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JinkoSolar Second Quarter 2013 Review

Sep 03, 2013 Hit: 46 Written by 
JinkoSolar Second Quarter 2013 Review

On August 14, 2013, JinkoSolar Holding Co., Ltd. (NYSE:JKS) reported its second quarter 2013 earnings. Its positive net income marked a cycle milestone for an industry that has been plagued by losses for two years

JinkoSolar became the first of the US-listed Chinese solar PV companies to return to profitability – at least of those who have reported their second quarter earnings. The GAAP EPS was improved from negative $0.92 to positive $0.36, and the non-GAAP EPS was improved from negative $0.56 to positive $0.56 from the first to the second quarter of this year, where the non-GAAP numbers exclude effects related to its convertible senior notes. Included in the second quarter EPS were a reversal of provisions for bad debt of around $0.41 per ADS and a net foreign exchange loss of $0.04. The low net foreign exchange loss was due to successful forward hedging of their foreign currency exposure on the balance sheet. Removing the $0.41 gain on the provision reversal, but including the net foreign exchange loss, still leaves a positive non-GAAP EPS of $0.15.

The main drivers propelling Jinko to profitable territory were a 51.7% revenue growth from $187.3M in the first quarter of this year to $287.6M in the second quarter, and a gross margin improvement from 12.7% to 17.7% quarter over quarter. The combination of the two resulted in the gross profit more than doubling from $23.7M in the first quarter to $50.8M in the second quarter, and thus covering all fixed costs to enable the positive net income.

The drivers behind the revenue growth were, to a large degree, growth in product shipments, and to a much smaller degree an improvement in the average selling prices for products. The drivers behind the gross margin expansion were lower production costs and higher average selling prices. You could say that all arrows are pointing in the right direction now with production costs going down while shipment volumes and selling prices go up. This has created a very bullish trend of gross profit expansion in the industry and Jinko has been leading this trend.

Looking at their main product, the solar panel, shipments grew from 282.4MW to 460.0MW quarter over quarter, while the solar panel average selling price (ASP) grew from slightly below $0.59 to slightly above $0.61. The in-house production cost for such panels was reduced 1 cent to $0.50, attributable to a $0.01 reduction in the non-silicon cost, while silicon cost remained constant at $0.09. The solar panel ASP is not explicitly given, but can be deduced from the total in-house cost and the in-house gross margin disclosed in their supplementary ER presentation.

Looking ahead, Jinko has guided further solar panel shipment growth in the third quarter with expectation to ship between 460MW and 500MW of panels. The panel ASP might also improve as global stability is observed, while improvements in Jinko’s big markets like China and the EU are seen at the same time they enter higher ASP markets like Japan and South Africa, according to the conference call discussing the earnings release.

Maybe most exciting of all is that while gross profits from panel and component sales already covered operating and interest expenses in the second quarter, they have been doing more work weighing on these overhead costs, which will have its revenues recognized at a later point in time. They have been very active in developing solar PV plant projects this year. In their second quarter earnings release they disclosed that they completed three PV plants totalling 55MW and were constructing another six PV plants totalling 146MW. The three completed plants were connected to the grid and started generating FiT revenue during the quarter. In total for 2013 they have guided to develop 200-300MW of PV plants and their total pipeline is approaching 700MW. The focus of this project development segment is the huge Chinese market that is emerging as the central government is putting incentive programs into place that will sustain an interest to install more than 10GW annually for many years to come.

Given the above 200MW project development in 2013, which is not included in the panel shipments reported, and thus not recognized as panel sales revenue, around 50MW per quarter higher production and deliveries than reported shipment volume have been carried by the organization without yet seeing any gross profits to help cover the overhead costs of that total scale of production and logistics. The internally shipped panels for in-house project development are likely shipped at inventory cost, thus only capitalizing the production cost and not the overhead cost for that incremental 50MW quarterly volume. This should mean that Jinko is actually a bit more profitable on it panel sales than we see due to these overhead costs for project development appearing a bit ahead of the revenues from that segment.

As a panel producer in China there should, however, be less overhead cost to supply in-house project development teams in China with panels compared to the global stocking, marketing and sales of panels. This means that the gross profits from the added value from plant sales compared to panel sales should go more directly down to the bottom line than an increase in panel sales volume would. The per-watt revenue of selling a PV plant is more than the double that of selling a pane, while gross margin could remain the same, thus doubling the gross profit per watt of produced panels while keeping most of that gain on the bottom line. What this boils down to is better and thus quicker return on the capital (fixed as well as working) investments required for the panel production. There is also the option to keep a developed PV plant, which means annual revenue per watt from power sales becomes lower, but lives on for 20 years, so that adds up to more than six times that of a sold panel or, if discounted, three times the panel sales revenue. The most interesting part here though is that the margin is much higher to compensate for the slow revenue collection, so if you wait for the profits they will be much higher and very predictable with PV plants having fix FiT and interest rates in place. Keeping plants could thus create a segment working as a stable foundation for the group as the industry cycles and evolves, giving strength to exploit opportunities that may arise in the future.

This idea of collecting gross profits from more parts of the value chain while avoiding the increase of overhead costs is an effective strategy to increase net margins and thus, in the long run, enable Jinko to offer cheaper PV electricity; this is referred to as vertical integration. The popular approach has been to integrate up- and downstream in the poly, wafer, cell and panel segments, but now we are seeing a big trend of panel sellers integrating further downstream to project development to become plant or power sellers. China emerging as the world’s largest national PV market has accelerated this trend for the large Chinese tier-1 panel makers, and Jinko is one of the early big adopters of this new strategy.

Regardless of how Jinko decides to split its business segments between panel, plant and power sales in the future, the foundation for its profitability edge against peers will be its low panel production cost and its low overhead cost. The low cost of Jinko has previously been put against its technology and brand value. Their technology is now on par with top peers, but it still lacks brand premium in panel sales. For plant and power business segments the brand value should matter less and their cost strength should translate directly to profitability strength.

As a bonus for potential investors, Jinko has not only taken some overhead costs ahead of project revenue recognition, but also has taken some panel production and overhead costs ahead of full revenue recognition from the panel sales. Some panel sales contracts entered mainly with Chinese customers in the second half of 2012 included so-called retainage clauses, which means that Jinko gives unusually long credit terms for some 5-10% of the payments, and from an accounting perspective they are not recognizing those 5-10% on delivery as normal, but when they are paid 1-2 years later. As of June 30, 2013, Jinko had $24M of unrecognized revenue from retainage sales outstanding. So, sometime during the second half of 2013 or 2014, up to $24M in revenue can be recognized from costs already taken in previous quarters, which means all that additional revenue will convert directly to additional gross profit and net profit for the quarters where it is recognized. Jinko still does retainage sales, but to a lesser extent now than in 2012.

Some final investor-pleasing notes from the ER was that they somehow at very low cost managed to increase their integrated production capacity from 1.2GW to 1.5GW, and that they raised their mid-point FY2013 panel shipment guidance from 1.35GW to 1.6GW.

Jinko has, since its IPO in 2010, run a very lean machine compared to peers, where it keeps low working capital to enable low capitalization requirement. This means that although reaching a similar business size as its peers, Jinko has not needed as much capitalization from either equity or debt, allowing them to have low interest costs and high return on equity enjoyed by shareholders rather than banks. One enabler for this model is the use of a low cash balance and a more spot style business on both the procurement and sales sides, and thus quickly aligning with market developments and unlocking capital. One risk with Jinko is that the financial stretch this lean style of business has caused them while growing during the recent PV market depression might not hold, and that they eventually will need to capitalize their balance sheet with more equity. On the flip side, the fact that they are first to reach real profitability levels on the core panel sales business could mean that they don’t need the boost back to health from equity infusion, since they are ahead on the self-healing process.

Disclosure: Long JKS


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