JinkoSolar (JKS) is the lowest-cost solar components producer in the world, according to my research. It is vertically integrated to some degree, as it manufactures solar wafers, cells, and of course, modules. The business climate in the solar industry is changing very fast, and a few companies have already doubled, or even tripled, in value. Jinko itself went from $4 at the beginning of April to flirting with $20 today. That's a 5-bagger in 5 months, and amazing as that is, I don't think we are anywhere near the true potential of solar companies in general, and especially JinkoSolar. While the subject of analyzing the solar industry dynamics is a matter for another article (or even more), I will focus today on JinkoSolar's recent turnaround and near future, with a little taste of what Jinko could become in the mid to long term.
As Jinko is practically vertically integrated, it is the lowest-cost producer among the Chinese solar producers. Let's compare the top Chinese solar companies' cost per watt of a solar module, Yingli Green Energy (YGE), Trina Solar (TSL), ReneSola (SOL), and JinkoSolar.
|Solar Module Cost Per Watt|
|Company||Cost Per Watt|
|Yingli Green Energy||$0.57|
Source: Companies' Earning Calls and my own analysis.
This advantage pushed Jinko to be the first company to report a profit this last quarter. This is mainly attributable to the significant increase in solar panel prices in recent months. It's the first time prices have been in a sustainable uptrend for more than 2 years. Oversupply issues in the industry caused prices to plunge from $3.5 a watt in mid 2010 to the lows we saw 9 months ago of $0.65 a watt. These days the prices are pretty stable around the $0.70 level. The recent months' price increase helped the different solar companies achieve positive, and even double-digit, gross margins. If you had told any Wall Street analyst that these companies would report double-digit gross margins a year ago, he would have laughed in your face. To understand the complete picture, one must understand the cost reduction efforts these companies have taken over the last 2 years. Solar companies have invested a fortune in order to lower the cost of modules at a healthy rate. This caused all companies to cash in a nice gross margin, when the price trend changed direction.
In the last quarter, JinkoSolar reported its first quarterly profit after six consecutive quarters, a profit of almost $8M. I think this is only the beginning, and things look very bright for Jinko. I will go through every side of Jinko's business, and will show you how it is going to run at a rate of $4 earnings per ADS by next year, and it's not even going to stop there.
The Solar Components Sale Business
Jinko is running very close to 100% utilization rate of its current capacity. The company gave a guidance of 460MW-500MW module shipments for Q3, and it also stated that it is basically fully booked until the end of October, which gives its guidance a whole lot of confidence. If we take the middle point of their guidance we get 480MW. Now we can start thinking of future quarters. I assume wafer, cell and module shipments will grow about 5% from quarter to quarter, which I think is a fair assumption with the exploding demand all over the world. We are witnessing a few major plays here: worldwide capacity is limited. The Chinese government is well aware of the supply-demand situation, so much so that it has decided to ban new capacity, thereby limiting the solar companies to grow capacity only through M&A. Almost all the solar companies' shipment guidance represents at least 20% growth for 2013. China has declared its new subsidy program and the 35GW target until 2015. Multiple emerging markets are growing fast. Everything here points to continued PV shipment growth for the industry. In my model, Jinko's cost and ASP will see just modest cost reductions, and ASP increases, to be conservative.
I have summed up my forecast for Jinko's total MW shipments, ASP and cost until the end of 2014.
|Shipments, Cost and ASP|
|Shipments in MW||512||514||536||558||600||622|
|Cost per watt||$0.48||$0.48||$0.479||$0.478||$0.477||$0.476|
|ASP per watt||$0.62||$0.625||$0.63||$0.632||$0.635||$0.637|
Notice the ASP Jinko realizes is different yet correlated to a certain degree with the ASP we can witness at PVinsights.
The Big News
The big news a lot of investors are missing is the true potential of the new business strategy Jinko is applying. Recently Jinko reported that it has connected its 100th MW to the Chinese grid. It is aggressively building downstream projects, and connecting to the grid. Jinko set impressive targets for the rest of 2013 and 2014, as it stated that 200MW in total will be connected by the end of 2013, and 500MW will generate electricity by the end of 2014. It has also stated the amount of electricity they expect to produce in 2014 (630 GWh), and the amount of sales revenue this electricity will generate for them ($93M). If Jinko continues building solar power plants in China, keeping them and selling the electricity they generate, it can change the face of the company completely. Just to make it clear, the low-cost profile of Jinko enables it to gain almost 25% profit from this operation. No other solar company can make these profits with the FiT plans that are currently in place in China. For further reading about the profitability of this operation you can go here. Even though Jinko does not need to report revenues for this segment separately, as they are less than 10% of total revenue, they do affect gross margin and the bottom line. I did the math and came up with the following numbers:
Revenues By Segment
The effect of Jinko's new business for the following year is substantial. If the company can maintain the rate of building solar plants, by 2017 Jinko can get about $500M in revenue from selling power in China for the FiT and produce more than 3.1 TWh of electricity in China. These numbers are just astounding. There is the financing side of the power sales business, but this issue is a matter for another article.
Jinko raised more than $60M two weeks ago. This makes sense for the business, and reassures us that it won't need any more cash in the near future. As for the cash needed for building the plants, Jinko has already signed with CDB (China Development Bank) a $1B financing agreement until 2017. Although it is a risk, and a matter needed to be closely followed, I think Jinko will not raise any more capital anytime soon.
Earnings And Valuation
As implied by the revenues I stated above, earnings should be as follows:
|Earnings Per ADS|
|Earnings Per ADS||$0.55||$0.58||$0.68||$0.82||$1.04||$1.16|
Note: Jinko ADS are trading on the NYSE, each ADS is 4 common shares.
Currently Jinko ADSs trade for approximately $20 (at the time this article was written). This gives Jinko a P/E ratio just shy of 14, if we consider last quarter's annualized EPS. If we assume the P/E of 14 expresses all of the company's future prospects, and apply it to the annualized EPS in Q4-14, we get $65. To feel more comfortable we can cut this number to just $40, and we would still get a 100% upside on today's price. In the long run, I think the CBD agreement reflects the confidence of the Chinese government in Jinko, and the solar power sales business can turn into a significant and sustainable source of revenue for the company in the coming years and push the company value even higher. Looking forward to your thoughts about this exciting play.