On October 7, I published an article in which I claimed that JinkoSolar (JKS) shares are worth at least $40, based on the current state of the industry and company. This marked an increase of 59% from the October 7 closing price. After watching the company's share price reaching close to $37 in the past week, I decided to write a note re-examining the JinkoSolar story and explaining why my view of the company has gotten even more positive.
China M&A Plans
Recently, the Chinese government has shown further support for the solar industry and reported it is in the process of drafting M&A guidelines for the industry. It is now a few days later and JinkoSolar is already issuing a press release about taking control of a bankrupt solar manufacturing facility with "recently purchased equipment." This is a facility that has a capacity of 500 MW for wafers, 500 MW for solar cells, and 100 MW for modules. After taking control of the facility on January 14, JinkoSolar will be the proud owner of almost 2 GW of wafer capacity, 2 GW of cell capacity, and 2.1 GW of module capacity. This means the company can grow even further in 2014 than I previously presented. In my previous series on "The Solar Revolution," I explained that, with the government ban on new capacity, the Chinese solar industry is expected to consolidate very rapidly. We are just seeing the start of such consolidation and I expect further reports of M&A across the industry, which will enable further industry growth.
JinkoSolar Project Business
JinkoSolar announced another agreement with China Development Bank for $66M for projects over a 15-year financing period. I believe this is another vote of confidence in JinkoSolar by the Chinese government. On December 27, the company reported that it had reached 213 MW of connected projects. This is according to plan, and the press release repeated the goal of 500 MW by the end of 2014. I see this as a sign of excellence in execution by the company.
At an accelerating rate, JinkoSolar is turning out to be the most downstream-focused solar company in China among the big companies. This puts the company in a very good position through 2015, at least with the benefit of the generous feed-in-tariff (FiT) China put in place last year. In my previous article, I showed how the downstream business creates a recurring revenue stream for the company.
Margins Are Better Than Expected
In its Q3-2013 earnings call the company announced that power sales business generated about $6.6M in revenues. This business saw a gross margin of 60% and a net margin of 30%. These are fantastic margins and even more than what I previously expected. By Q4-2014, the end of this year, I expect JinkoSolar net income to enjoy over $15.5M of power sales in net income, almost 5 times more than last quarter's total of $3.3M. This alone doubles JinkoSolar's net income from Q3-2013. This makes me to believe we can see JinkoSolar's valuation rising up into the $65-$70 range before the year ends. To see further details, check my last article (link in the top of this article).
As I made clear in my previous solar articles. I don't believe that this solar boom is to end anytime soon; I expect the solar industry to keep growing and I think that investors that will join the ride with JinkoSolar will find themselves rewarded. JinkoSolar is enjoying the solar industry's fast growth as well as building a thriving, high margin, recurring power sales business, which will gradually differentiate the company from its peers.