JA Solar Holdings (JASO) trades at almost nine times earnings and just under six times forward earnings. The valuation is tempered by dependence on a limited number of key customers and related party transactions. The company experienced increases in revenues, but a decrease in earnings from the first quarter 2010. JA Solar was not immune to the tough market conditions at the end of 2008 and beginning of 2009, but it has since increased its revenues, kept strong operating cash flow and improved its financial performance since the beginning of 2009.
Many of the company’s rankings fell in the second quarter 2010. Operating cash flow-to-net income dropped from 8th to 17th and free cash flow-to-net income from 4th to 12th. The company fell seven spots on the cash conversion cycle; however, the company still boasts superior inventory and receivables management relative to the peer group. Gross margin improved slightly to 11th, despite an increase in our calculated cost per watt. The other rankings did not change significantly from last quarter.
The company provides limited information in quarterly filings, and does not provide quarterly cash flow statements or full footnote disclosures. The company provides megawatts sold in each quarterly and annual filing; however, many of the key performance indicators, such as conversion efficiencies, are only found in annual filings. Warranty and allowance for doubtful accounts data can only be found in annual filings.
The company is one of the best performers in the industry in terms of cost per watt. Cost per watt has been below the industry average for the past two fiscal years and has exceeded the industry average for just one of the past eight quarters. The decrease in cost per watt is primarily due to a significant decrease in the average cost of silicon in 2009 over 2008. A consistently decreasing cost per watt puts the company in a better position to improve its earnings quality and financial results.
The company has pursued a considerable capital expansion program, increasing solar cell production capacity by more than fourfold since 2007. The company expects to expand solar cell manufacturing capacity to 1,800 megawatts, module capacity to 500 megawatts and wafer capacity to 300 megawatts by the end of 2010. The company says production capacity was 1,400 megawatts for cell, 300 megawatts for modules and 120 megawatts for wafers at the end of the second quarter of 2010.
The company’s operating cash flow has been in excess of net income for six of the past eight quarters. On a last-12 month basis, operating cash flow has been in excess of net income for five of the past eight quarters. We believe a metric of 1.0 or higher is an indication of good earnings quality.
Free cash flow has exceeded net income three times in the past eight quarters on both a quarterly and last-12 months basis. Strong operating cash flows have allowed the company to fund its capital expenditures while maintaining positive free cash flows.
The company has done a superior job of managing its inventory and accounts receivables to drastically improve its cash conversion cycle to one of the strongest in its peer group. The company has consistently done a better job of managing its accounts receivable and quickly turning credit sales into cash. In the second quarter 2010, the days sales outstanding (DSO) was 23.5 days. The company’s DSO has not exceeded the industry average for at least the past eight quarters. Low DSO numbers have a positive effect on operating cash flow since credit sales are not tied up in accounts receivable, but instead turned into cash more quickly. Additionally, a shorter DSO decreases the collection risk of the specified accounts receivable.
Baofang Jin, the company’s executive chairman of the board, owns 39.8 million of JA Solar’s outstanding shares, or 23.54%,through his interest in Jinglong BVI, of which he is the sole director. Other officers and directors own less than 2% of outstanding shares. Jinglong BVI , which owns 100% of the Jinglong Group, is JA Solar’s largest shareholder. Baofang Jin, the chairman of JA Solar’s board of directors is a prominent shareholder of both Jinglong BVI and the Jinglong Group, with a 32.96% interest in each. Jin is also the chairman of the Jinglong Group. Additionally, Bingyan Ren, one of JA Solar’s directors, owns a 4.79% interest in each of the Jinglong Group and Jinglong BVI. The company discloses that the interest of Jinglong BVI may conflict with its own interest and it may have limited ability negotiate as the board of directors of Jinglong could exert significant influence, causing JA Solar to take actions that may not be in the best interest of the company. Additionally, the company discloses that Jinglong BVI may be able to prevent JA Solar from taking actions to enforce or exercise its rights under the agreements entered into with the Jinglong Group.
Additional analysis of JA Solar Holdings and its peer group can be found here.
Disclosure: No positions