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JA Solar (JASO)

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Guest Klothilde
Not transparent with cost structure. Chairman doing arms length deals with other businesses he owns (is he or minority JASO owners benefitting). Looking at balance sheet they seem to have faired well compare to peers. I think this is due to being a middle man service partner. Without carrying own branded products they have been able to navigate the pricing volatility better (now they've ventured into branded modules though, thus competing with their customers). They signed a deal with Hefei city on Feb 26 2011 to spend 13.5 billion RMB to build 3 GW integrated wafer to module plant there. The project is supposed to be complete Sep 2013 (yeah right). Management hubris warning. To sum up JASO. Price is decent. Balance sheet is decent. What else are you getting? They don't like to tell you.
I disagree with the service partner theory since their tolling revenue historically has been very low. I would be surprised if the Hefei deal didn't allow for some degree on timeline flexibility based on market evolution. As to the secrecy, I don't regard this necessarily as a sign of underperformance. If I remember correctly the company decided not to disclose cell conversion cost any more at at time when they were cost leaders anyhow. Here are my working hypothesis for JA: Pros: - History of financial discipline - Lowest leverage and highest liquidity among solar 11 - Very competitive cost structure - Technology edge vs. peers - Higher or even highest fraction of high-power products produced (60% vs. YGE 15% and CSIQ < 5%) - Very strong traction in Japan - very high GM contribution out of Japan - Very good market penetration in China Cons: - Dubious arms length deals by management - Low Brand awareness in the module space - Channel conflict through direct competition with with customers - Highest exposure to US tariff (cells) and possibly higher exposure to EU tariffs than peers Lack of cost transparency is giving me a hard time, but I'm not posting it as a Con. GOGS in Q3 are way higher than what my modeled cpw x volume would give and I don't think inventory carrying cost is enough to explain the gap. So I will wait for Q4 to hopefully get a better picture. My model even gives me a slight chance of net profit in Q1 so I'm on the watch out...

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Guest JulyWebb

From what JASO management has said their customers asked them to make modules and those customers have helped them in their factories in the module making. Their are some clips on youtube that confirm this. JASolar at EUPVSEC2011 can be viewed where JA is interviewed. JASO also has like you said one of the best balance sheets in the industry. They've managed that area well. They paid a portion earlier than needed on their convertible notes due May 15, 2013 in June of 2012 $89.2 Million with the remaining balance being $130.5 Million. This doesn't look like an issue for them with their balance sheet at $545 Million. From my understanding they have not borrowed any money from the CDB but there is funding available for them to. What else is nice since they did the 5 for 1 R/S making their float 1/5'th of what it was. My belief is they were shorted to oblivion because of their float size in 2012 & the fear factor that they made cells. All over done JA spent the time in the early Fall to make alternatives to not incur tariffs by either using one of their manufacturing plants in Mexico or Maylaysia or partnering in Taiwan. From being the largest cell provider in the world I believe their capable of also being one of the largest module producers. In 2012 from Cleantech Media reported they climbed from the 15'th spot to #8 as one of the largest module producers, not bad for not having that long of history of making modules either. Their modules are definitely taking off accounting for from memory 60% of their revenue last quarter. JA recently won a contract with Siemens in Israel to supply modules. Explo my question is once they pay off the remaining notes and they could also do that before the scheduled date. They did pay a portion of it earlier than they had too. What benefit would/could be perceived to the stock price after this is paid off ? Being a OEM provider could be a reason why they have not revealed as much, as you seem to think? What is it that you feel they are not revealing?

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Guest sony1

Yea, thay had a presentation in february or whatever where the 3 GW Hefei date was moved to 2015.

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Good pros and cons list Klothilde. As you saw I have some more cons maybe. For me the main problem with JA is not that the net value isn't good relative to valuation - it's the mess and non-transparency of things. I wish every one would do as SOL and clearly state ASP and selling cost and give cash flow analysis each quarter. I'd say that JASO is a quite safe bet here on the financials side, but is it good to have 2.8 GW cell capacity in China? For some reason cell capacity in China penalized in US and might be in EU. Overall the good financial it is just not worth the operation uncertainty for me. Btw, being industry middle man even if not doing tolling still enables nimble inventory and AR handling compared to module brands having to stock up warehouses in major end markets and give long credit terms.

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Guest littleguyintucson

Jaso has a large convertible bond expiring. Jaso has been hoarding the cash for a year to pay for this convertible buy back. Once the buy back is done interest payments will drop significantly. Jaso will have one of the lower Operating costs with one of the lower debt payments. Jaso is also significantly increasing module sales and will be profitable on Cells. In Q2, they took a large writeoff for capacity.

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They also ship a lot of modules to China. Again, both good (Japan) and bad (China) from an geography impact on ASP.

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Yes, their multi wafer capacity have taken two big impairment writedowns two years apart. Don't remember if it was that crap they bought from the chairman at peak wafer pricing or if it was the other wafer plant.

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What is it that you feel they are not revealing?

I'd like to know more about what quality level of wafers they buy vs make themselves and how much their procurement and production cost of wafers are. The quality level of wafer substrate used by their cell lines then gives how much value their cell processing adds and I'd like to know how much their conversion cost is. Finally the module processing cost would also be interesting to know. JASO just generally seems very uninterested in sharing their key performance indicators. Inventory effects are winding down now as market prices are stabilizing, so we'll get a better sense of their profitability soon. Generally they should do well, since poly and wafer prices have been depressed, cells have been healthy (15% processing margins) and modules bloated (30% processing margin) in Q4-Q1. Companies that should have an easy Q4-Q1 are those buying poly and wafer. Companies that should have a difficult Q4-Q1 are companies making poly and wafers. That's the expectation perspective that I look at the Q4 and Q1 result from (after Q1 the reverse applies, i.e. things improve for poly and wafer makers, while things compress for the buyers). As you might have seen I've been impressed with SOL (faring best on the stormiest sea). SOL also happens to be very transparent. That makes the pick easier. Not saying JASO looks like a bad pick, but it is more difficult to assess its operational (not financial) excellence.

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Guest Klothilde

some tidbits from the CCs:

Q1 CC:

"Kelly Dougherty - Macquarie Research Equities

Can you give us a sense of what your wafer processing costs are even relative to selling your peers that have already given numbers? Are they X percent higher because of the underutilization?

Ming Yang - VP of Business Development and Corporate Communications

I’d say we were probably similar in cost, so just ballpark probably in the US$0.12 to US$0.14 type of range in as of June."

Q3 CC:

"Christoph Flinck

Maybe I can answer that question. ...When it comes to the manufacturing costs, so our manufacturing cost now have been in the mid 50s dollar cent range and went up a little bit compared to previous quarters due to some under utilization. This means that we see costs modules quarter to quarter flat and wafers as well. The increase comes from the cell parts."

My guess is at full capacity they are running close to 47 cents in-house conversion cost. 12 wafer, 15 cell, 20 module. Buying wafers from the spot market they end up at 55 cents all-in with 20 wafer, 15 cell, 20 module.

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I've been modelling 14, 15, 20. High wafer because they can't utilize their multi plant (not competitive) and mono is high by nature. I don't think the can buy 20 cents wafers on average. They do a lot of mono including high efficiency mono and their multi is also quite high efficiency. A high efficiency wafer does not only lower per watt cost in the BOS step like a module does, it lowers the per watt cost in the cell and module processing step too. Therefore high efficiency premium for wafers as well as cells (easiest seen in the mono vs multi price diff) is high in absolute cents (and of course much higher in percentage terms than for modules). Thus there's a lot of gross margin to be made by adding conversion efficiecny early in the value-chain. So the big question when it comes to JASO is if they buy or add that value? Let me say like this. I think they are a peach, but since their hiding themselves I don't know. Value of other names are more obvious to me.

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Guest Klothilde

So the big question when it comes to JASO is if they buy or add that value?

That's a good question. On the mono side I think the answer is quite straightforward in that they add value: Just compare the datasheets of CSIQ and JASO on standard 72-Cell 5' cells: http://www.canadiansolar.com/en/products/standard-modules/1.html http://www.jasolar.com/uploads/files/201210/20121018105345_r5ZcX3.pdf Here CSIQ's peak efficiency equates to JASO's average efficiency. And both company's start out from the same mono wafer. When it comes to poly standard 60 cell modules go from 235-255W for CSIQ and from 235-260W for JASO, thus not really a big difference there. Seems to me both CSIQ and JASO just buy the regular poly wafers from GCL. So I would guess to answer your question: no value purchase here in the form of external HP multi wafers. Interestingly their MAPLE quasi mono move seems to have died or been scaled down again. No talk on the last CC. I figure they may switch to HP multi instead, either through internal development or in partnership with GCL. P.D. Can you shed some light why you think their multi plant is uncompetitive? I'm just starting to dig deeper into JASO and also want to hear about the "dirty" secrets...

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Guest Klothilde

No idea, I follow your inquires on JASO thread. I am hearing that JA is making huge effort to be number one Chinese company in Japan.

The interesting thing is that they are following a pure OEM approach in Japan, i.e. they leave branding and marketing to their partners. Given the known apathy of the japanese for chinese products imho this is a pretty smart move.

I also hear that they want to be big in China. On basis of this I am split on ASP.

As long as they generate cash in China I don't think there is a problem. They can use China as a sink to absorb whatever they cannot sell elsewhere and crank up utilization. If exports to Japan stay as high as in january then that volume alone will go a long way in covering opex and interest of the company...

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Klothilde, I think JA is mainly a mono play too, in terms of differentiating strength. This probably helps them too get big in Japan. The multi wafer plant was impaired in 11Q4 and 12Q3 if I remember correctly. Another thing to consider is that they've committed to take 10 gw wafer volume from GCL.

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Guest Klothilde

I'll look into the poly side. The GCL contract seems to be based on market pricing, which is imo better than the trina contracts. Anyways, there are imo 2 pieces of critical information coming our way to shed more light on JASO: 1) COGS in Q4 to see if CPW is reconcilable 2) Export data for feb to see if jan was only a spike or a sign of a trend to come Regarding differentiation on the multi side: Imo it is a safe bet to consider that JASO is working on HP multi, especially since they seem to be winding down quasi mono and since they have a close partnership with GCL (also through tolling), who made inroads with their S1+ HP multi wafers already. One thing that I'm sensing is that the ramp of HP multi technology for some reason is not that straightforward. GCL seems to devote only a small fraction of their capacity to HP multi so far and also SOL is up till now basing almost all of their modules on quasi mono and has only started "trial production" of HP multi modules. Any thoughts on why the ramp is so slow?

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Guest JulyWebb

That's good putting all that crap behind them! JA doesn't divulge much info on their cell cost is all I can see and from what they have said in past Q&A's Conference Calls they do not want to get into that referring to it as trade secrets as they are an OEM provider and not just a manufacturer of modules.

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Guest Klothilde

“We should learn how to maintain sustainable and stable operations rather than pursue shipments,” Xie said. There's the prudent and the reckless, and this guy is one of the (few) prudents. Go figure who the reckless are... It's easy if you try...

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Guest Uncle Chang

Good for JASO to be prepared. I think CSUN has more than prepared as all shares loaned to CS appeared to be back to CS on their SC 13G filing.

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Guest Uncle Chang

By the way, I'm not pumping CSUN, people always blame me for pumping stocks. I just stated what I saw and CSUN's balancesheet happens to be one of the best of all. That said, none of the Chinese Solar company can survive financially if their banks insist pushing them off the cliffs demanding loan paybacks. I'm not bashing them either, and I don't think they'll be stupid to do that either.

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Guest Klothilde

By the way, I'm not pumping CSUN, people always blame me for pumping stocks. I just stated what I saw and CSUN's balancesheet happens to be one of the best of all.

I think I'm missing s.th. fundamental here. Excel tells me that CSUN has the worst balance sheet after LDK. Net debt (173M) over equity (76M) was 229% in Q3. So what am I not seeing here?

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