YGE Q1’16 Update

Yingli Green Energy (NYSE:YGE) announced that it is set to turn net profit positive in Q1’16, for the first time since Q3’11. First quarter shipments amounted to 500-510 MW, higher than its guidance of 480-510 MW. Shipments to Japan rose when compared to the previous quarter, as a result of which ASPs increased. Gross margin is expected to come at 18.5-20.5%, from the previous quarter’s 11.8%.

Yingli Green Energy is a Tier 1 solar company with a strong branding, and I always believed that the management’s focus on reducing cost, increasing efficiencies and strengthening the balance sheet will help Yingli attain its deserving position in the future.

“Looking ahead, we expect 2016 to be an important year of transformation for us. We will continue to actively explore methods to improve our operating fundamentals through reducing manufacturing costs and related expenses and pursuing various alternative financing options including restructuring our debts as feasible in order to achieve a successful transformation,” Mr. Miao Chairman and CEO of YGE in Q4’15 investor call.

In the last quarter of 2015, Yingli reported net revenues of ~$328 million on shipments of 505 MW. Q4’15 was marked by 80% utilization rate of production capacity, with total shipments for the year at 2.4 GW. Note larger players like Trina Solar and Jinko Solar shipped close to ~4-5 GW during the last year.

Why Yingli Green Energy can Turnaround

i) Increasing Shipments to Japan – Yingli Green Energy successfully increased its Japanese shipments by over 18% Y/Y in the last year. Shipments to Japan accounted for 30% of the total shipments in Q4’15. The North American market is also gaining momentum. Note Yingli Green Energy was the second largest in 2014, in terms of shipments.

ii) Strengthening Downstream project portfolio – Just two years ago, Yingli had a weak presence in the project development business. But today the company has strengthened its project business and diversified to emerging markets like Africa, Latin America and Algeria. Sales to such markets represented more than 18% of total revenues in 2015. Yingli is a tier 1 solar panel supplier, with a strong brand name which helps it to bag contracts on a regular basis.

iii) Improving Relationships in China – The company successfully bagged module orders worth 700 MW from China in 2016. Yingli is also improving its business relations with state-owned enterprises, funds, EPCs with strong financial background to increase its domestic dominance. A number of supportive policies by the Chinese government is a plus for Yingli Green Energy. China was always a big market for Yingli Green Energy.

iv) New products launch – In May 2016, the company launched its TwinMAX high-efficiency dual glass module – 60 and 72 cells. These modules are made using Yingli’s PANDA n-type monocrystalline solar cells with cell efficiency ~20.5% and average module efficiency of over 17%; power yields are expected to be 30% more than traditional monocrystalline modules. In April, the company announced its new utility-scale product line, the YGE-U 1500 Series to be available in the Americas. These modules are certified for use in projects with maximum system voltages up to 1500 volts DC, with expected installation cost savings of upto $0.05 USD per watt.

v) Increasing Capacity – Despite all its problems, Yingli is going ahead with building a new 300 MW solar panel factory in association with a major Thailand industrial group. This plant will be used by Yingli to sell solar panels to Europe and USA, which have imposed anti-dumping duties on Chinese made solar panels and cells.

vi) Strong Branding – The company hosted the FC Bayern Munich Youth Cup Japan selection event in Japan, for the fourth time alonwith sponsors such as Adidas, Lufthansa and Audi. Yingli Green Energy has also been sponsoring Football in Europe.

Challenges

Debt issues – Yingli Green Energy toppled as a result of excessive debt. Last year in September, we reported Yingli’s massive debt of almost $1.5 billion and its losses, which made it impossible to service the debt. Despite good gross margins, the company could not manage to earn money to lower its debt leading it into a death spiral similar to what we saw for Suntech and LDK Solar earlier. Last month, the company announced its inability to repay its medium term notes. The company is in active discussions to arrange for alternative sources of financing. Though the company is showing improved operational performance, debt hangs on teh company as a sharp sword.

Conclusion

 The company was one of the largest vertically integrated solar companies in China, having presence across the entire PV industry value chain, ranging from crystalline polysilicon ingots and wafers, PV cells and modules to PV systems. However, the company came under the increasing debt burden. Last year was marked by increasing risk aversion in the market with investors becoming wary of companies with excessive debt. We all witnessed the downfall of the once poised to be RE leader SunEdison, because investors felt the company would not be able to honour its debt. YGE will formally announce its results in this month. Valuation is cheap with a market capitalization value of just $103 million.