Yingli Green Energy (NYSE:YGE) Should Outperform from Current Levels

Jun 05, 2008
Author: SCP Editor

June 5, 2008 – This morning we have to pound the table on Yingli Green Energy (NYSE:YGE),  a leading vertically integrated solar company. All signals for this business point towards growth and it has not disappointed on an historical reporting basis. Last week we began recommending the stock at the $19 level writing that “given current multiples, and the stated guidance we think the stock is cheap. On a P/S basis, currently at 3.38, against the forecasted revenue guidance, we think the trading range for YGE should be closer to $27 to $29”.  This is about 50% higher than current levels.

We cite the company’s recent Q1 financial results as reasons to consider the stock:

·         Net revenues of $227.5 million up 9.8% on a quarterly basis and up 272.2% Y/Y.

·         PV module shipments of 54.6 MW, an increase of 7.3% from 50.9 MW in Q4 2007 and up 274.4% from 14.6 MW Y/Y.

·         Gross profit of $55.9 million on gross margin of 24.6%, up 9.1% from the GP of $359.6 million reported in Q4, 2007 and an increase of 337.8% Y/Y.

·         Net income of $31.9 million, an increase of 61.5% on a Q/Q basis and 2,580.5% Y/Y.

The secular trends are in solar’s favor – rising oil prices, climate change issues and legislation. We remain tremendously bullish on the sector and have been a steady advocate of other leaders including LDK Solar (NYSE:LDK) which has risen from $31 to $42 since our April 24 recommendation on it. YGE is another company that we think is extremely well positioned to benefit from these dynamics.

To be sure, the sector is volatile, and often misunderstood. Some MENSA analyst over at Merrill downgraded numerous companies about a week ago ahead of Germany’s decision whether to cut subsidies to solar companies (Germany is close to 50% of global solar consumption). We thought the downgrade was myopic in light of the fact that solar consumption is less than 1 percent of global energy consumption and so many other countries are just coming on line that will drive growth, in our estimates to about 7 to 10 percent consumption by 2030. As it turned out, Germany kept its subsidies and stocks rebounded.

Solar uptake is going to be slowed until it can get closer to grid parity in terms of cost per kWh. But it is well on its way, and the leaders in this industry are already posting strong earnings (pace YGE’s $31.9 million in net income, up 2,580.5% on a Y/Y basis). And anticipated growth remains compelling. YGE is expanding capacity form 200 MW in July 2007 to 400MW this year and 600 MW next year to accommodate. At current levels, we think the stock is well worth accumulating.

What the Analysts Are Saying

·         June 2, 2008 – Citigroup upgrades from Hold to Buy. Stock closed at $20.79.

·         April 16, 2008 – Lehman Brothers initiated at Overweight. Stock closed at $21.79.

·         February 27, 2008 – Banc of America downgraded from Buy to Neutral. Stock closed at $16.90.

·         January 17, 2008 – Jesup & Lamont upgraded from Neutral to Buy. Stock closed at $25.17.

Disclosure Note: SCP Editor is LONG Yingli Green Energy.