Is JinkoSolar The Bright Spot In The Solar Industry?

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The solar industry is once again plagued by oversupply and falling prices, affecting the whole industry. Against the backdrop of this, Jinko Solar's management is surprisingly upbeat.

We look at what drives this remarkable optimism.

JinkoSolar (NYSE:JKS) enjoyed surprisingly good third quarter results. The company again increased shipment guidance for the full year considerably (from 6.0-6.5GW to 6.6-6.7GW). This is pretty surprising considering the fact that they are the market leader in China.

Before we get to the market conditions, first, some highlights from the third quarter:

Their gross margin (22.1%) even improved a bit, both sequentially (20.4%) as well as YoY (21.3%). The gross margin is 10% for their module business and 61% for their power plant business.

One worry we have is that the company has a considerable amount of debt ($2.17B) although less on a net basis ($1.62B).

$980M of that debt is related to their module business (up from $809M just a quarter ago), the rest is tied to their power plant business. Our debt concerns show up in an 81% rise in net interest cost to $33M in Q3.

The company did generate $180M in operating cash flow, and $200M disappeared in increased accounts receivable (which they expect to bring down again), so they are not in any immediate trouble with the debt.

Their average selling price (ASP) was $0.50/Watt in Q3. Their power output business is growing pretty well:

This is mostly contained to China, so they're not really exposed to the headwinds in the US utility sector, which offers at least one clue to their relative optimism.

The market

While the Chinese market had a bumper run in the first half of the year, with installations amounting to a staggering 20GW, the second half year experienced a notable slowdown, from PV Magazine:

GTM calculates that China will end 2016 some 28.3 GW of solar heavier, which is more than twice the amount of capacity added in the U.S. In 2017, though, demand is expected to slump by around 40%, and this year's figure is unlikely to be surpassed for a few years at least, said Attia.

The slowdown is produced by a proposed sobering of solar subsidies in China that is exceeding expectations, from Renewable energy world:

Even though the suggested changes in tariffs are not yet official, the magnitude of the proposed cuts is significantly higher than previous market estimates of a 13 percent tariff reduction. Zeng Shaojun, secretary general of the China New Energy Chamber of Commerce, an association under the aegis of the All-China Federation of Industry & Commerce, said recently in an interview that the new scheme may have a major dampening effect on the future development of China's PV sector.

The association has issued an urgent notice to solicit opinions from member companies. Once the adjustments are officially implemented, small and medium-sized PV firms relying heavily on subsidies may suffer a fatal blow, which, in turn, is likely to have an adverse effect acrossthe entire sector. Zeng urged the NDRC to find a more sustainable and effective subsidies cut plan.

Perhaps Jinko can benefit from a few of the weaker companies going under, with its 35 cents/watt cost at the end of Q3, it is still one of the lower cost providers.

Yet despite this market slowdown in its home market, where Jinko is the market leader, and despite the solar glut and declining ASPs almost everywhere, management was fairly upbeat during the Q3CC at the end of November.

This optimism makes the company a little bit of an outlier. Considering the geographical mix of their markets, this is actually even more surprising (from Q3CC):

We shipped 1,556 megawatt of solar modules to third-parties, including 38% in China, 38% to North America, 11% to Asia Pacific, 6% to Europe and 7% to emerging markets.

With the US market also notably slowing down, that's 76% of their revenues coming from markets that have been slowing down considerably.

So we're sort of curious what Jinko sees in the markets that others apparently don't, or what the reason is behind their relative optimism. Here is what management had to say about China:

China remain one of our largest markets during this quarter. Although clean [ph] orders in fourth quarter are not very evident, demand remain strong as prices stabilize, and began to increase again. We expect this amount to grow again during the first half 2017 as a result of FIT cuts to be announced by LRDC.

And this is what management said about the US market:

Despite near-term headwinds, we remain optimistic about the U.S market. Solar energy is gaining more and more popularity and are creating a large number of jobs in U.S. The market is now rapidly recovering as ASPs stabilize. We expect to see the U.S market return to positive growth during the second half of 2017.

What about prices? Well, even Jinko can't escape reality. Remember that ASP was 50 cents on average in Q3. We're afraid it is necessary to quote them at length:

we are believing Q4 ASPs will at the range of low $0.40 for this Q4. And actually we've seen the market price has dropped after the first half and pretty sharp decrease. However, we've seen the picking up demand is very obvious, especially in China, also as well as in India. So we're expecting the market price will not only become stable, but sometimes it will be coming back to a more reasonable and -- more reasonable market numbers. So in that case we're expecting the Q4 ASP will at the range of low $0.40. And for the 2017, in general, we believe that the price will continue to decrease a little bit. However, if we're looking to this quarter-by-quarter, we have seen -- obviously we're expecting the China rush will impact the total ASP significantly. Meanwhile -- as well as this rushing in Japan, as well as India, because both India and Japan got this fiscal year ended by March. So in that case with this three major markets rush coming in online at the same time, we expect our market price will become better.

Going from 50 cents to the low 40s in a single quarter is a fairly dizzying decline and indeed it tracks the declines in spot prices and other solar companies' pessimism:

But Jinko assumes that the crunch has already largely run its course and ASPs will stabilize, and perhaps even increase in their major markets. The 'rush' they're talking about is a flurry of installations in order to profit from the old (higher) tariffs.

In China, one can probably still profit from the old tariffs until September 2017 (things haven't really finalized yet), so one can expect a bit of a rush, especially considering the considerably steeper drop in the feed-in (FIT) tariff (which depends on the region).

But we know from the US that after a rush usually comes a period of demand easing, and we don't see much reason why China should be able to escape these realities. So there might be a delay in slow down of the market, but that's still likely to come.

Indeed, Axiom's Garry Johnson, who has made some pretty good bearish calls in the past, asked whether there will not be a slowdown in China from 2018 onwards, although his reason for expecting one might be a little different (the recent reduction in installed capacity by 2020 from 150GW to 110GW, and the amount of capacity already installed).

But management argued that the 110GW target is a bottom line target and they believe the market is already expecting more. They are sticking with the 150GW target for the Chinese market by the end of 2020. Given the resurfacing of Chinese pollution, they might have a point, from The Guardian:

Last month, the National Development and Reform Commission, the country's economic planner, said in its own five-year plan that solar power will receive 1tn yuan of spending, as the country seeks to boost capacity by five times. That is equivalent to about 1,000 major solar power plants, according to experts' estimates. The spending comes as the cost of building large-scale solar plants has dropped by as much as 40% since 2010. China became the world's top solar generator last year. "The government may exceed these targets because there are more investment opportunities in the sector as costs go down," said Steven Han, renewable analyst with securities firm Shenyin Wanguo.

Jinko believes worldwide solar demand will still be up 10%-15% in 2017, and they're more optimistic for 2018. There is another market reality that Jinko will not be able to escape from, which is the increasingly competitive nature of the project business.

This is now moving to China as well, spurred by China's Front Runner Program (a reverse auction showcase solar project program based on some exact specification standards). Here is management's concern (from the Q3CC):

Well, for the Top Runner Program we see is that sometimes the bidders are beyond our expectations and they behave very aggressively. Sometimes we believe it's not good for the industry, but we believe it will be the -- it shows some indication that some of our peers are very desperate to get it done on projects in China.

These were comments from VP of Global Sales and Marketing Gener Miao while IR Director Sebastian Liu relativized these a little later, arguing these are exceptions.

Conclusion

Unless the solar market plunges more deeply than many anticipate,JinkoSolar is one of the solar companies that is likely to come out of it whole. The company enjoys some of the best margins in the industry and while they have a considerable amount of debt on their books, this doesn't pose any immediate threat by any means.

We think this (together with First Solar) is one of the safest investments in the solar space. While there might not be much immediate upside in the shares, longer term we see a considerable amount of clawing back of the losses of the last year and a half.

 

 

 

 

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