Yingli Green Energy Price Estimate Cut As Debt Concerns Hurt Operations

We are reducing our price estimate for Yingli Green Energy (NYSE:YGE) to about $0.50 per share, roughly in line with the current market price, due to concerns over the company’s massive debt load, chronic lack of profitability and sharply lower full year guidance. Additionally, there are concerns that weaker solar names such as Yingli will face pressure, as the Chinese government – which has been a big backer of the solar industry – could potentially reduce support, diverting funds into more pressing areas of a slowing Chinese economy. In this note, we take a look at the rationale behind our revised price estimate for Yingli.

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High Interest Costs Creating A Debt Trap

Yingli’s total debt load at the end of Q2 2015 stood at about $2 billion, out of which about $1.6 billion was classified as current debt. The debt is resulting in massive interest costs (mostly cash interest), hurting Yingli’s ability to 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 roughly $28 million. Yingli and its equity holders may find themselves in a paradox in this regard. In order to claw its way out of its current debt trap, the company may need to raise additional equity at a depressed valuation – significantly diluting its common stockholders. Alternatively, it could divest more assets, but that would further hurt its ability to return to profitability. ((Yingli Q2 Earnings Press Release))

Diverting Resources Away From Operations To Service Debt

Yingli’s leverage is also forcing it to divert resources away from core manufacturing operations towards debt payments. The company paid down a $193 million tranche of medium-term notes in May and is preparing to pay off (or restructure) tranches due in October 2015 and May 2016. This is stressing the company’s liquidity position, hurting its ability to fund its working capital needs and run operations. During Q2, shipments fell to 20% year-over-year to 727 MW and the company has cut its full year guidance to 2.5 GW to 2.8 GW, down from about 3.6 GW. This is in contrast with key rivals such as Trina Solar (NYSE:TSL), who have increased their shipments guidance to above their nameplate manufacturing capacities. Now, Yingli has indicated that it intends to act as an OEM module manufacturer for other Chinese solar vendors. While the move should bring in incremental cash flows, without calling for additional investments, it’s likely to be low-value work.

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