Yingli Green Energy
, one of China's leading solar companies, has been nagged by Wall Street and investor concerns over its plans to expand into polysilicon production.
Yingli's plans to ramp up a polysilicon plant have been part of the larger debate over the move by solar module players to internal poly production. As the price of polysilicon has plummeted from the highs that just a few years back made such strategies seem a no-brainer, Yingli has suffered as much as any solar stock in trying to explain the value of its polysilicon plant production plans.
These concerns about Yingli Green Energy's move into the polysilicon production market were likely behind a press release issued by the Chinese solar company on Thursday morning.
If that's the case, it seemed to work. Yingli Green Energy shares were up 4% on Thursday morning, to the Chinese solar stock's highest share price in two months, above $13.50.
Of course, solar companies manufacture a lot of "noise" in the form of press releases, but that's part and parcel of massaging the market message in any industry. Yingli may have felt a need to get some positive press out into the market. Some of its biggest Chinese competitors were getting big endorsements this week, too.
The China Development Bank announced
close to $12 billion in loans for the two biggest solar module players in China:
What did Yingli say in the release on Thursday morning? The Chinese solar company said that it is near the end of its trial run for a 3,000 metric ton (MT) polysilicon plant and expects to reach full production in mid-2010. The timeline was in line with previous statements and, thus, all on its own, didn't seem like much of a game changer.
The more important statement in the Yingli Green Energy release may have come after the company said it was on pace for the mid-2010 production. "In addition, the Company confirmed that it has no plans to further expand its polysilicon manufacturing capacity beyond the current 3,000 MT in the near future."
Of course, "near future" is a vague term, but there had been concern among investors that as the polysilicon plant has the power to be a drag on earnings, any major expansion of capacity would continue to exert an outsize influence over the market view on Yingli shares.
Adam Krop, an analyst at Ardour Capital Management, was among the first analysts to
raise concerns about the Yingli Green Energy polysilicon plant expansion early in 2010.
Krop said on Thursday that even though the wording of the Yingli release was not definitive in terms of limiting any polysilicon plant expansion beyond 3,000 MT, he believes Yingli will stay at that level of poly plant capacity for a while.
"I don't see Yingli getting beyond that soon. Anything beyond the 3,000 MT mark would be a drag on business, a significant source of depreciation, especially for a vertically integrated solar company," Krop said.
Krop added that Yingli management more or less stated the same aim in its last earnings conference call. The Ardour Capital analyst does not think there would be a trigger for a further polysilicon plant capacity expansion by Yingli, unless the solar market demand reaches beyond capacity and polysilicon pricing rises significantly, and this change in the supply-demand change is hard to envision currently.
Of course, there is still the potential for Yingli's plans to change, and the "near term" certainty to morph into a polysilicon plant expansion that catches the market by surprise. Still, given general investor concern and Krop's comments that any expansion beyond 3,000 MT would be a source of depreciation for Yingli, it seems reasonable to conclude that Yingli is being sensitive to the drag that its polysilicon plant has already exacted on its shares.
In that case, it comes back to pricing of Yingli shares. Did they fall enough as a result of the general solar sector pressure earlier in 2010, and the polysilicon plant-specific pressure on Yingli shares, to reach an attractive valuation?
Ardour Capital's Krop says that the polysilicon plant will continue to be a key source of concern for many analysts and investors, particularly with Yingli's 2010 second half cost structure as the plant comes on line. Krop said the Chinese solar company has taken a little business depreciation during trial production in the first half of 2010, but that's not as significant as the depreciation that can be expected in the second half of 2010. Yingli is not likely to reach its stated goal of producing polysilicon at $35/kg -- which would be well below current spot market pricing -- until mid-2011.
Nevertheless, after Ardour Capital downgraded Yingli because the Chinese solar stock had moved well above its $15 price target -- Yingli was near $19 a share at the time of the Ardour downgrade -- Yingli shares fell to as low $11.12 in February.
Ardour Capital still has its $15 price target on Yingli, but the decline in Yingli's share price earlier this year made the analyst put a buy rating back on the Chinese solar energy stock.
"We didn't change our model significantly after the last earnings conference call, but from a valuation perspective, we liked Yingli. It hit a low point and it became a valuation call, even sticking with the same numbers," Krop said.
Yingli also received a coverage initiation at a buy from Auriga Securities, and a price target of $18.
Ardour Capital and Auriga Securities have a gap of $3 between them in Yingli valuations, and it was when Yingli Green Energy raced above $18 in early 2010 that Ardour felt compelled to downgrade the shares. Still, with Yingli shares at $13.50 on Thursday after their 4% gain, even moderate bulls on Yingli have reason to view the solar stock as a buy.
Yingli isn't alone in its rally, though it rally has come later than most other favored solar energy stocks.
Many solar shares have been rallying of late on the brighter global demand outlook for solar.
In the case of Yingli Green Energy, the global solar demand outlook lifts all shares, but making its intention more clear to limit the drag on earnings associated with the polysilicon plant might be an important note for the Chinese solar company to continue sounding.
It will no doubt be in issue in the "near future" as Yingli's second-half earnings take into account the costs of running the fully integrated polysilicon production plant.
-- Reported by Eric Rosenbaum in New York
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