As we review the results of this year's third quarter, it is becoming apparent that the solar industry is no longer an ecosystem made up of the same organisms, only differentiated by their individual names and the size of their capacities. In the past, most likely due to its own inefficiency, the market quite often moved the sector up and down in ruthless harmony. Using almost flawless precision, low performers matched the uplifts of the leaders, and often the sector was brought down based on the poor result of a single entity.
Since a certain amount of predictability was built on those characteristics, an ability to see beyond that strategy is becoming necessary to understand the current status of the industry. In this model profitability becomes a factor, which moves companies to a new level of scrutiny.
Certainly, Trina Solar (NYSE:TSL) has assured clout with Wall Street. The company has one of the cleanest balance sheets among its peers. It has a solid capacity, and at the height of its glory, it has been recognized as a champion of the last solar high cycle. This impression continues to this day.
This year, JinkoSolar Holding Co., Ltd. (NYSE:JKS) made its first profit in Q2, ahead of everyone else. Thanks to the newest equipment among peers and debottlenecking-born efficiency, combined with high conversion modules, the company delivered over 18% in gross margins, already cueing a powerful third quarter. Surely enough, Jinko surpassed all expectations.
Jinko earned $0.72 per share, with revenue of $320M. Its net income was $16.9M, and revenue-generation per share was $13.9. The net income margin was 5.1%. Jinko's operating profit margin was 12%. Gross margin was 22.3% on a gross profit of $71M.
In the case of Trina, the company made $0.14 per share on revenue of $548M. The net income was $9.9M, with the revenue-generation means of $7.7 per share. The net income margin was 1.8%. Operating profit margin was 1.1%; in dollars, Trina made $6M from its operations. Gross margin was 15.2% on the gross profit of $83M.
Removing the per-share calculation for a moment, Trina had 71% greater revenue, but due to lower margin, its gross profit dropped down to 16% greater over Jinko. When comparing income from operations, Jinko blasted 660% over Trina. This means Jinko's business was more than 6 times more effective in obtaining operational income. Operating expense ratio (OER) for Trina was 14.1%, and Jinko's was 10%. Trina's operating expenses (Opex) took 92% of gross profits.In the case of Jinko, this percentile was 55%. Considering that Trina took provision for doubtful accounts and Jinko recovered money from this line, Trina looked unfavorable in comparison.
The problem here is that while Trina is expanding its sales potential, without any savings efforts, its Opex will grow with it. In absolute terms, the company will have an opportunity to make a profit, but its operating expenses will impede bottom dollars. Meanwhile, in the case of Jinko, its ability to keep the same structure, while increasing sales, will raise its earnings per share more effectively.
While the next segment of the income statement refers to the financing aspect of the company, the order of entries for the most part is fixed and does not increase impacts with more revenues. Trina has dropped its $6M generated by operations to around $4M of earnings before income taxes (EBIT), helped considerably by foreign exchange and other income. An application of the tax benefit doubled the net income.
The increase in market value of the convertible senior notes caused a $14M deduction on Jinko's income statement. Management pointed out that change in fair value of bonds and capped call options impeded the earnings, which would be $1.36 without this non-cash item.
Summarizing this section, Jinko was just a lot better at earning money during this quarter. Having $157M in project assets versus Trina's $69M, Jinko shows more progress into an EPC business today. By holding power generating capacity, Jinko has become an energy supplier, growing at the fastest pace of anyone listed in the US. Our ED Reports also demonstrated a positive reversal, at least in the third quarter, with Jinko exporting more modules quarter over quarter, where the opposite was true for Trina. Those global exploits, besides increasing revenue for JKS, reduced the average selling price gap between the two companies.
In the case of Trina, certainly its financial balance sheet is its largest advantage, and with the operational ingenuity of Trina's executives, the company should not be neglected by current and prospective investors. Let's throw out some stats to support this.
Trina had $558M in cash and equivalents at the end of Q3, with $1.1B in debt. Trina also had $600M in accounts receivable, a potential trouble area in tough times, but a quick cash generator in times of prosperity. Jinko had $218M in cash and restricted cash, less than half of Trina's. However, the company had $138M in short-term investments, which are as good as cash, but are term deposits with less than a year maturity. Accounts receivable were at $138M. Debt-wise, Jinko had $641M in financial debt. Per share, Trina had $8 of cash, Jinko had $15 if including short-term investments. Debt-per-share, Trina had $15 while Jinko's debt was $30. Still, in terms of comparison, both companies had a similar proportion of cash to debt, where naturally, less debt is more comforting to investors.
Trina's plans for entering the solar farm business can be fully supported by cash on hand, but this expansion still remained only a goal during this quarter, with the sale of a 3.5MW Italian plant for $9.9M. That said, Trina's CFO Terry Wang estimated a completion rate of 100 to 200MW projects per quarter in the next year.
Analysts' estimates predict Trina to make $0.35 in 2014. If Trina simply does what it did in Q3, this is at least $0.56 per share. I think it's reasonable to assume that Trina can get at least $1 in 2014 on its manufacturing efforts alone. At the price the stock is trading, it seems to have a P/E of 14. The upside is in project sales, producing 20% gross margins or FiT income at Jinko's levels.
Jinko is looking to expand its module capacity up to 2GW in 2014, with what is currently the most efficient processing operation in the world. Its solar plants' portfolio will double in the fourth quarter and reach 500MW in 2014. In our opinion, an average analysts' estimate of $2.76 per share does not even consider the whole module business potential.
Excluding non-cash deductions, the company already made $1.36 during Q3. The entry, which affected it, will still play a role in the forthcoming quarter, as the particular bonds are $13M undervalued to their face value. Jinko's excellent operational performance increased the fair value of its market-traded financial instruments, having non-cash consequences on the income statement.
By just repeating Q3 results in 2014, even on a fully diluted basis, $5.00 is highly probable, as long as $32M retained for prior module sales is included. With $65M of FiT income from 200MW of solar plants at 60% GM, Jinko can possibly make $39M gross profit, and net profit of 30% will result in $19.5M. Including the additional 300MW of projects planned for 2014, calculating only half-a-year contribution will boost earnings per share by an extra $1.34 per share.
At $6.34 EPS for 2014, Jinko is a new rock star among peers. Its potential lies in the $50 to $63 range per share, using 8 to 10 price-to-earnings ratio. Trina's market's valuation seems to consider the manufacturing model only, but if plant sales come on line at the speed described by Wang, modification will be required.
Disclosure: I am long CSIQ, JKS, SOL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.