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Firstly, China’s National Energy Administration announced a bomb in May 2018. They announced that they are cutting substantial parts of solar photovoltaics subsidies. That has seriously affected Yingli Green Energy.
Therefore, the consensus view is that solar panel demand in China to fall by about one-third in 2018. As well, and more importantly, China is the world’s largest solar energy market. Therefore, this policy change by the National Energy Administration has weighed on global average selling prices for solar panels. This change will directly weaken the profitability of manufacturers.
Yingli Green Energy Holding Company Limited (NYSE: YGE) is the tenth-largest operator by shipment volume, has been battling financial distress more than three years. However, it seems that Yingli's risk of corporate failure has substantially increased in the last few quarters. Also, their proprietary FRISK® score highlighted Yingli as one of the most troubled inthe solar industry. This shows that large publicly traded corporations canfall. Fall into distress. Thereby, ultimately exposing their customers andsuppliers to material financial risk.
Most importantly, CreditRiskMonitor helps risk professionals stay ahead of such hazards, as we offer credit reports with deep analysis that are updated daily. Our commercial credit report coverage exceeds 58,000 public companies worldwide. With our services, risk management professionals proactively show healthy and distressed companies across many industries and geographies. In China specifically, the FRISK® score covers more than 4,000 companies. Most noteworthy, their subscriber base includes risk management professionals from more than 35% of the Fortune 1000. In addition and as well as many other large corporations around the world.
In addition, Tier-1 panel manufacturers, such as First Solar Inc., SunPower Corporation, Jinko Solar Holding Co Ltd. ,and Shunfeng International Clean Energy, have been reporting mixed annual results on solar project sales. But overall, these U.S. and Chinese-based operators have averaged healthy double-digit gross margins over the last five years. During this time, the broader industry has massively improved efficiency and reduced the costs of panel products – yet this trend has been a problem for small operators. For example, Germany-based Solarworld AG could not handle persistently low panel prices and filed for insolvency last year. With the latest Chinese subsidy cuts, panel oversupply appears to be an issue once again.
The FRISK® score can help credit and procurement professionals quickly distinguish between solar operators that are distressing and those that are not. That's legally so many counter-parties of all kinds to a lawsuit. That is including utilities, solar installers, polysilicon suppliers, and even competitors can check manufacturers that are susceptible to distress and failure. The riskiest operators are those with weak competitive positioning and poor balance sheets – and Yingli falls right into this category.
In conclusion and after reporting full-year fiscal 2017 results, Yingli’s auditors raised substantial doubt. Doubt about the company’s ability to continue as a going concern. Yingli has been trending in the FRISK® “red zone” for a long time! More importantly, and as of July 2018, it held the worst possible FRISK® score of “1”. On the “10” (lowest risk) to “1” (highest risk) scale, this bottom-rung score indicates a 10-to-50% chance of corporate failure within the next 12 months.
Therefore, Chinese solar operator Yingli Green Energy’s FRISK® score has ranked far below the industry average for years. In addition, the Chinese government has financially supported Yingli in the past. It may do so again to save jobs. However, without such help, Yingli could very well fall into corporate failure. From a financial perspective, the company has been severely constrained by its heavy debt load. Over the last five years, the company’s annual spending on capital expenditures was only an average of 46% relative to total depreciation. This low figure indicates severe under-investment and likely reflects deficient spending on research and development as well as maintenance of property, plant, and equipment, among other items. Conversely, First Solar’s cumulative capital expenditures have exceeded depreciation by about 37% over the last five years, indicating enough investment spending.
In the fourth quarter of 2017, Yingli actually reported a negative gross margin after including all related costs of revenue. Based on its 20-F, Yingli has lost most of its market share in Japan over the last three years but offset most of the lost revenue with a sales increase in its home country. More specifically, sales in China increased from 41% of the company’s total revenue to 77%. Combined with China’s subsidy cuts, Yingli’s lack of sales diversification should prove to be problematic and likely result in lower sales and/or weaker gross margins. Therefore, the company looks set to continue reporting steep losses on both an EBITDA and a free cash flow basis. In 2017, its free cash flow margin was negative 11.7%, after backing out changes in working capital.
So Creditors should be worried. In the last few months, Yingli’s lenders and suppliers have been pressing hard to obtain payment. In April, a supplier filed a request for arbitration. They demanded a deal be made for payment of its raw materials of polysilicon. Please note that their case is still ongoing. Talk about causing legal bills!
In addition, a different lender never received payment on medium-term notes matured. In May, however, the Chinese courts ruled that the lender would be given cash for the notes. That’s for notes which matured in October 2015 and May 2016. It took two or three years for one lender to get paid. Finally, this litigation and settlement only represented around 4% of the debt. You know from ll that those medium-term notes are outstanding. Unfortunately, creditors have their work cut out for them.
In conclusion, Yingli Green Energy won’t make it. Right now, creditors are doing everything they can to get paid for the corner.
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