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Article / 20 November 2015 at 3:54 GMT

Jinkosolar beats consensus, but downstream unit fails to shine

China Watcher / Shanghai
China
  • Jinkosolar's Q3 earnings beat revenue and earnings consensus
  • But the solar firm raised concerns about the debt on its balance sheet
  • Capacity constraints impair growth for its downstream business Jinko Power
  • Jinkosolar has delayed its plan spin-off of Jinko Power

By Neil Flynn

Solar panel manufacturer Jinkosolar released its third quarter earnings on Thursday morning, beating both revenues and earnings. However, as with many of its domestic rivals, Jinkosolar sold off despite the good results, closing the day down 9.5%.

Concerns are arising about the firm’s growth prospects in the light of capacity constraints, as well as the delayed spin-off of its downstream business Jinko Power.

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Renewables including wind and solar power are a key focus of Beijing next five-year plan,
which is cause to be bullish on the Chinese solar industry. Photo: iStock



Strong headline results

Jinkosolar’s headline results were strong, with revenues of $637.6 million beating consensus of $561.28mln, and EPS of $1.04 beating by consensus by $0.02.

All in all, these are strong results from the firm. But the reaction bears close similarities to rival firms, because despite seemingly strong results, the share price sold off after the announcement.

Jinkosolar revenues






















Source: Jinkosolar Investor Relations

Strong revenue growth was impressive, and is a result of growing demand, not just from China, but globally. The proportion of shipments to China fell to 31.4%, and whilst the home market is still the largest market for the firm, that is a notable decline from 44.7% in the second quarter.

However, it should be remembered that when the Chinese government’s Five-Year Plan is officially announced at the start of next year, renewable energy sources will be a key focus. This will be a major long term driver of Jinkosolar’s revenues, and is why I remain bullish on the Chinese solar industry.

Cost per watt has remained relatively stable over the past few quarters, particularly as silicon costs have fallen by just $0.02 over the past year. The overall trend of falling costs per watt is better seen in rival firms, such as Trina Solar. The firm broke through the $0.40 floor in the second quarter, with a cost per watt of $0.39. With Jinkosolar at $0.41 in the third quarter, and Trina Solar announcing its own earnings on Monday, there is the potential for the differential between the two firms to widen further.

Jinkosolar cost per watt
















Source: Jinkosolar Investor Relations

Downstream worries?

I was slightly concerned that the firm has been making little progress in its downstream business. Over the past five quarters, the firm has missed its downstream module shipments on four occasions, the average miss of these four quarters being 44.8%, with the only beat being a mere 4.3%. Whilst this isn’t a sudden realization, the firm failed to provide a forecast for downstream shipments for the fourth quarter.

The explanation given by the firm is that it is facing excessive demand for solar modules, particularly from the US, and hence it has been serving third party demand instead of its own downstream business. This is all fine, but this is likely only adding further delays to the spin-off of its downstream business, Jinko Power, which is primarily responsible for the increase in debt during 2015.

Management has stated that the targets for Jinko Power’s production are still in focus, with total project development scale targets in 2016 not expected to be affected. The issue that this raises though is that the firm is clearly suffering from capacity constraints, which raises questions about its growth prospects going forward. Domestic demand as a result of the five-year plan from the Chinese government will add further strains on the firm’s production capacity.

Jinko Power’s debt

A growing problem is the debt on the balance sheet. The continued delays on spinning-off the Jinko Power unit means that the extra debt remains on Jinkosolar’s balance sheet. Management did state that the increase in debt during the year is solely related to Jinko Power. This is slightly concerning because at the start of the year, the firm stated that it would spin off the unit in 2015. This has obviously been delayed, and investors should expect no earlier than summer 2016 before this happens.

The problem is that it leaves the firm more susceptible to currency risk. This was highlighted by exchange loss of $19.1mln, as a result of the yuan's depreciation against the US dollar in the third quarter. Whilst it may be unlikely to happen again in the near term, it does highlight the risks that Jinkosolar faces by delaying the spinning-off of Jinko Power. Management stated that the US market currently isn’t favorable for the spin-off, so the firm is looking at other options including Hong Kong and the domestic Chinese market, reiterating that it will be done in 2016.


– Edited by Robert Ryan

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.


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