Article / 29 May 2015 at 5:13 GMT

Earnings Review: JinkoSolar has its day in the sun

China Watcher / Shanghai
China
  • Unlike its rivals, JinkoSolar has a more internationally diversified order book
  • Downstream business fell short of the 160-180 megawatts guidance range
  • China's bottleneck of solar projects in China should be solved during Q2
By Neil Flynn

Chinese solar energy firm JinkoSolar announced strong results on Thursday morning, which saw the share price end the day up 4.23% at $29.60. The downstream business felt the constraints of strong overseas demand, but this should recover in the second quarter as the firm expects strong demand from China to begin shortly. 

Headline results

Revenues of RMB2.749 billion beat analysts’ consensus of RMB2.308 bn, whilst non-GAAP diluted earnings per American Depository Share of RMB5.36 beat analysts’ consensus of RMB2.48.

These are strong results from the firm in the seasonally weak first quarter, and investors should be expecting to see this as a strong starting point for the fiscal year. The decline in gross margin was due to the decrease in average sale price and the depreciation of the EUR and the JPY, however, this should recover in the second quarter.
 
JinkoSolar Revenue & Earnings
Source: JinkoSolar Investor Relations - Create your own charts with SaxoTrader. Click here to learn more

Total module shipments were in line with management guidance, as 753.8 megawatts (MW) fell within the guidance range of between 710MW and 780MW. Third party product shipments of 789.2MW exceeded the guidance range of 550MW to 600MW, but this came at the expense of the downstream business, which saw shipments of 50.3MW fall short of the 160MW-180MW guidance range.

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 Setting up an overseas base has worked well for JinkoSolar. Photo: iStock

Whilst this downstream result looks disappointing, management stated that this was a capacity constraint issue. The firm is running at 100% capacity utilisation, and due to the strong demand from the UK and Japan, the firm decided to control the downstream shipments during the quarter by delaying shipments until the second quarter.

The new Malaysian production facility should help to reduce this capacity pressure, and investors should expect to see the downstream business perform better throughout the rest of the year.

Domestic growth should begin next quarter

The expected demand from China is a major driver for the firm and the industry during 2015, as the government focuses on weaning itself off fossil fuel dependency and onto domestic renewable energy sources. As I stated in my earnings preview, China added 5.04 gigawatts (GW) of capacity during the first quarter, which is just short of France’s total solar capacity. By the end of the year, the government expects to have added a total of 17.8GW of capacity, which is an upward revision of previous guidance.

There is currently a bottleneck of solar projects in China, which should be solved during the second quarter, as the government accelerates the approval process. It is thought that the government will pay the outstanding feed-in tariff from 2014, and begin paying the feed-in tariff for 2015 projects, which should see JinkoSolar have a notable increase in downstream project completions over the next two to three quarters.

Management stated that the National Development and Reform Commission asked firms to submit a list of all projects that have yet to receive feed-in tariffs, which they believe is a strong indication that the whole process is being accelerated.

Strong international presence

China continues to be JinkoSolar’s main market, as 37.5% of module shipments were for domestic projects during the quarter. However, unlike its rivals, JinkoSolar has a much more internationally diversified order book, and the firm saw growth in its North Americans and APAC module sales, which accounted for 13.3% and 23.2% respectively of module sales.

The Malaysian factory has already become fully reserved out and the firm currently has 1.1GW of sales contracts for the US market for 2015 and 2016, and more orders are coming in. As the firm is forecasting that it will produce 500MW of solar cells and 450MW of solar modules, this facility will also help to relieve the capacity constraints that restricted the downstream business growth during the quarter.

The benefit of having production outside of China is that the firm can avoid the high tariffs applied to solar modules from China in the US and EU. The high order list is due to JinkoSolar being the first Chinese manufacturer to move their operations overseas in order to avoid the tariffs, and hence US- and EU-based projects are able to make orders without concerns over higher costs. Due to the initial success of the production facility, JinkoSolar expects that the total investment for the Malaysian factory should be paid off within six to eight months.

Update on the JinkoSolar power IPO

As I stated in my earnings preview, the downstream business is set to hold its own US IPO sometime this year, on the condition that the business reaches certain targets set by management.

In the fourth quarter conference call, management stated that so long as the downstream business can connect between 800MW and 1GW of solar capacity by the end of the first half of the year, and 1.5GW by the end of 2015, then investors should see the Jinko Power business list in the US.

After shipments of just 50.3MW in the first quarter, the downstream business connected 617MW of capacity by the end of the quarter, compared to 503MW at the end of the fourth quarter of 2014.

Due to these constraints on first quarter shipments, management has revised its half year and full year targets to 750-800MW and 1.1-1.3GW respectively. Given that the firm expects to see strong demand from Chinese domestic projects during the second quarter, and first quarter downstream shipments were delayed until the second quarter, it is likely that we will see the firm comfortably meet its half-year target.

The downstream IPO is an important event for JinkoSolar for two reasons. Firstly, the notable buildup in debt is due to funding for downstream projects, so the IPO should relieve this debt pressure from JinkoSolar.

Secondly, under US GAAP regulations, revenues from shipments to its downstream business can’t be recognised, so the IPO should help JinkoSolar to realise a notable gain in revenues.

-- Edited by Adam Courtenay

Neil Flynn is a portfolio manager at Alcuin Asset Management. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.
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