Yingli Bankruptcy

The largest producer of solar panels in 2013 is fast slipping into a point of no return. The last quarterly result of Yingli Green Energy (YGE) saw both its revenues and margins plummet, as the company ran into liquidity issues. Without enough money to buy raw material, the company was forced to do tolling for other larger Chinese competitors at low margins. Low utilization also led to a hit on margins. Yingli has a massive debt of almost $1.5 billion and it has been losing money constantly over the last 3 years. This has made it impossible to service the debt. Despite good gross margins, the company has not managed to earn money to lower its debt. Now facing a severe money crunch, the company seems to be going into a death spiral similar to what we saw for Suntech and LDK Solar earlier.

It seems that the No.1 ranking of solar panels is a jinx. First Q-Cells went bankrupt after being the biggest supplier of solar cells in 2008, then it was Suntech and now Yingli seems to be following. Debt has always been a concern for Chinese companies such as Renesola and others. The low margins and need for large capex makes this industry vulnerable to debt traps, as is being seen in Yingli’s case. Though the Chinese government and banks have backed large solar companies, these companies have over-extended and failed. Competition in the solar industry remains intense, despite the bankruptcies of thousands of solar companies. This is due to the fact that overcapacity has never really gone away, with other larger companies buying the capacity and running them. Suntech still runs under Shunfeng, while LDK operates under a state owned company. This makes it difficult for even efficient companies to run.

However, I think this new wave of bankruptcies should allow the industry to become more stable and sustainable. Hanergy and Yingli are both going down and this should help the large established companies such as Trina, Jinko and others.

If the Chinese hard landing scenario comes about, then lots of nonviable solar panel capacity will get removed leading to good times for the leaner and better organizations. Note solar panel costs have come down dramatically because of the overcapacity and competition, which has been great in pushing up global solar demand exponentially. However, most of the industry has failed to benefit as many stocks still are down 80-90% from the peaks reached in 2008. The returns and margins have never really gone to the high levels reached earlier, when solar industry was becoming a mainstream industry.

The current low sentiment towards the solar stocks is a good time to pick up multi-baggers. The stocks can go down much more, as the solar sector has a super high beta. In the last downturn, excellent stocks such as SunEdison and SunPower went for low single digits. This can happen again if the stock market crashes. The solar sector is not a utility industry with stable profits and low competition. This makes the investors abandon the sector giving great opportunities for buyers.