Is Oversupply Yingli Green Energy's Biggest Problem?

Yingli Green Energy (NYSE: YGE) has yet to post a profit in the aftermath of recent oversupply issues. The solar industry has been recovering for the last year or so, and 2014 also seems to be promising as installations of more than 40GW are expected worldwide. Yingli is increasing its volume in line with the industry and is expected to ship in excess of 4GW this year.

Despite these efforts, the company is not expected to post a profit for the full year of 2014. The problem does not lie with the company's volume; it lies with the manufacturing costs, OPEX, interest costs, and the low selling price of its modules. Furthermore, the module selling business has lower margins than downstream services.

Recent developments
Yingli is considering taking part in the UAE solar energy project. Dubai Electricity and Water Authority (DEWA) is tendering a 100MW project as a portion of the 1,000MW solar power plants planned by 2030. Yingli is expected to partner with other companies to submit a bid, or it may support the project through services rendered. Provision of services means Yingli will supply the modules for the project. However, submitting a bid through partnering will allow the company to be involved with the whole project, not just the supply of modules.

This will be a high-margin activity while only supplying panels will not be very favorable for Yingli due to low margins. It should be noted that it is not necessary for Yingli to have a part in the project because it is open for tender, and other players may manage to secure the project.

The company recently announced that it has delivered 10MW of its monocrystalline modules to Kingspan Energy. 5.8MW of these modules will be installed on the rooftop of an automotive company in the UK, and the remainder will be used on other large-scale rooftop projects.

Yingli's subsidiaries in China and France agreed to cooperate with a leading French PV module manufacturer to fulfill the requirements of the French national tender program. The French partner will manufacture modules using Yingli's polycrystalline cells. 185MW out of 380MW projects were won with modules from this partnership. The point to note is that Yingli is yet again not involved in the projects; it is just a cell supplier.

The company began trial production of monocrystalline metal wrap silicon modules with the collaboration of Formula E, a supplier of photovoltaic technology and automated manufacturing lines. In these modules, the amount of metal applied in each solar cell is reduced, exposing more surface area to the sun and resulting in improved efficiencies. It can be compared with an earlier effort by Trina Solar (NYSE: TSL) and its Interdigitated Back Contact, or IBC, solar cells. Trina Solar leads the efficiency department, and Yingli is trying to play catch-up. The efficiency improvement or cost benefits that may result from this development are not yet known.

The problem
All the above-mentioned developments, with the exception of the metal wrap module, indicate that Yingli is still focusing on just selling the modules and trying to spur volume in order to return to profitability. As China has doubled its solar installation target from 35GW to 70GW for 2017, Yingli can return to profitability by increasing volume in the next couple of years or so, but it should engage in downstream business in order to address the short-term margin problem.

Unlike other solar players, such as Trina, Yingli has a high fixed cost and heavy debt structure, which entails high interest costs. The company's debt-to-equity ratio is around 29, which is higher than the industry average, and it has a quick ratio of just 0.57, which is below the industry average. The point is that the expected 4GW installation will not result in net profit; current net profit margin is around (20.67%), and the liquidity problems of the company may increase because its high debt structure can be a hindrance in securing future financing.

Bottom line
Yingli is sticking with its module selling business. Supply is not expected to curtail and hence the average selling price of modules will remain under pressure. The inability of Yingli to generate profit, along with its high debt capital structure and low quick ratio, paints a worrying liquidity picture of the company. The increase in China's solar targets may help Yingli's cause a couple of years from now, but until then there is uncertainty about the company's future prospects amid a low-margin business model and financial risk associated with its balance sheet.