Key Takeaways From Yingli Green Energy’s Q1 And What Lies Ahead

Yingli Green Energy (NYSE:YGE), China’s second largest solar company, published its Q1 2015 results on June 5, posting its 15th consecutive quarterly loss. Quarterly revenues grew by about 8.4% year-over-year to about $469 million, driven by strong module demand in Japan, lower-than-expected seasonality in the Chinese market and relatively stable average selling prices. ^[1] However, net losses widened to $58.6 million from about $55 million a year ago, owing to stubbornly high interest costs and a $21 million foreign exchange loss, relating to the weakness of the Euro and the Yen against the Yuan. While Yingli shares soared by over 22% following the earnings, the stock remains down by over 50%this year.

We are currently revisiting our $2 price estimate for Yingli Green Energy.

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The outlook for the firm continues to be mixed. While the company reduced its 2015 module shipments guidance to 3.6 GW from a range of 3.6 to 3.9 GW provided last quarter, it indicated that it expects to become close to break-even or turn slightly profitable during the second half of the year, as it restructures its European operations, cuts operating costs and realizes a greater mix of higher-margin project related revenues. That said, the company’s massive debt load and high interest costs remain a significant concern. The firm’s future prospects will be contingent on its ability to raise additional equity or sell of assets to find its way out of a potential debt trap. Here’s a quick recap of the earnings and what to expect from Yingli going forward.

Japan Drives Module Shipment Growth 

Yingli’s module shipments (excluding shipments to its downstream projects) grew by about 16% year-over-year to 727 MW this quarter, driven by strong sales to the Japanese market. Shipments to Japan increased by more than 100% year-over-year, accounting for 37% of the company’s total shipments for the quarter. The higher shipment mix to the Japanese market helped ASPs remain sequentially flat at about $0.595 per watt, according to our estimates.  However, Yingli’s gross margins on modules declined to about 14.8% from about 16% in the previous quarter, owing partly to lower utilization rates, which resulted in non-silicon costs per watt increasing by $0.01 to $0.39. Margins could remain depressed through Q2 as well, since the company expects a less favorable sales mix (higher proportion of low-margin Chinese sales) while also anticipating high non-silicon costs.

Systems Sales Should Grow In The Back Half of The Year 

Yingli is counting on its downstream solar business to drive its long term earnings growth and the firm has a pipeline of about 1.6 GW of projects in China and 300 MW of projects internationally. Systems revenues for the quarter stood at about $10.08 million, representing a small sequential increase. Year-to-date, the company has grid connected a total of 128 MW of projects and has sold about 54 MW worth of projects to third-parties. The company expects to complete and connect 400-600 MW of solar projects by the end of 2015, out of which 200-300 MW are expected to be sold to third parties. A bulk of the sales expected to take place during the second half of the year.

Operating Costs Fall

Yingli made reasonably good progress on the operating cost front, with operating expenses as a percentage of total revenue falling to 16.4% in Q1 2015, a significant reduction from 22.6% in Q4 2014 and 20.5% in Q1 2014. The reductions were primarily due to lower marketing and general and administrative expenses, as well as the effects of bad debt related expenses recognized in Q1 2014. The company intends to reduce operating expenses by about 20% year-over-year for 2015 by restructuring its European operations and minimizing its marketing expenses. ^[2]

Divesting Real Estate To Payoff Debt

Yingli remains one of the most highly-leveraged Tier-1 Chinese solar companies, with a debt load of over $2.3 billion at the end of March 2015.  On the other hand, the total equity attributable to the company has deteriorated to a deficit of about $90 million, while its cash on hand stands at under $400 million. The company’s interest expenses stood at about $38 million or about 8.1% of revenues during Q1 and this has been a key factor inhibiting its return to profitability.

While Yingli has made some progress on the financing front after the close Q1, paying off a $193 million tranche of a medium-term note that was due in early May, it still has a long way to go. The payment was funded by $81 million in cash from the sale of some land to the Land Reserve Center of Baodoing National High-Tech Industrial Development Zone, and about $112 million in bank loans and other financing facilities. The company expects to receive another $130 to $144 million from the Land Reserve Center if the said land is re-sold to commercial or residential property developers. ^[3] The next two tranches of medium term notes, valued at $161 million each, are due in October 2015 and mid-2016. While the company is looking to divest more real estate to meet its October payment, we believe that it will still need to raise additional equity to better balance its capital structure and find its way out of a potential debt trap, given the weak conditions in the Chinese real estate market.

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1. Yingli Q1 2015 Press Release [↩]
2. Yingli Green Energy’s (YGE) CEO Liansheng Miao on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, June 2015 [↩]
3. UPDATE: How Will Yingli Green Energy Repay Its Debt?, Barrons, May 2015 [↩]