Solar Outfit Yingli Appears to Be Pulling Our Leg: We’ve Read the Fine Print

Yingli Green Energy Holding Company (YGE) has surpassed its Chinese rival Suntech Power Holdings (STP) as the largest photovoltaic (PV) module supplier in the world, based on forecasted 2012 shipments. Given management hasn’t demonstrated it can leverage economies of scale into sustainable profitability, investors remain unimpressed – and the stock price of the vertically integrated solar company remains stuck some 88% below five-year trading highs, as seen in a stock chart.

YGE Total Return Price Chart

YGE Total Return Price data by YCharts

The Baoding, China-based manufacturer announced last week that total shipments of PV products (from modules to solar panels) would exceed 2.2 GW, an impressive increase from the 1.6 GW delivered in 2011. Chairman and chief executive officer Liansheng Miao attributed the volume growth to contract wins for utility-scale power systems and an installation boom in key European markets (like Germany) for its crystalline silicon (c-Si) rooftop panels, attributed to alleged cost advantages over competitor offerings (higher module efficiencies at lower selling prices).

Notwithstanding subtleties of how to define solar conversion efficiency (“cell” efficiency is optimally greater than “panel” efficiency), Suntech, the global leader in crystalline silicon-based PV module shipments since 2010, is painting a different picture of industry dynamics: Last month, the company reconfirmed sovereign debt issues and subsidy cutbacks led to further demand weakness in European markets for its products. With the glutted market for solar panels expected to persist into 2013, management slashed its 2012 guidance to a range of 1.7GW to 1.8GW, compared to previous expectations of 1.8GW to 2.0GW in PV shipments.

Like rival c-Si module manufacturers – Sunpower (SPWR), Suntech, Trina Solar (TSL), and JA Solar (JASO) -- in the current market climate, Yingli is aggressively looking to achieve cost savings through vertical integration and technological improvements, from lower energy consumption in ingot casting, water recycling, and reduced waste in wafer yields to higher module efficiencies. In third-quarter 2012, the company brought non-silicon costs down to $0.53 per watt, from $0.66 per watt last year.

Driven by industry overcapacity throughout the capacity chain, the downstream decline in the ASP of crystalline-based modules has been more dramatic, falling more than 50% in the last 12-months to just $0.60 per watt by December 2012, according to market research firm ENF. Ergo, capacity expansion and improvements in operational efficiencies haven’t helped margins at Yingli – or its competitors – as shown in the following YChart:

YGE Operating Margin Quarterly Chart

YGE Operating Margin Quarterly data by YCharts

“To know how to disguise is the knowledge of kings,” said the 17th century French statesman Cardinal Richelieu. Unfortunately for Yingli, chairman Miao is no emperor. A review of regulatory filings shows that the significant volume growth experienced by the company is more a result of aggressive pricing initiatives – and not – as claimed, a result of superior solar panel performance and an expanding commercial-scale footprint:

• Module efficiencies of its rooftop panels aren’t, on average, much better than its Chinese rivals (lab efficiencies do not mirror the actual performance of rooftop-power conversion rates);

• quarterly revenue derived from the sale of utility-scale projects still totals no more than one-percent of aggregate sales; and,

• when European Union markets started cutting sponsored subsidies, Yingli management re-negotiated prices paid by end-users (permitting them to keep attractive rates-of-return on their invested capital). That the company is still offering easy payment terms to grow nameplate capacity is found in its days sales outstanding (DSO is the average number of days that a company takes to collect revenue after a sale has been made). In third-quarter 2012, as shown in the following Ychart, DSO grew to 130 days, an increase from 93 days in the second quarter.

YGE Days Sales Outstanding Chart

YGE Days Sales Outstanding data by YCharts

Notwithstanding current and new headwinds -- allegations of dumping by Chinese manufacturers in Europe and India -- there is one bright spot for Yingli: “Home! Sweet Home!” – back in the People’s Republic of China. The PRC’s National Energy Administration recently articulated that as part of its non-fossil fuel goals, the declared objective is to increase capacity of installed solar power projects to some 21 GW by 2015, up from about 2 GW in 2011. As the company currently derives only about 20% of total revenue from domestic customers, there is ample room for sustainable growth. Investors should note, however, that in addition to Yingli, there are more than 500 other Chinese solar chain manufacturers, from polysilicon suppliers to module and panel makers, whistling the same tune.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com.

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