JA Solar Holdings (JASO) 6.553% YTM 05/15/2013
JA Solar Holdings is a world leader of design, development, production and sales of high-performance solar cells. They are based in China and have customers in Germany, Italy, Spain, India, Korea, China and Japan. Established in 2005, they currently posses a top ten global market share. JA Solar Holdings currently trades as an American Depositary Receipt (ADR) on the NASDAQ exchange.
At Durig Capital, we have developed a process to review, select, purchase and monitor corporate bonds on an ongoing basis. Enclosed is our review, along with supporting documents/links, showing why we believe this corporate bonds make sense in clients’ portfolios. We reviewed thousands of separate corporate bond listings to find what, we believe, is currently the best corporate bond for investors. The following illustrates our selection criteria.
Step 1 - We like shorter maturities
We are side stepping our own guidelines here for a reason. This issue matures in just over 30 months. The four to seven year time frame is due to yields being too low for our liking on the short end and uncertainties on the long end. The yield to maturity on this issue is 6.553% which is higher than what we have seen and JA Solar Holdings meets our other guidelines. Last week’s This Week’s Best Bond highlighted a recently issued Microsoft (MSFT), illustrating just how low short term yields are trading for. There are other risks associated with this that will be discussed in more detail.
Step 2 - We like companies that are profitable.
Like much of the rest of global commerce, JA Solar was affected by the economic crisis that is still lingering in parts of the world. Being based in China, JA Solar was able to avoid the worst of the events although did report net losses for 2009. This year has been much better for the bottom line for JA Solar. They reported revenue of $351.2 million which increased dramatically from the previous year's reported revenue of $88.6 million. Net income followed suit and just under $30 million was reported for the second quarter.
The demand for solar technologies is continuing to increase as efficiencies continue to improve. Shipments of products have increased dramatically. The 2010 shipments to date have exceeded 2009 shipments and Q2 shipments alone exceeded 2008 total shipments. JA Solar Holdings noted that they have secured .600 GW of contract production for delivery in 2011. To put this in perspective, they delivered .311 GW in the second quarter and have revised 2010 fiscal year upward to 1.35 GW from 1 KW. It is also important to note that JA Solar Holdings is expanding its footprint on the global solar market with international clients, non Chinese, growing to represent 46% of revenues. Having a globally diverse clientele is important as a regional economic down turn will have less of an effect on the firms operations.
Step 3 - We like companies with high cash and short term investments to long term debt ratios.
Currently, JA Holdings has $324.5 million in cash $383.8 million in long term debt. The long term debt represents $178.662 million of this issues debt, $174 million of long term bank borrowing with the balance representing other long term liabilities. One of the criteria that we like to see is a cash balance that can repay/payoff the debt currently. Although there is little less cash that long term debt, year to date net income is about $67 million illustrating that with the cash and a half year of earnings, long term debt could be retired.
Step 4 - We like companies that have flexible balance sheets
The debt to equity ratio is just under .26. This allows them to raise capital as they see fit. An interesting feature of this bond is that the owner has the option to convert the issue to equity. The option to convert to equity is well out of the money meaning the price of the equity would have to increase about 360% for one to break even. Unlikely as we perceive this to be, it does add a small value to the bond holder if the equity were to rise in value before maturity. The bond holder is entitled to receive interest and principal payments while possessing the conversion option. We are not recommending this issue be purchased in anticipation of conversion value.
Step 5 - We like companies with strong coverage ratios.
JA Solar Holdings has income from operations year to date of $105.4 million and an interest expense of $14.7 million, meaning they earn from operations over seven times what they owe for interest. With growth prospect good for JA Solar Holdings, the coverage ratios could improve as well.
Step 6 - We like higher yields
JA Solar Holding’s debt issue is attractive because it has such a short maturity, high yield and good coverage. Often young companies in young industries pay higher yields as they do not have an established credit history or operate in an industry or country that is well known. This may be the case with JA Solar Holdings. Enclosed is a link to other high yield corporate bond offerings so you can conveniently compare JA Solar’s yields to other issues.
Step 7 - Assessing additional risks
JA Solar Holdings is based in China. The two major concerns we have involve accounting reports and the Chinese government's control of the economy and currency. For the ease of reading and comparative purposes, the Chinese Renminbi has been converted to US Dollars at a rate of 6.7815 Renminbi/US Dollar which represents the exchange rate on June 30, 2010. There are differences between Chinese and American accounting standards which make interpretation difficult at times. Although Chinese economic and political agendas are becoming more transparent, there is much room for improvement. China’s currency does not trade in the open market so the foreign exchange rate is controlled by the government. There is global pressure being put on China to let the Renminbi trade freely in the open market which could be detrimental to JA Solar’s international sales.
JA Solar Holding’s has an outstanding short term yield for a company that is profitable and in a growing developing industry. Investors may be afraid to own debt of a foreign entity that is not covered by the standard rating agencies but we believe that these fears, although just, should not be the sole considerations when seeking income. The strong cash position, flexible balance sheet, profitability and short term maturity demonstrate that investors seeking higher yield should consider this issue. Other high yielding corporate debt issues qualifying under strict selection criteria such as Toll Brothers (TOL), Coventry Health Care (CVH), Netflix (NFLX) and Frontier Oil (FTO) have performed well in portfolios developed for client’s income needs.
Yield to Maturity 6.553%
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Disclosure: Durig Capital’s is currently recommending this issue and its clients currently do have positions in JA Solar Holdings bonds.