Despite Yingli’s costs lagging this quarter, the company is still the most recognizable name in the industry and will remain there for years to come
When it comes down to volume of shipped modules, Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE:YGE) is the undisputed champion of 2012. We have estimated that the company has shipped 607.89MW of modules in the second quarter, a 13.7% increase from the 534.6MW of modules shipped in the previous period. This is also a very impressive 57% increase over the same period of last year. While Yingli’s product is gaining popularity, the company has been faced with the same amount of pressure as other manufacturers. The downward momentum of ASP, as well as combat against its own cost, is a common theme of the last four quarters, and there is no end to it in sight.
It is also clear that Yingli has not been lured to the project or EPC segment. The company has chosen to be sensitive and not invade its own clients’ space. Management is also concerned about the health of its balance sheet to take on strain required to support those projects. It seems this choice does not lack merit. Despite the commoditization label plastered on anything solar, Yingli’s growing shipments seem to confirm its strategy. The company also has been vocal about acquiring customers, who are flocking to it from tier-2 and 3 companies in fear of weakness, which would lead to no support and no warranties. Yet the results state that manufacturing today is a loss-creating enterprise. Without a particular grasp on when and how this can end with stabilized ASP, Yingli is destined to lose money in the foreseeable future.
Based on $488M in revenue, the company had sold its products at an average of $0.80 per watt. This is a couple of cents less than other cost leaders, such as Trina Solar Limited (ADR) (NYSE:TSL) and Canadian Solar Inc. (NASDAQ:CSIQ). H1 shipments included 120MW of Panda high-conversion n-type mono modules, which in the past drew an ASP premium. This number, however, is only 10% of total shipments, so the ASP was influenced by polycrystalline modules dominating deliveries, perhaps even more so in Q2 than in Q1. Another ASP-lowering factor was a 65% reduction in shipments to the US, where the company enjoyed high ASP in the past. Adding an increase of deliveries to China, from a marginal 5% to 14%, along with China being the location of the lowest global ASP, contributed to the rapid devaluation of ASP in Q2. This tendency will be exhibited in the future, since the company plans to extract 30% of the H2 revenues from the region.
The range of shipments recognized in Q2 drew on non-poly costs at $0.55 per watt, which was higher than $0.52 at Trina’s. This is not an issue yet, since the company had just finalized 750MW of new polycrystalline lines, expecting to help drop costs below $0.50 by Q4 of this year. What makes things really bitter is the polysilicon price, which is trapping Yingli in the space no tier-1 should be in. At $0.22 per watt or some $40 per kg, it seems that averages will drop below $30 only in Q4 according to Bryan Li, CFO. This seems to be a distant place from where spot polysilicon is today. Mr. Li somewhat corrected expectations for a more effective decrease with increasing the mix of the spot poly, but this is clearly a matter that has dragged for too long. On the topic of poly, management had explained that China’s investigation into poly imports may not result in extra costs to Yingli. This is very good news, as South Korean OCI Chem is the heavy supplier of poly to the company and is one of the responders identified by government.
Other costs came in the form of the $28M foreign exchange loss and the $13.7M surge of selling expenses due to freight costs and increased shipments. Described as much as a 30% rise for the freight alone, local assembly plants could be a solution; beyond that they may become a workaround for nonsensical import duties.
Hanwha Group, and sharing its solar future, Hanwha SolarOne Co Ltd (NASDAQ:HSOL), just bought the ticket to avoid tariffs with a $323M acquisition of Q-Cells. 750MW of Malaysian-made solar cells can become a part of SolarOne’s modules and be expedited into the US, duty free. 150MW of module and 200MW cell capacity in Germany is a safe place, just in case the EU votes for the tariff in 2013. A well-placed purchase estimated at $0.29 per watt is crowned by a top-class research and development centre with many conversion and innovation records. Hanwha had won the bid over Spanish Isofoton, a company that has attracted various investments and ventures in the past - among them, the South Korean Samsung and the Chinese-based China’s National Offshore Oil Corp and GCL-Poly.
There is no connection today between Yingli and GCL-Poly, with exception of dubious statistic. At the end of June, GCL-Poly had over $5B in debt, while Yingli held third place with $2.7B, kept apart by LDK Solar and its $3.4B. Yingli added $370M in debt just this quarter alone, with most of it, $207M, landing in the cash account, which now totals $822M. It is hard to understand why those sums are being borrowed when the company holds $601M in inventory. Included in it are 450MW of modules worth $360M. Utilization levels are currently at 85%, but by compiling statements from other companies, some of the utilization levels may drop a lot more in order to clear inventory levels. Yingli added $57M to liabilities through an increase to accounts payables, a relatively small sum in comparison to what others managed to save by not paying their bills this quarter. Contrary to Trina losing $45M from unpaid receivable subaccounts, Yingli reduced its own by $26M, nice but nevertheless a teardrop in what is a $500M credit line Yingli has for its customers.
Despite Yingli’s costs lagging this quarter, the company is still the most recognizable name in the industry and will remain there for years to come. Even with the message of a 15% reduction in Q3, an expected 516MW shipment is an easy double over many other names. Yingli will remain the top module seller in 2012, regardless of a 200MW decrease for the full year. The company now estimates top sales to reach 2.2GW.
In a possible change of course by the EU, Angela Merkel, German Chancellor, promised China that Germany will not support trade action against Chinese manufacturers. Considering that SolarWorld is German and the main body behind the application for such action filed with the EU commission, creates an interesting twist prior to this decision as to whether the investigation will be started. The decision should be announced prior to September 8th.