Yingli’s Debt Woes Begin To Hurt Core Operations

Yingli Green Energy (NYSE:YGE) posted a larger than expected loss in Q2, owing to weaker panel shipments, high interest costs and lower utilization rates. ^[1] Although the broader Chinese solar industry is doing reasonably well, amid strong global solar demand, lower commodity prices and the currency devaluation tailwinds, Yingli’s massive debt load has put it in a precarious situation, as it has apparently been diverting resources away from core manufacturing operations to service debt. (related: Our View On The State Of Affairs In The Chinese Solar Market) Moreover, there are concerns that weaker firms like Yingli could face further pressure, as the Chinese government – which has been a big backer of the solar industry – could reduce its support, diverting funds into more pressing areas of the slowing Chinese economy. In this note, we discuss some of the key takeways from the firm’s earnings. 

We will be revisiting our $1 price estimate for Yingli, to account for the weaker guidance and earnings.

Debt Creates A Conundrum For Common Shareholders

Yingli’s total debt load at the end of Q2 stood at about $2 billion, out of which about $1.6 billion was classified as current debt. On the other hand, the company’s deficit has deteriorated to about $186 million. Now most of Yingli’s short-term loans are from state-backed banks, who have perpetually rolled them forward and we expect this to continue going ahead. However, the company does face two crucial issues in the form of high interest costs and two near-term debt maturities.

Tianwei Yingli, one of Yingli’s two major manufacturing subsidiaries, has a RMB 1.06 billion ($166 million) medium term note due and payable on October 13, 2015, with another payment of about RMB 1.4 billion ($219 million) due in May 2016. The company has noted that it is looking to meet these payment by selling land, downstream projects and other assets. However, it remains unclear as to how much liquidity the company can raise via land sales, as China’s property market remains in a downturn and also since much of the company’s land bank is likely located in Baoding, a third-tier industrial city. ^[2]

Yingli’s massive interest expenses (mostly cash interest) have also been a big factor inhibiting its return to profitability. Interest costs stood at about $39 million during Q2, or roughly 9% of revenues for the period, eclipsing the company’s gross profits of about $28 million. Yingli and its shareholders are likely to be in a paradox in this regard. In order to find its way out of its current debt trap, the firm would have to raise additional equity – diluting its common stockholders – or it would have to divest more assets, which would further hurt its ability to return to profitability.

Production Outlook Falls Amid Liquidity Constraints

Yingli shipped a total of 727 MW of solar panels this quarter, down from about 888 MW a year ago. The decline is likely due to liquidity constraints – it paid down a $193 million tranche of medium-term notes in May and is preparing to pay off other tranches (mentioned above) – which may be hurting its ability to fund working capital and run operations. ((Yingli Green Energy’s (YGE) CEO Liansheng Miao on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, September 2015)) This has resulted in lower capacity utilization rates and weaker gross margins (down to 6.3% from about 15% in the year ago quarter). Since the company has 4 GW in annual module manufacturing capacity, or roughly 1 GW in quarterly capacity, this would mean that utilization rates stood at about 73% during the quarter. ^[3] The company also cut its full year guidance significantly, indicating that it expects to deliver 2.5 GW to 2.8 GW of panels this year, down from its previous guidance of about 3.6 GW. This is in sharp contrast with key rivals such as Trina Solar and JA Solar, who have increased their shipments guidance to above their nameplate manufacturing capacity.

However, in an interesting move, the company is looking to bolster utilizations by acting as an OEM module manufacturer for an unspecified number of Chinese solar vendors who continue to witness strong demand. Under the agreement, customers will provide the company necessary materials to manufacture panels, while Yingli will only incur costs such as electricity and labor. Although these sales might have lower margins compared to the firm’s own branded panels, they should help bring in incremental cash flows, without requiring additional working capital investments. Additionally, the company expects collection periods for the OEM business to be relatively short (likely monthly), unlike its traditional panel business which sees longer credit periods. These OEM sales would not be listed as shipments, and they would be classified as other income in the firm’s balance sheet. The company estimates that these orders could account for 20% to 30% of its total production capacity for Q3.

Earnings and Guidance Highlights 

• Revenues fell by about 20% year-over-year to $438 million.
• Net losses attributable to the company nearly doubled y-o-y to $96.5 million.
• Cash and restricted cash fell by 28% to $286 million
• Q3 PV module shipments guided at  550 MW to 580 MW
• FY’15 module shipments cut to between 2.5 GW to 2.8 GW, from about 3.6 GW.
• The company expects to recognize a significant non-cash impairment charge on its under-utilized production facilities in Q3 2015

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1. Yingli Q2 Earnings Press Release [↩]
2. UPDATE: How Will Yingli Green Energy Repay Its Debt?, Barrons, May 2015 [↩]
3. Form 20-F [↩]