Strategic trade
Trade view / 12 November 2015 at 4:42 GMT

JinkoSolar set to buck rivals' earnings trend

China Watcher / Shanghai
China
Instrument: JKS:xnys
Price target:
Market price:
Background

JinkoSolar suffered heavily on Tuesday as disappointing earnings from smaller rivals cast doubt on the upcoming earnings releases of China’s market leaders. JinkoSolar endured a 9.2% fall on Tuesday followed by a 0.3% decline on Wednesday, but I believe concerns over smaller rivals don't justify this fall.

JinkoSolar has distinguished itself from rivals because of its strength in both international and domestic markets. International growth has been helped by its offshore production facility in Malaysia, which has allowed it to service US and EU clients without having Chinese tariffs imposed on products – they aren’t technically produced in China, so are therefore exempt. 

This also plays nicely into expected strong demand from the US as a result of the expiry of the US solar investment tax credit. I expect that this will play a major role in production growth over the coming few quarters.

From a domestic market perspective, there is likely to be a reduction in China’s solar feed-in-tariffs by Chinese New Year (February) 2016, which will improve JinkoSolar’s profit margins. This will be a major theme of not only JinkoSolar’s revenues over the short and long term, but also of every Chinese solar panel manufacturer. 

What separates JinkoSolar is that it has one of the cheapest production costs in China, as well as one of the largest revenues. In addition, it has the best downstream business in China, which will be a major beneficiary of government reforms and focus on expanding the country’s renewable energy production and usage.

JinkoSolar will announce its third-quarter earnings on November 19, which will give investors a chance to see how the firm is preparing for the increased domestic focus on the industry, as a result of the 13th five-year plan. 

While the earnings of smaller and less efficient rivals may seem disappointing, it should only highlight the fact that JinkoSolar (and rival Trina Solar) are significantly more developed in the industry, and are in a much better position to capitalise on both domestic and international demand.

Jinkosolar's 5 Year Chart
Source: Stockcharts.com. Create your own charts with SaxoTrader; click here to learn more. 

Management and risk description

Any earnings release will increase the volatility of a trade thesis, and the same can be expected for JinkoSolar. Its third-quarter earnings release will be closely followed by the industry. Rival Trina Solar will be releasing its earnings on November 23. As both firms are market leaders in China, the two events will likely be volatile for this trade view, and investors should be aware that if JinkoSolar disappoints on the 19th, it is likely that Trina Solar will compound this.

As with any China-related trade, concerns over the health and state of the economy are persistent, and appear every time that a data release misses (or in the case of GDP, beats) consensus. I maintain my belief that we won’t see a hard-landing for the Chinese economy, but these concerns continue to appear in the trading of all US-listed Chinese firms.

Parameters

Entry: $22.98.

Stop: $20.

Target: $26.

Time horizon: two months.

— Edited by Gayle Bryant

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