JA Solar (NASDAQ:JASO) announced its second quarter results on Wednesday and while the results came within management guidance, they fell short of consensus and far short of our expectations. Counter to our speculation, the Company did not announce a capacity expansion in North America. It turns out that our musings about the shelf offering was flat out wrong.
Just about the only part our speculation that was on target was the Company's plan to aggressively ramp its project business. Management's commentary during the Company's conference call indicates a strong move towards increasing China and international project revenues. We consider this a significant long-term positive.
In terms of the quarter, total shipments came in at 681.8 MW towards the lower end of guidance range of 670 to 700MW. In terms of the mix, the shipments of modules came in at 445.8 MW and shipments of cells came in at 236.0 MW. The overall shipment and the product mix both came in below our expectations.
Consequently, net revenue of $390.5 million, gross margin of 15.2%, and non-GAAP EPS of $0.14 came in well below consensus expectations.
In addition to the shipment and product mix shortfall, JA Solar suffered from the same deterioration in China ASPs that we saw at JinkoSolar (NYSE:JKS). All things considered, the quarter's results were understandable in the context of the Chinese ASP Flu. (Trina Solar (NYSE:TSL) investors take note as the China ASP issue is going to recur for Trina Solar.)
In terms of projects, the Company indicated that it will able to complete several projects in the second half of the year. While the management indicates that revenue recognition in 2014 likely, external factors could push recognition to 2015. The Company can get mid-teen margin for the project business in addition to margin captured on the captive module sales. While the project margins are anemic by international standards, they are typical in the China market.
As the YieldCo bubble grows, we see the project prices and margins exploding. In this context, holding on to the project assets instead of selling them may be a significant value generator for shareholders. However, the current project run rate at JA Solar is low and a YieldCo is unlikely until the Company substantially ramps its project business. In this current environment, we expect JA Solar to sell most, if not all, of its project assets without waiting for a YieldCo. In this context, the benefit from the projects to shareholders are likely to be limited compared to larger project players such as JinkoSolar.
In spite of coming in at the low end of the guidance range for the quarter, JA Solar management mentioned that the demand for the quarter exceeds supply and raised FY 2014 shipment guidance range from 2.7-2.9 GW to 2.9-3.1 GW - a 200MW jump from prior quarter. The Company attributed this mainly to the growth in China market.
In terms of pricing, the Company is expecting flattish ASPs for Q3 for China and a slight increase in ASPs for Q4. For the US market, the Company is modeling a slight increase in ASP for the Q4. For Japan, JA Solar expects flattish ASPs but a mix shift toward the cheaper multicrystalline solutions.
While the ASP expectations for China seems reasonable to us in the context of China's expected H2 build out, we are somewhat skeptical of the Company's planned Japan ASPs.
Japan has been one of the more important markets to JA Solar in the past and the high ASPs have been very beneficial to JA Solar's bottom line.
JA Solar ships high efficiency monocrystalline products into the Japanese market and the Company's monocrystalline products get premium pricing compared to competitor's multicrystalline products. However, the Japanese market has become a target for many companies due to high prices. Several Chinese companies are aggressively ramping their monocrystalline product lines. Any worsening of Japan monocrystalline ASPs is likely to impact JA Solar more than other players in the industry. Also, starting in Q4, we expect First Solar (NASDAQ:FSLR) to start shipping its TetraSun product to Japan. This product line has a much higher efficiency than the products offered by JA Solar and that may affect the Company's premium position in the market. Depending on the amount of product available, TetraSun product line could put meaningful pressure on monocrystalline ASPs.
In the US market, the ASPs are high but tariffs eat away at the margins. We also see a scope for ASP decline in Q4 as opposed to Company's guidance of ASP increase. Considering these price dynamics, we see potential for further ASP declines and margin erosion for rest of the year.
On the upside, it is possible that JA Solar may sell around 100MW of project in FY2014 and the profits from Company project pipeline sales could easily offset any module business shortfall.
We continue to standby our thesis that JA Solar is well positioned to transition from a cell manufacturer to a module manufacturer in 2014 and then from a module manufacturer to a project developer during 2015. In addition, JA Solar's strong balance sheet and premium positioning make it one of the more attractive Chinese solar stocks. While the Company may not have much upside unless it can execute meaningfully on its transition, its low valuation reduces downward risk in the short term.
At the money covered calls and selling cash covered puts at about 10% below market are likely to be profitable ventures for value investors.
Our Sentiment: Hold
Disclosure: The author is long FSLR, JKS, TSL, JASO.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.