Jinko Ships More Modules in Q2, Increases Gross Margins

Jinko experienced strong sales in Germany and Italy, with the German market reaching a record 120MW in shipments.

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JinkoSolar Holding Co., Ltd. (NYSE:JKS) had increased its module shipments to 223MW from 157MW shipped in Q1, slightly lower than original top end of 240MW guidance given at the time. Total revenue came to $194M, including sales of 63MW of wafers and 15.8MW of cells. The combined GM reached 8.4%, reported in-house module gross margin was 11.2% and the processing costs were $0.66 per watt, matching processing at Trina Solar Limited (ADR) (NYSE: TSL). Jinko has been selling modules at $0.74 per watt in Q2, which is eight cents lower than Trina ($0.82) and seven cents lower than Canadian Solar Inc. (NASDAQ: CSIQ) ($0.81). No provisions for inventory or the US CD/CVD duties were made in the quarter; therefore, GM received a significant boost in comparison to 0.7% from last quarter. Since Jinko belongs to the lower-end ASP sellers, already having low-cost silicon procurement, the company is in the rare condition of not having to adjust inventory.  In Q2 the company was able to turn its inventory once in 67 days, 2.5 times faster than Trina Solar.  At this point, this is one of the healthiest supply chains among the peers.

Operating expenses in Q2 matched those of Q1 at $29M, when the $20M provision for advances to suppliers recorded in Q1 would be detached.  Unfortunately, the $28M foreign exchange loss was also recorded in the period. Overall, the company had recorded an income loss to the tune of $48.9M, equalling to a $2.20 loss per ADS.

Jinko has increased its cash position to $97M by adding $30M in the quarter. The company’s short borrowing had gone up by approximately $48M with the issuance of short-term bonds in April. Liabilities have gone up as well, as thus far all Chinese companies are using accounts payables as a way of conserving cash.  It is expected that tier-1 and top tier-2 companies will continue to receive preferential treatment from vendors who are willing to suffer when dealing with industry leaders. In the quarter Jinko moved finances around, decreasing its notes payables (letters of credit to vendors) by $40M, but seeing accounts payables rise by $63M. Other payables and accruals went up by an additional $33M, so on balance, liabilities outside interest-bearing debt went up by $56M. In Q1, holding off payments and reducing supplier advances produced $152 more in liabilities.  This trend is expected to continue into the foreseeable future and may intensify with solar plant builds.

A total of $6M of capital expenditures was added to project assets, ending the quarter with $51M. This represents 35MW of project construction reported for the first time in Q1, with monetization expected in Q3 or Q4. Jinko has also revealed an additional 200MW project pipeline with tariffs already approved by government. Work is expected to start on those in Q3 and Q4.

Jinko experienced strong sales in Germany and Italy, with the German market reaching a record 120MW in shipments.  For the US market Jinko is procuring cells from Taiwan built on its own wafers. 16MW of modules were shipped to the US duty free.  Markets outside of Western Europe were also explored; Greece and Slovenia in Europe, as well as Brazil and Chile in South America, were mentioned as new emerging markets.  South Africa is also becoming increasingly important to Jinko, where the company has an expectation to win bids for large-scale projects.  The company started an exclusive club for its clients, enlisting 141 customers from over 20 countries.

In the outlook for Q3 Jinko had guided 250 to 280MW of module shipments. Yearly guidance was held up with 1GW of shipments to third parties and 100 to 150MW for projects. Jinko suspects that ASP in the second half of 2012 may further deteriorate by a 6% to 10% drop. Last week, prices were still holding above $0.73 for 190W poly module offered by the tier-1 company. European prices were also quoted one to two cents above Chinese rates.  In order to wrestle positive gross margins for the rest of the year, efficiencies will bring Jinko to all-in costs below $0.60.  

In summary, the EPC route, with the emergence of the project pipeline, gives a certain level of comfort to the next quarters, yet financials are the area when the company appears to be most vulnerable under current industry conditions.  Looking simply from the perspective of available cash to a dollar of debt, Jinko has only $0.11, whereas both Trina and Canadian have a $0.65 of coverage. It seems in this unforgiving environment of constant pressure, Jinko must make every move count without any allowance for error.