JA Solar Quarterly Loss Doubles in Q2, 2012, but JA Has Positive Outlook

The quarterly loss has nearly doubled from $35.4M in Q2 2011, to $72M in Q2 2012, which translated as loss per share of $0.37

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JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO), one of the leading Chinese solar firms, has announced its second-quarter results for 2012. The business has reported a fifth consecutive quarterly loss with reductions in the annual shipment guidance from 1.8GW – 2.0GW to 1.5GW-1.8GW, just weeks after its competitor, Trina Solar Limited (ADR) (NYSE: TSL), reduced their guidance.

The quarterly loss has nearly doubled from $35.4M in Q2 2011, to $72M in Q2 2012, which translated as loss per share of $0.37, more than double the analysts’ estimate of $0.14 loss per share. Even sequentially, the previous quarter’s loss of $39M was much lower than the current. The total operating loss was $24.5M, decreasing slightly from previous quarter’s $25M, but the foreign exchange loss of $11M and tax expenses of $18.9M have pushed the total loss to $72M.

The business earned revenues of $284M, increasing by 12.8% from $252M in the previous quarter, but considerably lower than the $420M earned in the same quarter last year. The increase in revenues was due to an increase in shipments by 14.2% from 366MW in Q1 2012, to 418MW in Q2 2012, close to the target of 420MW. Furthermore, effective cost-reduction strategy and improvements in operations have increased the business’s gross margins from 2.1% to 4.8%. This was also reflective in a more than double increase in gross profits from $5.2M in the first quarter to $13.6M in the second. For the first time, the company earned about 60% of revenues from modules, while they contributed 55% of the total shipments. However, analysts were expecting the firm to post around $292M in revenues, which is why the market was generally disappointed. The company sold its modules at tier-2 rate of $0.75 per watt.  JA recorded extra items in this quarter on its balance sheet. Selling expenses went up by $3.6M due to extra module shipments, there were $18.9M in taxes due to accrual of income tax expense by Hebei province in amount of $12.8M, and $3.3M of withholding tax were seen for dividends distributed by the company’s Jiangsu subsidiary.

Like all other firms, JA Solar continues to struggle due to falling panel prices. Furthermore, the increase in US duties also gives a negative outlook for the future. However, the management believes that the pricing pressure is easing. Commenting on this, Dr. Peng Fang, CEO of JA Solar, said, “Although not as severe as in previous quarters, the downward pressure on pricing continued. In light of this, we focused on sustaining a healthy balance sheet and building our footprint in key growth markets."

For the third quarter, JA Solar expects to achieve shipments of 350MW - 370MW, significantly lower than the current 418MW, but will be increasing module shipments to 70% of total shipments. The company insists that it is making these reductions because it would prefer “a healthy financial position over short-term shipment gains.” The business is seeing strong potential in the German market, which still continues to attract all the leading solar firms, despite the long list of bankruptcies it has endured. There are also opportunities in new and emerging markets such as the United Kingdom.

On an encouraging note, a momentous boost might be coming in the near future, for the solar industry in general and JA Solar in particular, from Japan. The country’s government had, in July, announced an incentive program aimed towards private investors to encourage clean energy investments. The new feed-in-tariff policy is pro-solar and hopes to attract $9.6B in investments.

Japan had witnessed one of the world’s worst nuclear disasters and since then, the support for nuclear energy has all but vanished. Furthermore, the recent dozens of solar insolvencies have also proved that this sector cannot just run solely on government support; the private sector has to step in with better products at lower costs.

The West Holdings Corporation, a local home renovation firm, formed a new subsidiary in June - the Japan Mega Solar Power Company - and has now come forward with around $1.27 billion for investment. It wants to build 250 small solar power plants across Japan with a combined generation capacity of 500MW, and it wants to do it quickly, within the next five years. The business’s managing director, Toshihisa Nagashima, said, “Recognizing the business opportunity early, management has turned the home improvement company into the largest provider of residential solar PV systems in the country.”

The Japan Mega Solar Power company is backed by 12 powerful investors that include the Tokyo-based financial services giant Orix Corporation (ADR) (NYSE:IX), JA Solar and the South Korean LS Industrial Systems. The good news for JA Solar’s investors is that their company, along with LS Industrial, is going to be the preferred supplier for Japan Mega Solar Power.

Both Orix and West Holdings have prior experience in the solar industry. Last year, Orix started testing and evaluation services for solar panels and other clean energy equipment. Then, about two weeks ago, the company had announced that it plans to invest $680M in the solar sector in the next three years, which was followed by the Japan Mega Solar Power news. On the other hand, West Holdings Corp entered the solar industry when it signed an exclusive distribution agreement with Yingli Green Energy in April 2011. In February this year, West Holdings had revealed that it was working with the Chinese Powerway Renewable Energy on developing a 2MW power plant in Japan. Furthermore, the company had around $12M in 80MW solar farm projects in its pipeline in 2012.