Jinko Solar’s First Quarter Highlights Financial Pressures

In the case of Jinko, at least their ability to reduce cost has become a tangible asset and a critical tool of survival. In any other case, high debt and lack of cash, intertwined with the absence of competiveness, is a recipe for imminent disaster

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Jinko’s  (NYSE: JKS) revenue in Q1 was $168M, a drop of 11.5% from Q4; the company had failed to sell its module guidance, as the total  of 249MW shipments  included only 157MW of modules, about 12MW less than Q4 2011. Selling 80MW of ingots and wafers lowered gross margins down to 0.66%; nevertheless, this was an improvement from negative levels in Q4.  The operational dynamic still looks very exciting, with internal gross margins reaching 10.8%. The company described internal non-polysilicon costs as $0.58 per watt, with the best polysilicon costs at around $0.16 per watt.  The total cost per watt was at $0.74, remaining in line with other leading solar companies. The problem starts with ASP, which was only at $0.82 per watt; in comparison, both Trina (NYSE: TSL) and Yingli (NYSE: YGE) remained above $0.90. Essentially, the cheap polysilicon advantage of Jinko is being eliminated by the low ASP. While eventually everyone will transition over to lower poly pricing, ASP variability is separating companies already, and that may become a future trend. The line seems to be drawn between the “higher ASP group,” including: Suntech Solar (NYSE: STP), Trina Solar, Yingli Green Energy and Canadian Solar (NASDAQ: CSIQ). Jinko spoke about future APS being in the area of $0.70 or below per watt by the end of the year, perhaps implying that the high end group may be in the category of $0.75 per watt.

While negotiating its financial condition, Jinko had applied some maneuvers on the balance sheet enabling the company to pay off $100M of current bonds, with the objective being to pay off the remaining $66M in July 2012. Overall debt levels improved by $61M, keeping total debt at $540M, yet total current liabilities actually increased by $15M. Cash accounts dropped to $40M, or 27% quarter over quarter. Cash levels are getting dangerously low and Jinko’s cash is at the lowest level out of all the Chinese-listed companies in the US. The interest payments are around $9M a period.  Evidently, without positive cash flow, the company will be required to issue more debt just to continue to make interest payments, a proposition which is very unattractive to investors.  Management has assured that the company has access to $860M in lines of credit and plans to prop its cash by an additional long-term $800M RMB bond issue in Q3. Jinko had already issued one-year $300M RMB bonds in April of this year, but results will be only seen until Q2. Furthermore, during the period, Jinko made a number of other efforts to save cash, and those inflated total current liabilities. They included diversion of cash from accounts payable, which went up by $46M, and notes payable (letters of credit in this case), which increased by $44M. Prepayments also dropped by $62M. So technically, cash involved in retaining supplies and paying bills had dropped by $152M. All Chinese companies have exhibited this methodology to conserve cash, particularly in Q1, yet the liquidity issues add extra pressure on Jinko. This may put the company at a disadvantage when negotiating with suppliers for the long-term, particularly if market and financial conditions do not improve soon, or when the company is perceived to operate on debt only.  While protecting cash internally, 25% of sales revenue was made on credit, not helping out liquidity. Accounts receivable increased by 17% or $41M, to $296M. Jinko managed to add $45M of project assets to its current assets, a value associated with 30MW EPC project development, located in China. The company expects sales of those projects in the incoming quarters, adding cash to the bottom line.

In a positive turn, Jinko is planning to have module shipments of 200 to 240MW for the second quarter, an increase of 52% from Q1; however, this is less in terms of total MW sold in Q1. For the year the company forecasts 800 to 1000MW module sales to third parties and 120MW in EPC.

While Jinko is well supported by availability of debt, the company is becoming heavily entangled in it.  A combination of current market conditions, heavy debts and limited liquidity pose clear risks, when faced with lack of income and what appears to be a bleak outlook for the foreseeable future. Another example of a heavily debt-laden organization is LDK Solar (NYSE: LDK), a company which has been pronounced to be on the verge of collapse by quite a few observers already.  In the case of Jinko, at least their ability to reduce cost has become a tangible asset and a critical tool of survival. In any other case, high debt and lack of cash, intertwined with the absence of competiveness, is a recipe for imminent disaster.