Now it's all politics: Sell Yingli Green Energy
07/31/2013 7:47 pm EST
The ADRs of Yingli Green Energy (YGE) have climbed off the floor (a low of $1.70 on April 3, 2013) to soar 136% to $4.01 on July 31, 2013.
The move, unfortunately, does not reflect a significant improvement in the global market for solar cells and modules. Prices remain stubbornly low and profitability remains a hope. Yingli has one of the lowest costs of production in the Chinese solar industry at an estimated 70 cents a watt, according to Morningstar. The recent agreement that avoided a trade war with the European Union set a minimum price of 75 cents per watt and capped Chinese imports at 7 gigawatts or about half of projected European demand. The rest of China’s production—and China’s solar production capacity hit 55 gigawatts in 2011—will have to be dumped…excuse me, I mean sold… in other markets at lower costs. Some of China’s more financially pressed (i.e., bankrupt) solar companies have been selling at prices near 30 cents per watt.
From here on the price of Yingli Green Energy’s stock will depend on politics in Beijing that will pick winners and losers in the sector and determine which companies get the financing they need to survive and which won’t
I think the odds are that Yingli will wind up in the politically favored group but frankly I’m basing that judgment on a belief that no company runs up $2.5 billion in debt in China without really good political connections.
But any estimate of current political clout that is based on past political clout runs into the possibility that the system is changing in China. For example, local governments, which were a major source of loans either directly or through pressure on local banks, have largely run out of cash. They may want to continue their support but many simply do not have the means. Similarly, the national government is putting pressure on banks to rein in lending. Who gets scarcer capital remains to be seen. And it looks like the Beijing government is about to pick winners and losers in the sector. One interpretation of the recent deal that settled the potential trade war with Europe is that it gives Beijing a way to thin the ranks of the 140 or so Chinese solar companies.
About half of Yingli’s $2.5 billion in debt is composed of short-term loans that Chinese banks have been willing to roll over. According to Morningstar’s calculations, Yingli’s operating cash flows for 2013-2017 will be less than half the level of its outstanding obligations. To survive, the company will require that its banks extend their loans again and pretend that the company can pay.
We had another rally in Yingli’s ADRs back from November 21, 2012 to February 12, 2013 that took prices up 153%. The ADRs gave back much of that in a 51% drop from February 12, 2013 to April 3, 2013.
Given my inability to predict with any confidence much higher than guesswork which way the political winds will blow that determine access to capital in China, I’ll sell here.
Yingli Green Energy has been a member of my Jubak’s Picks portfolio http://jubakpicks.com/ since November 11, 2010. For that period to July 31, 2013 the position shows a 62.4% loss. That’s terrible but still better than the 87% loss I was looking at on November 21, 2012.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Yingli Green Energy as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.