December 30,2008 - Yingil Green Energy (NYSE:YGE) Still Well Positioned Going into 2009

Dec 30, 2008
Author: Administrator

December 30, 2008 - Yingli Green Energy (NYSE: YGE) is one of the midstream solar companies we touted in 2008, and continue to think is well-positioned in the group. That being said, the stock has been hammered, along with all of the other midstream solar firms. The stock opened on January 2, 2008 at $39.01. Yesterday, the stock closed at $5.34, trading at 0.66x our forecasted sales for 2008 of $1.05 billion (which would represent 88% Y/Y revenue growth, and at about 6x our forecasted 2008 income for YGE at $115.5 million (which would represent 116% Y/Y income growth). So the question is whether the stock is oversold at current levels, and whether it is timely now.
The current stock price reflects a relatively downbeat Q3 earnings report (see below), concern about declining ASPs (management estimates that ASPs will decline by about 15% to 20% in the Q4, and by about 30% in 2009 from 2008 levels) and whether the business will have sufficient cash flow and capital on hand to cover its cap ex requirements in 2009 and planned expansion of capacity to 600MW. Management has iterated that its current cash flow and credit facility, as well as its expected cashflow will be sufficient. The December 23 announcement helps create some confidence that the business will be able to meet its expected $90 million in expected cap ex expenditures in 2009 (which will take capacity from 400MW to 600MW).
On the positive side, polysilicon prices are also declining and this should help lower Yingli's blended poly costs, and unit cost per watt. Management expects this to decline by 12% to 17% in the fourth quarter and in 2009 by 40% to 45% from 2008 levels (which will provide  leverage on gross margins). Yingli intends to move upstream through the purchase of Cyber Power, which owns a poly manufacturing business - a vertically integrated model which is being pursued by other midstream firms like LDK Solar. The question here is whether the timing is right, in light of the fact that poly prices are expected to decline from the current $200 to $250 a kilo range to $100 in the next 12 months.
On paper the move makes sense, and we certainly think companies like LDK will benefit from reduction of material costs and manufacturing costs associated with adding poly manufacturing to its portfolio - integrating the entire PV value chain, and gaining control over all critical aspects ot the production, and even in improving quality through tighter quality controls. Yingli can benefit in all of these manners, and the risks as we see it, are execution, getting the facility integrated efficiently and controlling costs in the process - in addition to ensuring it has sufficient capital on hand operate the integrated business. If it can, then the benefits should far outweigh the margin pressure poly is going to experience over the next 12 months or so. 

Recent Announcements

December 23- Secured $70 million loan agreement with China Development Bank to fund its planned 100MW expansion, which will bring annual prodcution capacity in Q3 2009 to 600MW.
December 19 - Signed sales agreements for 35MW and up to 65MW to two German integrators (20MW to City Solar, w/ option to purchase additional 30MW in 2009; and 15MW of modules to Wirsol w/ option to purchase additional 20MW in 2009).
December 5 - Signed sales agreements with Germany-based IBC Solar for 91MW of modules (through Dec 2009).
December 5 - Reaffirmed 2009 shipment forecast of 550 to 600MW of modules, and GM for 2009 of 24% (or better).

Recent quarterly financial results (Q3)
* Net revenues of $325.5 million, an increase from $289.6 million sequentially and $188 milllion from the same period last year. 
* ASPs were $4.04 per watt, down 3.8% from $4.20 per what in the Q2, 2008 (driven by depreciation of the euro against the RMB)
* Total PV module shipments were up 17.3% to 80MW on a sequential basis. 
* Gross margin was 22.3%, down from 25.8% the prior quarter. 
* Op ex was basically flat on a sequential basis at $17 million, and represented about 5.2% of net revenue. 
* Operating income was $55.5 million, down 4.7% from the prior quarter. 
* Net income was $22.2 million, down from $30.2 million in the prior quarter.

Our Take
We mentioned at the outset the $5.34 represents a 0.6x multiple of our forecasted sales this year, and a 6x multiple of our forecasted income for YGE this year. If we look at the stock in a vacuum relative to its peers and against its most recent quarterly report, we don't think the stock is too oversold. If we look at the midstream solar sector (its peers) relative to the growth prospects of the industry and strong underlying growth drivers, we think the whole group is tremendously oversold, including YGE.
For example, LDK Solar (NYSE: LDK) is trading at 0.77x our forecasted 2008 sales, and 4.25 our forecasted 2008 earnings. Relative to LDK, which continues to outperform all companies in its group, YGE still looks a bit expensive. On the other hand, we think that LDK's current valuation takes into consideration only the risk in the sector (module oversupply, ASP erosion, tight credit markets) and none of the upside (strong secular growth drivers driven by domestic and global legislation, increasing cell efficiencies and the fact that declining prices ultimately bode well for increased end demand).
Our forecasted top-line sales number for YGE in 2009 is $1.45 billion, and our forecasted income is $159 million. We believe that these are conservative and defensible estimates, assuming 550MW of modules (the low end of YGE's guidance) shipped at ASPs per watt of about $2.65, well below industry estimates. Based on these assumptions, the stock is currently trading at 0.48x FY09 estimated sales and 4.33x FY09 estimated income.
Our near term stock price target range for YGE is $8 to $9, a 49% to 68% increase from current levels, which would represent a 1x sales multiple of 2008, and a 0.72x sales multiple of 2009; and a 10x earnings multiple of 2008, and a 7.24x earnings multiple of 2009.

Here is what other analysts are saying:
·         Jesup & Lamont rates at BUY with $11 price target (12/1/08)
·         AmTech Research rates at BUY with $6 price target (11/13/08)

Important Disclosure: The SCPEditor is does not hold any position (Long or Short) in YGE. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.


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