We wrote an article on Jinko Solar (JKS) only last week, and while we didn't wholeheartedly recommended a buy, it already warrants a major update, as events have taken this company by storm, not to mention an almost 30% haircut.
Over the weekend, news came out, first in Chinese newspapers but a little later also in Western papers, that Jinko was experiencing some problems. The most detailed version of events can be read in the China Daily. There were villagers protesting, some environmental problem, and fish dying in a nearby river. How serious is the problem?:
An initial investigation conducted by the environmental protection bureau found that the plant failed to properly dispose of solid waste generated during its production of silicon wafers.
The fish were killed by excessive levels of fluoride after waste was swept into the river by heavy rains, according to the investigation.
The bureau ordered the plant to dredge the parts of the river that were contaminated and clean up the polluted water. It also urged the enhancement of waste treatment measures to prevent similar incidents from occurring in the future.
Chen Hongming, the deputy head of the environmental protection bureau, said that the factory's waste disposal system has failed regulatory checks since April, adding that the bureau has repeatedly warned the factory about its pollution problem. (China Daily)
What are the costs?
- Cost of shut-down
- Cost of clean-up
- Risk of permanent closure
One might hope that, after several warnings from regulators and a village protest, Jinko has learned its lesson. The root problem seems eminently addressable; solid waste storage and disposal is not rocket science, and solar panel production is like producing semiconductors -- these are processes which do not carry huge risks of polluting.
Cost of Shut-Down
JinkoSolar suspended operations at the plant “until the impact of any potential environmental damage has been assessed and remedied,” the company said in the statement. It expect to resume operations within the next few days. (Bloomberg)
That doesn't sound too serious either, but it's somewhat preliminary, we have to stress.
Cost of Clean-Up
We can only guess here. The harm seems done; usually stuff like this gets dispersed in a river and washed downstream, but the jury is still out on this.
Risk of Permanent Closure
This is not entirely illusory. China, under pressure from local populations, is cracking down more seriously on repeated polluters:
More than 70 percent of Zhejiang's 273 lead storage battery manufacturers were closed after a string of lead poisoning scandals in the province. Protests over pollution concerns have proliferated across China over the past few years. In August, a petrochemical plant in north China's city of Dalian was shut down after thousands of residents took to the streets to demand its relocation over concerns regarding potential toxic chemical leaks. (China Daily)
We hope this serves as an incentive for Jinko to clean up its act, quite literally. We conclude that this is likely to be not much more than a hiccup, albeit one with seriously bad publicity and considerable cost. These costs do not seem anywhere close to warrant a 28% fall in the share price though, unless some new information comes out that paints a different picture (like plant closures lasting longer, large clean-up cost, or even permanent plant closure).
Unfortunately, this is not the only headwind Jinko is facing, news out of the solar industry isn't good.
Growth in the Industry Lower Still
Germany is expected to see another wave of downward adjustments in the middle of the year, estimated at over 10%. Subsequently, yearly subsidies will show an overall decrease of over 20% for 2012. As the European market currently relies heavily on Germany and Italy for support, EnergyTrend expects that the aforementioned developments will have a significant impact on the growth of the European market… (Newenergy news)
And they were not alone with this assessment:
Goldman Sachs Group Inc. revised its global forecast for solar shipments, according to a research note published today. The company now expects total shipments of 15,697 megawatts of panels in the second half of the year, 18 percent lower than its previous estimate. It downgraded JinkoSolar to “neutral” from “buy” with a 12-month price target of $13. (Bloomberg)
While the shares are even much more oversold compared to when we wrote about them last week, the most we can expect right now is a mere technical recovery back to the falling trend, see figure below, which self-updates ( price is $6.50 at time of writing, Sept. 20 before market open).
On a more positive note, Jinko does seem to have rather committed employees: Three of the plant's employees were detained by local police after harassing two TV reporters who came to the plant to investigate the pollution, damaging a camera belonging to one of the reporters. (China Daily)