Yingli: Auriga Cuts to Hold, But Better Positioned Than Peers

Shares of solar energy provider Yingli Green Energy (YGE) are down 48 cents, or 9%, at $4.81 after Auriga Securities analyst Hari Chandra today cut his rating on the shares to Hold from Buy, while hanging onto his $5 price target, arguing that the stock’s 40% run-up this year (before today’s decline) flies in the face of a still weak balance sheet.

In a companion note, Chandra laid out his view of the industry today. He thinks recent reports by his competitors misrepresent the state of the industry as either too good or too bad to be true:

We find Street talk of “junk rally” in stocks as well as “100% capacity utilization” to be nonsensical. Reality is the solar PV industry is hanging on to survival economics (trading on x TBV), and is on a recovery mode despite on- going market challenges in Germany, U.S., China, and the lag effect of cost elasticity in catching up to the dynamics of�price elasticity. Given the state of flux, stocks will continue to trade manically – rips/pull backs are to be expected.

Chandra was alluding to a report by Deutsche Bank’s Vishal Shah, last week, who was upbeat on manufacturers’ capacity utilization, and a prior skeptical report by Jefferies & Co.’s Jesse Pichel, who has called the run-up in solar stocks this year a “junk rally.”

In actuality, writes Chandra, solar energy demand is responding “strongly” to “lower pricing as projects returns become attractive.”

But costs of producers have yet to catch up with falling selling prices, meaning that “we do not expect profits for most c-Si players until Q4 2012,” he writes.

As for Yingli, it’s better positioned than others, but it needs to attend to its finances, he thinks:

Industry profit dynamic will be no different on Yingli Green, but its cost structure guidance at $0.75/Wp to $0.80/Wp by 2H12 (similar to Trina Solar) positions it well, and if delivered makes it a key beneficiary in a cost catch up and/or a price stabilization scenario. [�] While Yingli Green will likely deliver on the cost gains, its balance sheet needs repair to position itself competitively. With debt/capital at ~60% vs. Trina Solar at ~45%, Yingli Green may have to exit polysilicon business to emerge as a strong survivor/competitor in improved demand/industry consolidation scenarios.