With energy prices on the rise once more, and some pundits questioning the sustainability of high gas prices, investors have turned their attention again towards solar power, which is in high demand in developed markets such as Europe, South Korea, China and the United States. Investors sniffing out the best solar panel manufacturers have followed their noses straight to China, where extremely profitable solar cell and panel manufacturers such as Jinko Solar (JKS: Charts, News, Offers) and Yingli Green Energy (YGE: Charts, News, Offers) have thrived. Traditional solar panel technologies, not thin-film ones, cost 20-30% less to manufacture in China than in Europe. Both Jinko and Yingli have experienced similar growth, with gross margins hovering around 33%. Both companies produce photo voltaic (PV) modules for solar power.
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Yingli’s primary global markets include Germany, Spain, Italy, Greece, France, South Korea, China and the United States. Of these, Germany is the world’s largest market for solar panels due to high government subsidies, although the government has recently announced it will reduce subsidies by 13%. Whether or not this will impact its import of Chinese solar panels remains to be seen. China’s own solar market is projected to become the world’s largest by 2014. Solar investors are worried that with too many manufacturers crowding the market from many different countries, a price war is imminent, which will cause deteriorating margins in exchange for market share.
So far, this has not been the case for Yingli. On November 19, the company announced a gross margin of 33.3%, above its original guidance of 31-32%, and well above the 22.5% it posted the same period last year. Operating margin was reported at 22.4%. The company reported a profit of 465.1 million CNY ($68.2 million USD) up from 120.8 million CNY last year. That’s nearly a quadruple increase in profit, with earnings per depositary share rising from 0.79 the previous year to 2.92 this quarter. Total revenue increased 48% to 3.28 billion CNY ($490.9 million USD). These numbers beat the analyst consensus of $478.2 million USD in revenue.
While its competitors low-balled guidance, Yingli offered a slightly rosier picture with flat sales in the first half of 2011 followed by a slight decline in the second half. While this limits its growth potential for the time being, Yingli has ambitious plans for expansion, as evidenced by its investment in a new silicon plant for mono-crystalline wafers which will begin production by the end of 2010. Its expansion plans have been aided by low financing from Chinese financial institutions, which allow it to expand quickly even though its initial returns will be low. By producing its own silicon wafers, it no longer pays a middleman, and over time will increase its operating margins substantially. The company recently entered into contracts to deliver over one gigawatt of PV modules throughout 2011. “We are answering increasing demand in new and emerging markets,” said CEO Liansheng Miao of the new contracts, “including Italy, France, England, the United States, and China.”
Higher operating margins will give the company an edge over competitors such as Jinko should a pricing war begin, and give it a cushion of safety should push come to shove. In addition, China’s government usually gives preferential treatment to its own national brands over imported ones, which will boost its sales within the country and lock out or handicap foreign competitors such as First Solar (FSLR: Charts, News, Offers). For now, if Yingli plays nice with its handful of Chinese competitors, it will have no problem meeting, or most likely beating, its lowered guidance. Pessimists believe that the solar industry will lose approximately three gigawatts of business in the coming year, mainly due to lowered and eliminated subsidies throughout the European Union, especially in Germany and the Czech Republic. These problems will likely be exacerbated by the ongoing contagion in Europe.
However, with a forward P/E of 7.19, and a PEG ratio of 0.3 and a stock price hovering around the $10 range, this is one solar stock that is getting too hot to ignore.
Other News About YGE
Yingli Can Sit Out a Price Warand Profit
Jim Jubak discusses the possibility of a solar price war.
Yingli Green secures 1 GW contracts for 2011
Yingli Green Energy hits sales target for 2011 deliveries a month early
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
