Yingli Q3 Earnings Were Weak But Underlying Trends Look Solid

Chinese solar panel manufacturer Yingli Green Energy (NYSE: YGE) reported its Q3 earnings on Thursday. The firm’s revenues declined by about 28% sequentially to $356 million while its operating loss widened from about $51 million to $148 million. Module shipments were also down by about 17% since the last quarter, primarily due to feed-in tariffs cuts in Germany. While the results for the quarter were relatively dull, we believe that the trends relating to the firm’s changing geographic revenue mix and cost reductions were encouraging.

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Shipments Strong, But Prices Still A Concern

Earlier this year Yingli bucked the broader industry trend by upsizing its annual module manufacturing capacity by around 600 MW to 2450 MW. This has allowed the firm to ramp up module shipments significantly – for 2012 the firm expects to clock between 2100 and 2200 MW of modules shipments (about 37% growth over last year). However, things don’t look as good on the pricing front as average price per watt has declined sharply since last year, causing revenues to decline. Given the year to date trends, we expect the average selling price for 2012 to fall to under $1 from about $1.40 last year.

Although the firm has been actively pruning costs (non silicon costs declined almost 20% y-o-y), the decline in selling prices has been more rapid, causing the firms gross profits to contract. For the quarter, gross margins came in at around 0.3%, excluding non-cash charges.

Growth In The Chinese Market Is Encouraging

The firm’s modules shipments to the Chinese market grew by about 74% over the previous quarter, marking strong growth in a promising solar market. The Chinese government has been actively bolstering demand for solar products to help its ailing solar industry. The country’s solar installation target for 2015 stands at around 21 GW. To meet this target, the government is providing incentives like feed in tariffs, investment subsidies and is also providing utility scale solar projects with connectivity to the national grid.

Yingli has a relatively strong position in the distribution network in China compared to peers like Suntech Power (NYSE: STP), which could allow it to expand more rapidly in the Chinese market.  However, pricing in the Chinese market could prove to be a concern as management highlighted that selling prices in China are typically lower than export prices (estimated to be about 10% lower than export prices in Q1). ((Yingli Q1 Earnings Call Transcripts, Seeking Alpha))

On the international front things were positive as the firm supplied panels to large solar plants in Singapore and Latin America. These regions are attractive to Yingli since they have higher electricity costs, which would allow solar power to reach grid parity sooner.

Progress In High Efficiency Modules Space

Yingli forayed into the monocrystalline panel segment with its ‘Panda’ product lineup, which offers better conversion efficiency and lower performance degradation over time.  This quarter, these panels accounted for about 12% of  total shipments and the firm expects that this could grow to up to 15% in Q4. ^[1] Monocrystalline panels are important to the company’s product portfolio since they find favor in rapidly growing markets like Japan, which require more compact panels, and also in the rooftop market in Europe. These panels enjoy a price premium compared to standard polycrystalline panels. ^[1]

Trefis Price Revision

Following the firm’s earnings release and call, we have updated our model to incorporate changes in the firm’s cash position and debt balance. We have also reduced near-term gross margins to below 10%  and selling price per watt to around $1 to account for the year to date trends. On the shipments front, we have increased our near-term forecast for module shipments for the international, German and North American module segments to reflect the better than expected year to date shipments.  Selling, general and administrative expenses have also been marginally reduced to reflect the firm’s year to date figures.

Our revised price estimate stands at $1.93 which represents a 19% premium over the current market price.

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1. Yingli Q3 Earnings Call Transcripts, Seeking Alpha [↩] [↩]