On September 16, 2013, JinkoSolar Holding Co., Ltd. (NYSE: JKS) issued a press release announcing the commencement of a 3.5 million ADS offering. This news came only two trading days after announcing a new strategic direction described in JinkoSolar’s New Power Strategy.
In the light of this equity raising news, this article will follow up where the aforementioned article left off, using the described Jinko case and cost estimates there to compare the profit profiles of two different business models for project development – plant sales only vs. power sales only. The growth assumption will be that Jinko develop 200 MW in 2013 and 300 MW in 2014, and then can increase development growth in MW by 10% annually for 20 years; i.e., in 2015 they develop 110 MW more than in 2014, when they developed 100 MW more than in 2013. The time frame for the comparison will be the 20-year lifetime of a plant. The net profit assumptions for the two models will be based on the previous article’s estimates of $0.34 for plants sales and $0.09 for power sales.
Note how the table compares two alternative business models’ return on project development efforts, one where all developed plants are sold and one where all are kept. The growth of power generation capacity for the latter model is in Jinko's Power Generation Capacity Table. Now to the interesting part – the profit generation profiles of the two models: 10 years and 20 years
The 10 years profit generation table has zoomed in on the first half of the 20-year time frame. Zooming out to look at the full-time frame reveals in 20 years profit generation table.
A couple of other things should also be noted. First, the above profit profiles are not actual profit projections, since coarse models using assumed parameters do not qualify for that. The purpose of the analysis is to identify the difference in profit growth profiles for the two models under identical conditions of project development and price declines. The second thing to note is that the very different profiles of the two models results from not assuming a high exponential growth in installs, offsetting the price declines with a wide margin. In such a scenario the plant sales model would come closer to the power sales profit growth profile. Alternatively, the same effect (to a different extent) is achieved by assuming no price declines. So one could say that the power sales model is the more conservative choice for the long-term investor wanting high profit growth with high certainty that does not rely on very high install growth or slow price declines.
One way to think of the two models is from a profit retention perspective. For the power sales model, profits of existing plants remain year after year for 20 years and any new project development adds directly to those profits, making profit growth very easy. For plants sales, each year you first need to develop the same amount of projects as last year plus an additional 5% to cover price declines just to retain last year’s profits; then any additional project development will add to the profits from last year. The benefit with the plants sales model is the quick return, which can be handy in a scenario with a lot of near-term investment opportunities and no other (attractive) funding source. In the example above it takes five years for the power sales segment to pass the plant sales segment on annual profits and eight years to pass it on cumulative profits.
A mix of the models in the early days of project development could make sense to fund a larger project development pipeline, but in the Jinko case – as opposed to many peers – they can be quite profitable on panel sales alone; thus, the project development for Jinko can be funded by panel sales instead of plant sales until it can be self-funded from power sales. The equity-funding requirement for project development is roughly $0.31 per watt, assuming the $1.25 CapEx and 75% debt leverage. For Jinko, this roughly means that selling one plant would fund the development of two new plants (one to replace the sold one and one for growth), or selling four panels to fund one plant panel, assuming their average selling price (ASP) trends toward US$0.70 with the large ASP increase in the EU and China happening now. For many peers, selling panels at the same $0.70 ASP (though right now many of them sell at higher ASP than Jinko) would only generate gross profits and not much net profits, so for them, unlike Jinko, it makes more sense to sell plants in the early days of project development to fund their pipeline unless panel ASP moves higher. Maybe this prerequisite is what is reflected in Jinko’s announcement of power sales focus compared to peers’ communicated intention to sell plants.
The equity raise just announced by Jinko could strengthen the perception that Jinko are aiming to fund project development investments, without use of the quick returns from plant sales, in order to quickly ramp up the power sales model. With a stretched balance sheet, this equity boost might be needed for the initial project development funding until panel profits grow from rising ASPs and power sales profits start to tick in. The equity issue has become very trendy among Jinko’s peers lately, so they are far from alone in exploiting recent stock price appreciations in the sector to strengthen balance sheets after a two-year ordeal of industry depression.
Comparing the Chinese panel-producing peer with the largest project pipeline, we see this opposite model where plants are built for plant sales. Canadian Solar (Nasdaq: CSIQ) is doing global project development focusing on Canada, the US, China and Japan, and in some of those markets can reach more than twice the revenue and profit per watt on plant sales that Jinko can achieve in China. SPVI CEO Robert Dydo describes in New Solar Investment Template Includes Canadian Solar a more detailed picture of this near-term profit-focused model.
Disclosure: Long JKS, CSIQ