Yingli Looks Likely to Survive the Solar Winter
12/01/2011 4:00 pm EST
Yingli Green Energy Holding (YGE) announced ugly third-quarter results on November 23—and then topped them with even uglier forecasts for the fourth quarter. Shipments will be down 20% in the fourth quarter from those in the third quarter, and average selling prices will fall by 13% to 19%.
But investors expected that. What they want to know about Yingli Green Energy—and about all of the world’s solar companies—is, "Do they have the cash to survive until the solar market turns?" and “When is that turn likely?"
(To see my take on the solar sector as a whole, see my recent post.)
Yingli looks like a survivor of the shakeout in the industry, but that’s not guaranteed. The company has a big capital budget—$600 million spent through the third quarter and another $200 million scheduled for the fourth quarter—that has driven up debt to $2.17 billion in the third quarter from $1.89 billion in the second quarter and eaten into cash.
The worst thing in the current environment is that the capital budget is enough to turn what would have been a modest cash burn in the fourth quarter into a significant blaze. Given that the company finished the third quarter with $929 million in cash, that red ink shouldn’t be an issue in 2011…but it certainly bears watching in 2012.
The big disappointment that Yingli Green Energy will almost certainly have to deliver in 2012 is the writedown of its polysilicon plant. The company decided that the best strategy—given the silicon shortages of a few years back—was to become a vertically integrated manufacturer that produced its own silicon. Now that silicon prices have collapsed, that looks like a bad decision.
Yingli Green Energy believes that its cost of producing its own silicon will fall to $45 a kilogram in the first quarter of 2012, and $35 a kilogram in the second quarter. That would be wonderful, except that current spot prices are around $25 a kilogram.
At some point in the not so distant future, Yingli will have to start writing down the $460 million or so that it has invested in its polysilicon plant to date.
The demand side presents a much brighter story—and this story is a big reason to think that Yingli will survive the solar winter. About 80% of Yingli’s sales go to utility-scale projects rather than rooftop installations. That utility-scale market is relatively healthier, and in that market, Yingli thinks it is picking up share.
On November 30 the company projected that thanks to new feed-in tariffs designed to support wind and solar installations, it expects the market in China to grow to 3 gigawatts in 2012, up from 2 gigawatts in 2011. (Some of Yingli’s competitors think that’s very conservative, and are projecting 5 gigawatts for 2012.)
Because Yingli’s customers include the top five Chinese utilities, which have no problem raising cash for adding solar capacity, Yingli Green Energy projects that it will have about 30% of China’s market in 2012, up from 25% in 2011. That would represent 800 megawatts of shipments in China in 2012 versus just 350 megawatts in 2011.
If you’re looking for a reason that shares of Yingli Green Energy have climbed 26.6% since November 21—despite the ugly report on November 23—to $4.48 at 3:15 p.m. New York time today, I don’t think you need to look much further than that. (Although the rally in China’s stocks in general over the last few days certainly hasn’t hurt.)
I don’t think that any sector that’s undergoing the kind of shakeout that the global solar industry is looking at currently presents a path to steady progress for the companies in the sector. As I advised on my column on the solar winter, this shakeout could take as long as two years to complete.
So there’s no reason to rush out and buy shares of Yingli Green Energy on the recent rally. You can certainly wait until mid-2012, when I think China’s market stands a good chance of moving into a sustainable rally mode because of interest-rate cuts from the People’s Bank.
In the shorter run, I think the shares could continue to run into the end of the year with an uptrend in global stocks in general.
If you already own them, as I do, I think the shares could climb to $6 or so by January. As of December 1, that’s my new target price for these shares, down from a prior $16 target set when I first added the stock to my Jubak’s Picks portfolio back in November 2010.
I wouldn’t automatically sell at $6, but instead I’d look around, sort of like a February groundhog, to see how much longer the solar winter looks likely to last.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares in Yingli Green Energy as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.