pipeline. Note that these projects have higher margins than the supply of PV modules.
  • The company is expecting reductions in operating expenses, capital expenditures, and manufacturing costs this year. Capex is expected to decrease by 20%.
  • Management claims that the company will return to profitability by the third quarter of 2014.

Manufacturing costs
Yingli was able to reduce its non-silicon costs by 16% to $0.42 per watt in the most recent quarter. This translates to a $0.50 per watt manufacturing cost per solar panel, and the company is focused on reducing these costs further. However, it is still trailing its local counterparts in cost-per-watt reductions. JinkoSolar, which is expecting shipments of 2.3-2.5 GW in 2014, revealed that its non-silicon costs are around $0.39 per watt, which translates to a $0.48/watt manufacturing cost. The ASP of Yingli and Jinko is the same at $0.63, meaning that the margins for Jinko are higher and it can afford price cuts in order to steal market share from Yingli.

Yingli is also facing stiff competition on the cost front. The company must rectify this if it wants to grow or sustain its market share. It is currently gaining market share on the basis of price reductions but this is putting pressure on earnings and the company is not expected to be profitable until late 2014.

Bottom line
Yingli may be able to return to profitability in 2014, but it will post a loss for the whole year. This will continue if the company does not rectify its competitive position regarding efficiencies and manufacturing costs. From an investor's perspective, Yingli should be avoided for now because of intense competition.

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