A Cloudy Outlook for Yingli Green Energy

Credit: Yingli Green Energy, NYSE

Higher margins, geographic diversification and a growing project development pipeline helped boost Yingli Green Energy Holding Co. Ltd.'s (NYSE: YGE  ) performance during a seasonally slow first quarter, but it's still tough going for China and the world's photovoltaic (PV) manufacturers.

The largest manufacturer of silicon solar PV cells, modules, and panels in the world, Yingli Green Energy and its peers have been struggling to survive a period of oversupply, sharply falling prices and a turbulent political and economic environment that has seen sharp cutbacks in solar feed-in tariffs (FiTs) in key European markets and a succession of international trade disputes.

YGE's struggle for profitability
Supply and demand conditions in the global market for silicon PV products have been improving of late, evidenced by increases in average selling prices (ASPs) for silicon PV panels. On the international trade front, a deal between E.U. and Chinese international trade authorities avoided the imposition of what could have been a damaging trade war.

Also boding well, demand for solar energy is on the rise in regions across the world. That bolsters Yingli's prospects, especially in its home market, where half the company's business originates. The Chinese government has doubled its 2017 solar power capacity target from 35 GW to 70 GW over the past year.

That said, Yingli reported a net operating loss of RMB 129 million (US$20.7 million), a -4.8% operating margin, and an overall net loss of RMB 341.8 million (US$55 million) for the first quarter. That amounts to a loss per ordinary share of on its American depositary shares of $0.35. Analysts don't see Yingli generating a net profit this year. 

Yingli shipped 630.8 MWs' worth of PV modules during the quarter, with total net revenues coming in at RMB 2,686.8 million (US$432.2 million). Overall gross profit totaled RMB 421.3 million (US$67.8 million) for an improved overall gross margin of 15.7% and a 16.8% gross margin on sales of PV modules.

YGE: Outlook for 2014
Expressing optimism regarding first quarter results and Yingli's prospects going forward, Chairman and CEO Mr. Liansheng Miao stated,

I'm pleased with the improvement in our gross margin in the first quarter of 2014, which is attributable to the slight increase in average selling price of PV modules and our on-going efforts on cost reduction, and I have confidence in our ability to drive additional improvement moving forward.

Buoying Yingli's outlook for 2014 and beyond, 35% of its PV module shipments went to countries other than China, the U.S., and Europe. That's a lot higher than the 16% that were shipped outside those markets just a quarter ago, in Q4 2013.

Mr. Miao characterized demand from Japan and other emerging markets as "exceptional." Furthermore, Yingli's sales in the U.S. continued to grow, while demand in Europe stabilized. Overall, Yingli's PV module shipments declined in terms of MWs declined, "primarily due to the traditional seasonality and a slightly delay in delivery for projects in Algeria."

Yingli made progress in its effort to expand its higher margin solar PV project development business as well. Looking downstream along the solar PV value chain, Yingli is looking "to transform ourselves from a pure PV manufacturer to a renewable energy solutions provider," Miao explained.

We have approximately 1 GW of downstream project pipeline across China. In the first quarter, we commenced the construction of two ground-mounted PV projects in Hebei Province, which are expected to complete in the third quarter of 2014. We also began to construct 110 MW of utility scale projects and 20 MW of distributed generation projects located in Hebei, Guangxi and Sichuan province in June of 2014 ... Based on the current project development status and the expectation of progress of project pipelines, we expect to develop approximately 400MW to 600MW of PV projects by the end of 2014."

Trade tensions and debt service
The increasingly likely prospect of wider and more costly punitive duties on Chinese exports to the U.S. is a dark cloud hanging over the heads of Yingli and other Chinese PV manufacturers. On June 3, the Dept. of Commerce widened the scope, and amount, of punitive countervailing duties imposed on imports of Chinese silicon PV products into the U.S. 

Yingli is facing the prospect of an additional 27% duty on its exports to the U.S., with the possibility of more to come. Compounding this, India is considering taking similar punitive trade actions.

From a microeconomic standpoint, Yingli's relatively high debt load (debt/equity ratio of nearly 30%) is weighing on the company's financial results. Investors have scaled back their expectations for 2014, with Yingli shares dropping over 40% since mid-March.

Capitalizing on rising solar demand
On the plus side, demand for solar energy is growing rapidly in China, where combating pollution is now a national priority. The Chinese government has doubled its 2017 target for solar power capacity to 70 GW over the past year. Winning solar power project work in China would provide a big boost to Yingli's performance as it seeks to expand its higher-margin project owner/operator/developer business.

Along those lines, Yingli during the first quarter partnered with Shanghai Sailing Capital to create the first Chinese cross-border RMB private equity fund, the primary purpose of which is to invest in Yingli's solar energy projects in China.

Yingli management anticipates conditions improving over the course of 2014. As shipments pick up in coming quarters, management forecasts total PV shipments of 4.0-4.2 GWs for the fiscal year. Industry forecasts call for over 40 GWs of new solar power capacity to be installed this year. 

Continued growth in Japan and emerging markets in South America, Southeast Asia, and Africa augurs well for Yingli as a solar energy project owner/developer as well as a manufacturer. Also helping Yingli's cause are improving margins for silicon PV cells and modules, which should help boost Yingli's margins and pay down its debt as it strives for consistent profitability.

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