Beaten-Down Solar Play May Shine Again

02/03/2009 11:14 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says a Chinese solar company is growing quickly, but its stock is very cheap.

Yingli Green Energy (NYSE: YGE) is one of the leading solar companies in China. The company designs, manufactures, and sells photovoltaic (PV) modules and systems for generating electricity. With an annual production capacity of 400 megawatts of PV cells and PV modules, Yingli Green Energy is currently one of the largest manufacturers of PV products in the world.

The company's China-based design, development, and manufacturing facilities provide it with several competitive advantages: cost-effective and efficient manufacturing, technological excellence throughout the entire value chain, growing brand recognition, and a solid customer base. Currently, the company sells solar products under its own brand name, Yingli Solar, to customers in key solar energy markets worldwide. 

Yingli has completed a number of large projects in Europe and China over the past few years. [For example,] Yingli, in cooperation with Solar-Energiedach GmbH NL, designed and installed a one-megawatt photovoltaic system covering the roof of the Kaiserslautem soccer stadium in Germany.

Since 2002, Yingli has been working with China Mobile (NYSE: CHL) to build solar power base stations for the company in western China. And recently, Yingli also won a sales contract to supply 1.4 megawatts of PV modules to the largest university campus solar energy facility at Rutgers University in the US.

The strong demand for Yingli's products has driven the company's business over the past few years and resulted in strong top-line growth. Net revenues increased from 120.5 million yuan in 2004 to 4.1 billion yuan ($556 million) in 2007. Its net income increased from 6.1 million yuan in 2004 to 389 million yuan ($53.3 million) in 2007. And gross profit margin—one of my favorite indicators of a company's operating performance—increased from 20.9% for 2004 to 23.6% for 2007.

In the third quarter of 2008, total revenues grew 73% year over year to $326 million, thanks to continued strong demand for Yingli's PV modules. Net income was $22.2 million, or 17 cents per share, down 16% from the same quarter a year ago due to the depreciation of the euro against the yuan.

Yingli expects to post full-year 2008 revenue of $1.05 billion to $1.11 billion, an increase of 89% to 99% [over] fiscal year 2007. Yingli anticipates its gross margin in 2009 will be at least 24%. It has a strong balance sheet with nearly $600 million in cash [and another] $600 million in authorized lines of credit as of September 30, 2008.

In the current economic and financial environment, Yingli's shares have been fairly volatile. After reaching a record high of $41.50 on December 26, 2007, the stock tanked nearly 90%. Shares are now trading at [less than] eight times this year's earnings, which is very cheap for a solar company. So, I expect the stock to rebound dramatically from here, and I'm targeting $12 by year-end.

Buy YGE under $8. (It closed Monday at around $5—Editor.)

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