Yingli Solar’s Prospects for Profit Remain Uncertain

The particularly large shipment forecast offered by the company for the EU could be severely reduced if the high tariff scenario is in place

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The largest Chinese solar module manufacturing company, Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE: YGE), published its quarterly results on March 4^th, 2013. The company reported $465M in revenues for the quarter, based on 692MW of module shipments, at ASP, which SPVI estimated at an average of $0.62 per watt.  At negative gross margin of 3.5%, the company described an average processing cost of $0.63 per watt, consisting of non-poly processing of $0.48 and $0.15 per watt of cost of polysilicon. Overall gross margin was negative 8.5%, due to COGS including a $19.4M provision for inventory, while cost of goods sold included other non-cash charges.

In comparison to the $0.10 average cost of polysilicon reported in Q4 by Trina Solar Limited (NYSE: TSL), Yingli has been disadvantaged by purchasing poly at $26 per kg, a price calculated using the company’s average of 5.6 grams per watt. While this specific cost is adding more distance before profit can be reached, at least the company confirmed no-impact status in regard to duties on imported polysilicon, as long as poly purchased is for use in modules destined for export. This was the controversy, which saw another negative impact on tier-1 companies and certainly Yingli was in the middle of it, having contracts with South Korean OCI Chem, valued at almost $2B.  

In the area of operating expenses the company took on more “one-time” adjustments, factors which are anticipated to diminish with Q1 due to stabilizing pricing in the value chain. Those included: a $32.2M impairment of long-lived assets, a non-cash provision for bad debts worth $16.3M and a loss of $9.9M on disposal of certain equipment. Excluding those charges, the total expense was $83M or $0.12 per watt.  

Yingli’s interest payment dropped to net $32M, a 20% reduction from Q3. During the quarter overall financial debt was reduced by $16M, a small drop in comparison to a total of $2.5B in debt, yet operating liabilities increased by $53M of short-term and $33M of long-term liabilities. The corporation spent $102M of its cash. The decrease in cash was partly due to revenue being generated by sales on credit. Accounts receivables increased by $116M as a result. One notable positive was an inventory reduction of $56M (includes 19.4M provision), or 12% from the prior quarter.

Based on the conference call transcript, Q1 2013 expectations for costs were estimated at $0.46 for non-poly and low $20s per kg, which could be translated to $0.12 per watt.  Consequently, the overall processing cost was expected to be in the area of $0.58 versus potential ASP of $0.62 – or perhaps $0.63 – therefore, flat in comparison to Q4 2012.

The company forecasted $24M in general and administrative expenses, in addition to $6M in research and development costs as a template for quarterly spending.  Another estimate was for selling expenses projected as 8% of revenues.  Using expected shipments of 588MW and revenue of $376M, selling expenses would be around $0.05.

If the company reached its objectives, total operating expenses would be at $0.10 per watt using the Q1 shipment forecast.  While potential gross margin of 6% would certainly be seen as an improvement, the 0.04 per watt, applied against operating expenses of $0.10 per watt, would be further reduced by $0.05 of interest expense, leaving a net negative $0.09 per watt.

Conditions of Q1 are also expected to improve only slightly moving forward. The cost of non-poly processing is predicted to drop down below $0.45 by the end of the year.  It could be difficult to see any further reduction in the cost of poly, as spot pricing may reach the vicinity of $25 by the end of the year, essentially halting adjustments to the market made in long-term contracts to date.  At that rate, a further $0.02 can perhaps be saved on processing.

Some cost savings may also be contributed to full utilization. The company is planning to not only sell its entire capacity of 2,450MW, but also to ship a range of 3.2 to 3.3GW of modules during 2013. Those are seen as part of OEM arrangements accomplished within China, which can theoretically offer savings due to some of the remaining capacities still operating under selloff conditions.

In addition, savings could be found in efficiency improvements. The company’s multicrystalline lines and further enhancements to the production line of n-type mono PANDA modules can offer savings to cost based on an increase of the average conversion rate of the existing production capacity. A 1% increase could drop an additional $0.01 from processing costs. 

When those factors are summarized, by the end of 2013, non-poly processing costs could be in the area of $0.43 with poly to stay flat at $0.12. If applied to average shipments of 900MW, estimated on the yearly shipment, for Q2 to Q4, G&A and R&D are at $0.03 per watt. Interest expense at $35M would be at $0.04 per watt.  Adding those together to the processing cost of $0.55, with an estimated 8% for selling expenses, Yingli would need an ASP of $0.67 to break even, even before other financial impacts and taxes. While expectation is for ASP to rise to the level of $0.70 per watt during the year, there are risks which keep this uncertain.

Using January Export Deliveries as a trend, in addition to the potential of 10GW of domestic shipments to Mainland China, the market is expecting to grow to around 35GW in 2013. Based on this expectation, ASP will likely rise as the inventory levels have been depleted and balance is returning to the supply chain, due to capacity reductions in China.  However, potential of tariffs in the EU may dramatically change the outcome of this estimate and complicate the recovery.

The particularly large shipment forecast offered by the company for the EU could be severely reduced if the high tariff scenario is in place, delaying further profitability and even with emergence of a new market, the gap may not be filled.