Why Yingli Earnings Won't Shine Just Yet

Yingli Green Energy (NYSE: YGE) will release its quarterly report on Friday, and investors have become increasingly optimistic about the prospects for the Chinese solar industry after some favorable developments in the space. Yet those following the company need to understand that Yingli earnings are a long way from turning a profit, and it'll take considerable work for the company to achieve its long-term financial goals.

Yingli is just one of many companies in China's solar sector that have struggled under tough conditions in the market for solar modules, as a glut of supply has brought on low prices that pushed Yingli's gross margins into negative territory during each of the past two quarters. Yet some more encouraging signs of progress in the industry could finally get the company moving in the right direction. Let's take an early look at what's been happening with Yingli Green Energy over the past quarter and what we're likely to see in its report.

Stats on Yingli Green Energy

Source: Yahoo! Finance.

Can Yingli earnings have their day in the sun?
In recent months, analysts have gotten more optimistic about the prospects for Yingli earnings, narrowing their June-quarter loss estimates by a nickel per share and reining in loss projections for next year by more than five times that amount. The stock has responded favorably to that news, with gains of almost 30% since late May.

Yingli has already given investors a glimpse of what they can expect from its second-quarter report, as the company announced preliminary figures earlier this month. Shipments of solar modules rose at a greater than expected rate of 23% to 24%, while gross margins are seen coming in between 11% and 12%, a big improvement over recent negative figures. That's consistent with results we saw from peer Trina Solar (NYSE: TSL) last week, whose gross margins jumped to 11.6% and which raised its guidance on shipments for the full year by about 300 megawatts.

Still, dealing with large debt levels is a big barrier to Yingli and its peers turning a profit. Trina's results were good enough to get it to break-even status, as interest on about $1.1 billion in debt added to losses. With Yingli sporting more than twice Trina's debt levels, it needs even stronger gross margins to end up with a net profit.

One vision of Yingli's future might get clearer once the financial problems surrounding Suntech Power (STP) resolve themselves. Suntech got creditors to agree to an extension on more than half a billion dollars in debt, but the deadline for presenting a viable restructuring plan is this Friday. If Suntech successfully survives its debt crisis, it could present a road-map for Yingli, which could eventually face the same dilemma as it struggles to deal with its extensive debt load.

But the resolution of trade disputes between China and Europe will put Yingli, Trina, and their peers to the test. A new price floor for solar panels of $0.74 per watt could potentially help Yingli, as its average first-quarter selling price was almost 10% lower. Yet if higher prices force Yingli to lose market share to rivals Trina and Canadian Solar (CSIQ -0.38%) on the basis of quality, then the net impact could end up being negative for the company.

In the Yingli earnings report, focus on what the company sees coming down the pike in the aftermath of the European trade agreement as well as China's decision to add 35 gigawatts of solar capacity by 2015. Once investors get a better handle on whether the industry will get out from under massive amounts of debt, it'll be easier to plot Yingli's course forward.

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