Yingli Shines Among Solar Energy Stars

October 10, 2007: 08:05 PM EST
Oct. 11, 2007 (Investor's Business Daily delivered by Newstex) --

As solar stocks continue to power ahead, newcomer Yingli Green Energy is casting a long shadow on its rivals.

The Chinese solar company has seen its stock soar more than 150% since its debut in June.
Most other solar shares have also soared, though their gains over the same period have been far less dramatic.Analysts say the company is catching more attention with new supply agreements to ramp up production. It's also got the size and scale to drive profits and attract the best customers.

"I believe this is the best-positioned company in China," said Jesse Pichel, an analyst with Piper Jaffray (NYSE:PJC) who has an outperform rating on the stock. Yingli YGE has been a Piper Jaffray banking client, and the investment bank expects to do more business with the firm.
There's no doubt that the company is in a hot market. The solar industry continues to grow as governments around the world pour money into programs to spur "clean energy." Companies like Yingli are in the photovoltaic segment of the solar industry that helps businesses and homeowners tap the power of the sun via rooftop solar panels.

In the second quarter the company reported sales of $118 million, up more than 150% from the year-ago period. Thomson Financial had no official estimates for the newly traded company's quarter, but Pichel says sales beat views. The company earned 6 cents per share for the quarter, which the company says also topped estimates.

That's drawing more interest from bigger investors to Yingli and other solar stocks, analysts say.

"Part of it has just to do with momentum in the sector," said Adam Hinckley, an analyst with CIBC World Markets. "There's a lot of institutional money that has not really been involved in the sector. There is now capital inflow into the sector." Hinckley has a sector performer rating on the stock, and his firm has a banking relationship with Yingli.

Although Yingli is new to the U.S. stock market, it's one of the oldest Chinese solar companies around, founded in 1998, Pichel says.

Through its subsidiary Baoding Tianwei Yingli New Energy Resources, the company keeps its costs low with a business model that says, in essence, more is better. The company has brought just about every step of the manufacturing process in-house. Analysts note that Trina Solar (NYSE:TSL) TSL is moving toward this vertical model as well.

The only step Yingli excludes during production is the actual manufacturing of silicon, the basic material used to make photovoltaic solar modules.

After Yingli buys the silicon, it makes the basic polysilicon ingot, then the silicon wafers, then the actual photovoltaic fuel cells. From there, it makes the larger modules and finally the complete solar-energy system.

Miao Qing, Yingli's director of investor relations, says the company has all of its manufacturing process at one central site in China. That means there are no extra transportation costs to move products from one site to the next.

Perhaps most importantly, Yingli avoids paying third-party providers.

"Why let your supplier make margin on wafers when you make the wafer?" Piper Jaffray's Pichel asked. "And why let your supplier make the ingot when you can make the ingot?"
The company had gross margins of about 23% in the quarter, easily beating out other solar players such as China Sunergy CSUN, according to Hinckley.

The company has found the right target market. About 80% of the company's sales come from Spain, where solar expansion is on a tear, Pichel says. Government incentives are a big help in expanding megawatt capacity.

"We thought it was going to be 300 megawatts (of solar) in 2008," Pichel said. "Now it looks like it's 500 megawatts."

China itself is opening up with its own set of government incentives, which could be finalized by the end of the year.

To meet demand, Yingli is expanding production with new equipment. The investments should double its 2007 manufacturing capacity by the end of 2008. Analysts say capacity could then rise 50% in 2009.

Pichel says the company's size should help make it an attractive customer for polysilicon makers.

That's important, since polysilicon is in short supply in the industry. Companies that can't get enough polysilicon can't meet their manufacturing targets.

For example, China Sunergy saw its stock slump 19% in one day in July after announcing difficulties in getting enough polysilicon.

CIBC's Hinckley says he had hesitations about the company's ability to meet supply and manufacturing equipment goals when he initiated coverage in July. But in early September he saw signs that the company's prospects were better than he'd first thought -- and the stock began its big surge.

Later in September, Yingli announced a new deal with Wacker Chemie of Germany. Wacker is set to supply Yingli with polysilicon from 2009 to 2011, enabling it to produce more than 80 megawatts' worth of solar modules over the life of the contract.