Yingli's cost per watt: 45 Cents or 50 cents ??

Klothilde

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Friday, February 1st 2013, 10:06am

Yingli's cost per watt: 45 Cents or 50 cents ??

I'm trying to get a better picture of Yingli's non-silicon cost progression and came across the communicational SNAFU in their latest CC. They read their prepared remarks communicating a year end non-silicon cost of "below 50 cents" and then confused everybody by switching to a year-end expectation of 45 cents. See below for an excerp of the SA transcript.

I'm trying to assess the seriousness of the 45 cents claim. Given the cost progression over the last quarters from 57 in Q1, 55 in Q2, to 53 cents in Q3 I would expect a further 1-2 cent drop in non-poly costs in Q4 to 51-52 cents and a year-end figure of 50-51. 45 cents seems out of line to me, and given the communicational snafu there's more reason to doubt. I can imagine that they do have an internal target of 45 cents to put presure on operations and purchasing but that they target below 50 cents at executive board level.

I trust that you guys have a better feeling for the seriousness and consistency of Yingli management and look forward to your assessment.

SNAFU:

Miao Liansheng: …As a result of all the aforementioned efforts, we expect to bring our non-silicon costs down to below $0.50 per watt and poly silicon costs close to industry average level by the end of this year…

Bryan Li:…As we continue to negotiate the material suppliers and a stake committed to technology innovation and operating efficiency improvement, we are confident to bring our non-silicon costs down to below $0.50 per watt and are blended the poly silicon costs to the low 20s in terms of US dollar per kilogram when we exit the year…

Bryan Li:…and as we commented earlier and we currently expect for the poly silicon processing costs, we are target to reduce to roughly $0.45 by the end of this year…

Philip Shen:...I want to ask a clarifying question. I think earlier in the remarks, you talked about non-silicon processing costs, target of less than $0.50 by year end '12. But then later on in the call, you talked about an actually target of $0.45. I just wanted to confirm that that was the case…

Bryan Li:… In the German remark and the German was indicated and our expectation is to reduce the costs and down below $0.50 for the non-poly silicon part for Q4. That is the average cost. So the supplementary comment I made is when we exit this year and I am expecting the non-poly silicon costs will be somewhere close to $0.45. But that is an exit point… (Remark Klothilde: WTF ???)

Mark Bachman:… Bryan, have I heard you correctly? I thought I heard you say that non-silicon costs would possibly reach $0.45 before year end 2012. Is that correct?...

Bryan Li:…Correct.

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rational_judgement

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Friday, February 1st 2013, 10:44am

Here is what I understand:
$0.45 cost on December 31, 2013
< $0.50 for the entire Q4 2013.

That means on 10/01/2013 they will have somewhere around 51 or 52 cents processing cost. Not sure how they achieve that though.

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odyd12

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Friday, February 1st 2013, 11:35am

Have you guys looked at this page?

https://solarpvinvestor.com/database/asp

Pretty much the summary of what is happening in the area of the internal processing there. YGE's 0.17 per watt for poly made them 0.53 in Q3 for non-si processing. Their objective of the 0.45 or under 0.50 is not really that of a stretch.

Look at the Jinko. 0.46. What is really happening is that utilization costs weight heavy on the bottom line. I could swear that Hanwha said they were already at 0.46 but 0.06 per watt low utilization penalty.

So when they will roll out shops to 100% capacities it will not be that hard. Throw the ingot improvements at 17.75% for multi and hitting 20% on Panda should bring them down a bit too.

In regards of inconsistency, I doubt it is dishonesty, more the timeline like RJ says. 90 days in the quarter different pricing snapshots. My big "if" on Yingli is how they get 0.17 to .11 for poly? OCI is reluctant to drop prices, nor I could see their prices to be that low. Their plant is dormant and not much use anyway when it was running. I would be very surprised when I see 20/kg avg. although TSL did pretty good job with it so maybe they can too.

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explo

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Friday, February 1st 2013, 11:38am

In a declining market the discrepancy between cost of production end of quarter and average cost of goods sold in the quarter (with share of goods sold from finished goods inventory entering the quarter produced/purchased in different steps in prior quarters) can be big.

Yge said 45 cents entering 2013 and shave 5-8 cents off that in 2013. So as low as 37 cents non-Si cogs in 2014 is guided for.

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Klothilde

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Friday, February 1st 2013, 12:39pm

@rational_judgement: What you say makes sense: Enter the quarter @51-51 and exit at 45 to achieve an average of 48-48.5. I agree that this is VERY challenging in light of their track record of stripping 2 cents off per quarter

@odyd: Of course I know that page, I think I use it daily

My understanding from the CC is that YGE's 53 cents non-poly costs in Q3 are calculated at full utilization. I agree that underutilization can add several cents to the costs but apparently this is not the case with the 53. Also, Panda volume is projected to be only 15% of total volume in Q4. I agree that the poly price is the biggest challenge for YGE.

@explo: The 53 cents of YGE in Q3 exclude the inventory write-down charge for that quarter. What I don't know if that write-down charge applies only to "idle" inventory or also to inventory that goes into the production of modules. If it only applies to "idle" inventory and expensive inventory affects production costs through FIFO than I can side with your point of discrepancy between average and end of year costs. Still, a discrepancy of 45 cents at year end and "below 50" cents at mid-quarter is not easily digestible imho.

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odyd12

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Friday, February 1st 2013, 1:27pm

This is really good conversation.

My understanding of inventory management has three categories of possible adjustments. Trina calls one of them as inventory effects. This is basically loss of value due to market conditions. A company evaluates value of inventory (used and not used) at lower cost and the market. This will be taken out in COGS and value of inventory will change in the BS. In this case company will price inventory to the lower cost and will take the write-down or adjustment or inventory effect.

Second one is simply write off of obsolete, not salable product. One has to be careful to differentiate between the two , as companies generally do not report adjustments but mostly write-offs. This is why gross margin on processing does not look the same as gross margin on cogs.

Last one is the cost of carrying inventory which appears in cogs, like storage costs, etc. which would also add up.

0.53 excludes non-cash charges, but payroll or labor is part of processing, so it is a cash-charge, I would argue that they had not laid off everyone to drop to 60 or 80% they were operating at. They also paid bills for utilities etc, storing of inventory and so on, so even if I am 50% wrong there is still a penny or two to squeeze. I think that materials will go up in Q1, and therefore we will have a paradox.Anything which was adjusted down in q4 will have a higher price in Q1. Materials are going up pushing ASP. Technically they can increase gross margins by this.

I should add that inventory cost for finished goods is the all-in- processing cost. Only when that cost is below the market, the realized value becomes associated with prevailing market price. This is why in so many cases losses have been overstated due to inventory dropping like a stone.