Monday, 15 September 2014 00:00

2014 Chinese Solar Stock Portfolio: Second Half of the Year Assessment

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2014 Chinese Solar Stock Portfolio: Second Half of the Year Assessment

Six months return objective is at 66% for CSIQ, 24% for Trina, 25% for JA Solar and Jinko at 8%.

 Our last article published on May 10th, 2014, suggested a portfolio consisting of four Chinese solar stocks. Comparing prices on the date of the article to closing prices on September 12th, those stocks have the following returns:

Canadian Solar Inc. (NASDAQ:CSIQ), May 9th: $26.32, September 12th: $39.74, 50% gain.
JinkoSolar Holding Co., Ltd. (NYSE:JKS), May 9th: $26.12, September 12th: $33.28, 27% gain.
Trina Solar Limited (ADR) (NYSE:TSL), May 9th: $10.82, September 12th: $14.51, 34% gain.
JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO), May 9th: $9.95, September 12th: $10.34, 3.9% gain.

With the exceptions of JA Solar and weaker-than-hoped market performance for Jinko, this portfolio experienced decent returns. During the second quarter, all four companies delivered profit. Financial health has been also showing stability or improvement, despite an increase in sales registered in accounts receivable as well as dollar increases in accounts payable. Both items normally are red flags in times of stagnation, but this is not the case here. We view accounts receivable as a strategy to conquer the domestic market, and accounts payable as an enterprise resource gathering for impending demand explosion during the second half of the year.

Summarized earnings per share for the first half of 2014 have CSIQ at $1.02, JKS at $0.68, TSL at $0.51 and JASO at $0.46. Our second half of the year estimates for EPS are CSIQ at the range of $3.20-3.33, JKS at $2.00 to $2.10, TSL between $0.60 and $0.70 and JASO from $0.45 to $0.55.

Therefore, for the fiscal year ending on December 31, 2014, top end of the range EPS estimates are for CSIQ at $4.35 (60M shares), JKS at $2.78, TSL at $1.20, and JASO at $1.01.
Our valuation of the price-to-earnings ratio uses a combination of factors like global or domestic focus, brand recognition and size of the global market share in third-party sales. Using Chinese Export Data Reports (CEDR), we concluded that both Canadian and Trina rate around 11% in the global market share of exports for the third-party sales, while JA and Jinko scored 6% in this category.
All three, Jinko, Trina and JA Solar, are heavily engaged in the domestic market, with a ratio of delivery to the Mainland being the most noticeable in the case of Jinko. Therefore, we expect Canadian and Trina to benefit from global brand recognition in more ways than Jinko or JA Solar today.

Jinko also leads in domestic focus, when it comes to projects, advancing its pipeline from the end of last year. In wide strides, Trina will add as many as 500MW of completed projects in China, but the company also has a small EPC footprint in the EU and plans to expand it to Japan. JA Solar also has increased, in size and level of completion, its portfolio of projects in China, but lacks conclusive presence on the same front abroad. Certainly, global solar-plant builder and seller, Canadian, continues to keep a large distance from other names using its global project advantage. Here, we see a price-to-earnings ratio benefitting Canadian and Trina, perhaps with a slight lift to Canadian.

While the general market gives inequitable valuations to Chinese solar companies, we will ignore bias noise and apply a PE of 15 to Canadian Solar and Trina Solar, and a PE of 13 to Jinko and JA Solar. PE application based on EPS sees price objectives of $65 for CSIQ, $18 for Trina, $36 for JKS and JA at $13. Six months return objective is at 66% for CSIQ, 24% for Trina, 25% for JA Solar and Jinko at 8%.

Our view on revenue generation includes the following positive factors:
• New value add-ons
• China's consolidation plus rapid demand in H2. Capacity and asset bidding wars in full play to benefit strong financial players, including our names.
Some market negatives can fluctuate around the concepts listed below:
• Gross margin pressures
• Capacity constraints
• Value chain variables
• US market debacle

Both Canadian and JinkoSolar, by the execution of two different financial platforms, bolstered their expansion into the Chinese energy market, thus increasing shareholder value. First, JinkoSolar received $225M in a private equity sale, in exchange for 45% ownership of its power subsidiary, responsible for building and owning solar plants in China. Partners: China Development Bank International, the Macquarie Greater China Infrastructure Fund and New Horizon Capital are seen to offer assistance in financing, as well as to widen future opportunity horizons for the company. Jinko, when making this announcement, already augmented its solar plant objective from 600 to 800MW for a 2014 year-end completion. This also means that net income from the energy sales will be shared with minority interest at 45%. Initially viewed as adverse, this condition is only limited by the total volume of projects managed by Jinko's power unit. Considering that Jinko already managed to increase project scope and speaks of a potential 1.1GW to be built with the gathered equity, this particular investment in the company has qualities of temporary regression.

Secondly, Canadian Solar announced its intention to take part in an investment fund with overall capital contribution, along with Sichuan Development Holding Co. and third-party investors, totalling $810M. This particular setting seems to allow the company to sell its services and modules to the fund, and have to eliminate a portion of earned profits based on its own percentile ownership of the fund. Jinko and Canadian will recognize assets on their balance sheets, but it seems that Jinko will carry all the weight of liabilities of the total asset, while Canadian will hold a portion of the fund in the form of the investment and receive investment income only.

More positives are in project portfolios growing in China. JA Solar has around 700MW of projects, with the target to complete 200MW this year and sell some of it to third parties. In the apparent ownership transfer, the company is in waiting mode to recognize revenue that would bring earnings to a new level, something that is not getting much attention at this point.

The 500MW to be completed by Trina in 2014 is now enhanced by a portion of the 300MW accessed by the acquisition of Yunnan Metallurgical New Energy. Trina has another 682MW portfolio of early-stage, approved by the board projects, including 17% in Japan and 5% in the EU. Trina has committed to dispose of its UK solar plant assets and roll cash flow to another, newly acquired 50MW project also in the UK. The company's plans look to fuel growth with global solar plant sales (like CSIQ) in addition to becoming the largest module exporter of 2014.

Lastly, the 4.3GW Canadian Solar pipeline, which includes global and domestic projects, has been enhanced now by the creation of an investment fund with capital potential of $810M. While we do not know how this pie will be sliced, we can expect the fund to own around 600MW of solar plants.

The cyclical peaks and valleys of the solar industry created by the demand and supply disproportion may soon be a thing of the past, as we finally see signs of consolidation taking place in China. Assets of financially broken entities are being auctioned, and they are getting bid up in the process.

Another phenomenon is taking place with Chinese companies operating on the Mainland. The competition to acquire as many projects as possible is heating up another bidding process, with some of the secondary lineup players' targets beyond financial competence. We expect only a few wealthy entities to emerge, and to receive benefit with project availability not only in China, but places like Japan, which today cancels projects in limbo, most likely attained in similar conditions. Therefore, it should not be a surprise to anyone that US-listed companies are gradually increasing their stake in the country's project roster.

Another bidding war in China takes place on the third-party sales. This excessively oversupplied market is being retaken by the US-listed, which until now has concentrated on global dominance. During the second quarter, US-listed companies exported over 60% of modules, forcing other companies to market their products in China. It appears that sales on credit were the weapon of choice on the domestic battleground. Accounts receivable have rapidly increased in Q2, as financially stable companies sold on credit, while smaller, less liquid ones could not compete on terms. This strategy, in our view, represents the collective desire of top players to gradually eliminate smaller contenders. The second quarter round had $374M in sales on credit, made just by the companies in our portfolio review.

Those who can pay more also take assets, but perhaps by choice rather than circumstance; Jinko has lost its lease-to-own Topoint capacity to a higher bidder. Regardless of that fact, the company supported its increased guidance with capacity expansions, but one outcome of the situation could be a potentially lower gross margin if the new capacity comes partially as OEM. Another, more obvious reason is the global ratio of sales. Jinko had a great Q2 delivery roster, including USA, but South Africa and Chile contracts pumped up the revenue. We have not yet seen anything of this scale to make a similar contribution; besides, in Q3, we see Jinko's global module ratio drop in the shift toward China. Between potential OEM costs, the lower ratio of global contribution than Q2, and flat lined ASP, Jinko's EPS is being affected enough to lower our early-in-year estimates. We see the second half of the year as not as robust as we initially thought; still, Jinko is the second-highest earner among peers.

JA Solar's ratio, besides global module delivery percentage, has another dynamic ratio between modules and cells. We see the second one shift to about 80%, and the first one to look quite healthy based on CEDR analysis. JA also holds a potential ace up its sleeve: the already mentioned revenue recognition of the solar plants transferred to a buyer during Q2. Overall, margin is not going to get that much of a boost from solar plant sales. The margin is about 15%; however, we see gross profit from asset sales to be almost exclusively transitioned to the bottom line, improving the absolute net income, since most of the expenses have been already capitalized. The same situation is seen for Trina.
Finally, with the dissolution of the in-process or trade imports of poly to China, there could be pressure associated with polysilicon ASP. Another pinch point could be in the unequaled value chain. The legacy-based vertical integration was abandoned, as a part of a continuing strategy for the 2012 US tariff. Another reason was efficiency in wafer cost and quality provided by GCL, also GCL somewhat forcing the sale of wafer sales, by limiting poly sales.
We do not believe that vertical capacity is a big risk. First of all, there is hardly anyone left who has it. Secondly, the downstream expansion is a cure for all ills. While not being necessarily as powerful in China when it comes down to gross margin, it is the absolute value of sales per watt which will matter the most. Canadian superiority in this aspect seems to be shielding any potential problems due to its wafer small footprint, even before we recognize the value of wafer joint venture Canadian has with GCL.

Finally, the new anti-dumping and countervailing duties to the US will be responsible for new strategies, but will not make much of a difference to business outcome, in our view.
Companies will either: 1. use the 2012 tariff levels to export to the US using their own subsidiaries to import at the cost of goods as a base for a tariff calculation; or 2. completely bypass the tariff system by assembling outside of China, without the use of either Taiwanese or Chinese cells. At least all three companies in some ways had offered plans for the US-based manufacturing. Canadian already has a base in Canada, which is covered by NAFTA agreements. Temporarily, we consider deliveries by Jinko and JA Solar turning less significant when it comes to the US, whereas Trina and Canadian will explore their advantages in this market.

Read 2694 times Last modified on Wednesday, 24 September 2014 05:11
Robert Dydo

Robert is the founder and CEO of SolarPVInvestor and SPVInvestor Research, Inc. His career spans more than 20 years in supply chain, managing and planning operations for distribution centers. An ardent private investor, Robert found his niche in contesting misinformation about solar in general, and the Chinese solar industry in particular, while using his finance education matched with a lifelong ardor for the stock market

SPVInvestor Research, a Canadian incorporated research firm. We publish CEDR, the most complete, monthly report on exports of modules, cells, wafer from China, including focus on US-listed Chinese companies.