JA Solar Holdings' (JASO) President Jian Xie on Q1 2016 Results - Earnings Call Transcript

| About: JA Solar (JASO)

JA Solar Holdings, Co., Ltd. (NASDAQ:JASO)

Q1 2016 Earnings Conference Call

May 27, 2016 08:00 AM ET

Executives

Victor Yang - IR Director

Jian Xie - President

Herman Zhao - CFO

Analysts

Justin Clare - Roth Capital Partners

James Bardowski - Axiom Capital Management

Jennifer Ky - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the JA Solar Holdings First Quarter of 2016 Earnings Conference Call.

I would like to hand our conference over to your first speaker today, JA Solar IR Director, Mr. Victor Yang. Thank you, please go ahead.

Victor Yang

Thank you, and welcome to JA Solar's first quarter 2016 earnings conference call. Joining us on the call today from the company are JA Solar's President, Mr. Jian Xie; and Chief Financial Officer Mr. Herman Zhao. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including statements regarding expected future financial and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results.

Actual results may differ from management's current expectations. Therefore, we refer you to a more detailed discussion of the risks and uncertainties in the Company's annual report on Form 20-F filed with the Securities and Exchange Commission. All information provided on today's conference call speaks as of today's date unless otherwise stated. The Company undertakes no duty to update any information except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese renminbi. We offer these translations into US dollars solely for the convenience of the audience.

Now I'd turn the call over to Mr. Jian Xie.

Jian Xie

Thank you everyone for joining our conference call today. Overall we are pleased with our first quarter performance. We experienced the normal seasonal decline from the prior quarter to the first quarter. As expected, yet our results showed meaningful year-over-year growth. Revenue of RMB3.5 billion was up 44% year-over-year. Non-GAAP EPS increased a little bit less than threefold when compared to the prior-year quarter. The overall market demand globally was strong and China was our strongest market. A natural result of our accelerated activity in front of subsidiary -- subsidy reductions that occurred this summer. Total shipments were 1.13 gigawatt above the high-end of our guidance of 1.0 to 1.1 gigawatt. External shipments of 1.04 gigawatt increased 52% year-over-year. As we anticipated, gross margin ticked down 50 basis points sequentially as we observed wafer price increases. The vast industrial growth coupled with regulatory constraints is challenging local upstream suppliers to keep up and they are nationally [indiscernible] pricing power.

In terms of geography, Asia saw growth, representing over 86% of shipments that is up from 84% of shipment in Q4. As I mentioned China dominated the growth including from 44% of shipments to nearly 50%. We shipped less to overseas market in Q1 as we delayed our production to fulfill demand in China. For example, APAC was down sequentially from 40.5% to 23.7% [ph]. And North America was down from 8% to 4.5%. As China slows in the second half, we see the potential to delay production to all oversea market. For instance, we believe the US will be an important growth market for us in 2016 given a favorable regulatory environment. We are also making some special progress in South America after continue doing investment there over the past several years. We also anticipate growth in India [indiscernible] gigawatts of clean energy installations every year.

Now a quick update on project development. We expect to connect around 250 megawatts of projects before June 30. In line with our full year target, in the first half of project development business focusing on our home market of China. Like others we are licensed to connect our project before subsidy changes hit this summer. However, we are not doing projects in close liberty in China. We are actively developing projects in several other jurisdictions. Our success both in China and around the world is due to our high spending for product quality and our leading technology. One example this quarter was our success with Chinese Central Government frontrunner program which promotes technical and the quality improvement in the domestic equipment industry.

The National Energy Administration is implementing Phase I of this program, a large domestication project in Datong, Shanxi province. We are supplying 44% of the modules to the Datong project [indiscernible] by any of our competitors. Further evidence of our technical leadership in the world of CTF certification from the testing agency, TUV SUD. This demonstrates the high quality and the reliability of our quality assurance test process.

Looking ahead let me provide you with our Q2 guidance. We expect shipments in the range of 1.4 to 1.5 gigawatts including approximately 100 megawatts to our downstream projects. For the full year, we continue to expect shipments in the range of 5.2 to 5.5 gigawatts with 250 to 300 megawatts going to our own downstream projects. Our plans are unchanged [indiscernible] capacity to 5.5 gigawatt by the end of 2016. A couple of weeks ago, we announced that the production began in our new highly automated 1.5 gigawatt facility in Xingtai, Hebei province. We are also upgrading our production capacity towards higher efficiency. For example, we plan to double over total capacity from current 700 megawatts to 1.2 gigawatts by the end of 2016.

Now I will turn the call over to our CFO Herman Zhao for a detailed review of our financial results.

Herman Zhao

Thank you Mr. Xie and good day everyone. Let me walk you through the details of our financial results. Note that I will present all monetary figures in US dollars for the convenience of our listeners. Our price represents the figures in both RMB and US dollars. Keep in mind that RMB is our reporting currency and we offer the US dollar translation strictly to help our audience compare our results with peers. Let's start with our first quarter 2016 performance.

Shipments growth was solid. We shipped 1038.8 megawatts to external customers, up 52.4% year over year and down 22.4% sequentially. We shipped 919.4 megawatts of modules, up 57.4% year over year and down 29.1% sequentially. Modules was 88.5% of total shipments and tolling shipment of 118.9 megawatts, increased 22.1% year over year and 188.6% sequentially. Looking at the geographic mix, we continued to see strong demand in China which represented 59.6% of our total shipments during the quarter. We expect demand in China to remain strong going into the second half – going into the second quarter of 2016. Japan remained our important market for us representing over 9% of the total shipments in the fourth quarter. Meanwhile, North America accounted for 4.5% of our total shipments in the quarter and Europe represented 5.6%.

Turning to the income statement, net revenue was $538.1 million, up 44% year-over-year and down 25% sequentially. The sequential decrease in net revenue reflected seasonality in the solar industry. Gross profit was $89.2 million, up 49% year over year and down 27% sequentially. Gross margin was 16.6% which compares to the 16.1% in the prior-year period and 17.1% in the fourth quarter of 2015. The sequential decrease in gross margin was primary due to increased wafer price during the quarter. Total operating expense was $54.6 million, representing 10.1% of revenue. This compares to operating expense of 9.9% of revenue in the year ago quarter and 11.4% of revenue in the fourth quarter of 2015. Within operating expense, we invested RMB6 million and spent $48 million on SG&A. R&D was up approximately 1% year-over-year. The modest increase in R&D spending represents our continued commitment to leading the industry in technical advancements. SG&A expense was up 58% year-over-year, but down 36% sequentially. Operating profit was $34.6 million in the first quarter of 2016, resulting in operating margin of 6.4%. This compares to 6.2% in the prior year period and 5.7% in the previous quarter.

Below the operating line, we incurred interest expense of $10.4 million, a positive impact from the non-cash warrant valuation of $3.6 million and income of $2.5 million of other items. Taxes were $5.9 million.

Net income was $24.5 million, which was up 352% year-over-year, but down 15% sequentially. Diluted earnings per ADS were $0.43. Our non-GAAP earnings per ADS were $0.36, representing a sequential decrease of 26%. This compares to non-GAAP earnings per ADS of $0.13 in the same quarter last year.

Now we turn to the balance sheet. At the end of Q1, we had cash and cash equivalents of $362 million, compared with $447 million at the end of Q4. Days sales outstanding increased from 56 days to 70 days during the quarter, while inventory days increased from 39 days to 84 days. Inventory increased in anticipation of high level of activity we expect in the second quarter. Debt increased to approximately $839 million. Debt was 31% of our total capitalization, essentially flat with Q4.

Now I will turn the call over to the operator for the question-and-answer segment of our call. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Philip Shen from Roth Capital Partners. Please ask the question.

Justin Clare

Hi, everyone. This is Justin Clare, I am on for Phil today. Thanks for taking my questions. So first off, in Q1 you mentioned the China increase to almost 60%. I was wondering if you could give us a sense for whether the mix could increase in Q2 and then potentially tell us what percent of your Q3 bookings are for the China market.

Herman Zhao

Well, Q1, in China was a little over 65% and Q2 in China market we expect roughly little over 55% and then Japan will be roughly close to 7% and Asia Pacific excluding Japan roughly 6%. European market roughly 6%. North American market roughly 9% and the rest of world will be around 17%. That’s overall. Your second question is, can you repeat Justin?

Justin Clare

Yeah. I just wanted to know for Q3 what percent of your bookings are for the China market.

Herman Zhao

Well, currently I would say the booking for China market is very low because we are still waiting for energy department to release the quota for the year, so that’s why the visibility for Q3 is quite varied. But even though without any visibility we still expect overall in the China market for the whole year we should still have roughly 46% roughly. Maybe it can give a little bit high level number for what we expect half from China. That maybe help you understand how much we can get from China market. As you know, in the first half we believe in China market probably will be anywhere between 12 to 13 gigawatt and the second half what we believe will be in the range of 5 to 7 gigawatt. So it will be substantially reduced from China market. That maybe a little bit helpful for you to get a picture of how much we will get from Q3.

Justin Clare

Yeah, that is helpful. Thank you. So my second question, so you had mentioned that you are trying to connect 250 megawatts downstream before June 30 from feed and tariff cut. So we’ve heard that the Chinese government maybe considering an extension of the feed and tariff reduction and potentially move it to the end of August from the end of June. Could you help us understand if you’ve heard about this or if this is a real possibility and then what could this do to impact your downstream development plans and overall demand in the market?

Herman Zhao

Good question. We heard the same thing like you just said and we think the likelihood for that happening is high, but even though the likelihood is high but that will not impact our downstream business plan. We still try to complete our downstream project like roughly 250 by the end of June, so we do not want to risk our sales on that part, number one. Number two, our total year’s downstream plan hasn’t been changed. So if that happens that will be helpful maybe but we don’t count on that.

Justin Clare

Okay. And then finally, in the past you’ve mentioned that you have some flexibility in expanding capacity outside of China. I was wondering if you could just give us an update there, how many megawatts of overseas capacity are you planning for this year.

Herman Zhao

Yeah, currently our Malaysia sales production still about 500 megawatt at this stage, but at the end of this year based on the demand picture we have flexibility to extend it to annual between 800 megawatt to 1 gigawatt.

Justin Clare

Okay, great. Thank you. I will pass it on.

Herman Zhao

Thank you.

Operator

Thank you. Your next question comes from the line of Gordon Johnson from Axiom Capital Management. Please ask the question.

James Bardowski

Hey, guys, this is James Bardowski in for Gordon. Thanks for taking the question. Just had a little question on the downstream projects. I know you guys haven’t changed your guidance from last quarter, although your peers seem to be cutting this guidance. Do you, one, still feel comfortable in the 250 to 300 megawatt range and are these still going to be focused in China? And also can you tell us what kind of margins you expect to sell on any projects you do expect to sell?

Herman Zhao

Good questions. Yes, our plan is still the same, anywhere between 250 to 300 megawatt in China it hasn’t been changed yet. So far we feel very comfortable we can do probably little closer to 250 by the end of June, then we are left another 50 megawatt for the second half, so that plan hasn’t been changed. And so far we do not intend to sell any of those downstream projects. Once we finish building all those projects we intend to maintain all of them at least in the short term. If we will consider sale or not, in the future, that really depends on the situation. I think with our current accumulated total amount we should include what we finished earlier part of last year, the total amount compared to our peer is relatively small, so at this stage I don’t know if there is any need for us to consider sale of any of those until our [indiscernible] we consider to maintain some better return projects. Hope this answered your question.

James Bardowski

Absolutely, it’s very helpful. I guess secondly, where do you see ASPs as well as what was your all-in costs going, I’m sorry for the second and third quarter of the year?

Herman Zhao

Okay. Good questions. ASP for the second quarter in China market, we do expect will be down 10% plus or minus, that’s in China market. US market, we do expect some price coming down for the second half as well, even though, later part of last year, we do believe in low-60 will hold out until the end of this year, but based on the information, the feedback we get, the US market, the ASP compared to the first half may be down 8% plus or minus. So that will give US market in mid-to high-50s reach market.

And another big market, which is Japan probably will be down compared to first half, 5%, just of our sales line as the product switched. Before, we had a higher percentage for mono based modules. Now, we may have most product mix towards multi based. As you know, multi based ASPs are lower than the mono based ASP. That’s one of the reason. The other reason is the general market price decline. So those two will contribute about 5% plus or minus for our sales.

James Bardowski

That’s helpful. And how about your costs?

Herman Zhao

Costs, well, this quarter compared to previous quarter, on a blended basis, reduced by $0.01 and quarter-over-quarter, it really depends on the raw material price change, but just for product costs will continue to drive it down. So basically, others really depends on the number material price. As you know, current spot market price for poly is very high than maybe the strong demand in the China market, non-material costs, we can control, but the material cost really is not under our control.

James Bardowski

Okay. I guess one more and I’ll jump back in queue. I guess considering your capacity expansions and also including the doubling down on the PERC technology, what can you expect in terms of additional spending for this as well as increase in G&A? And thank you again for taking my question.

Herman Zhao

Well, for our whole year, CapEx I think, last call, we mentioned, will be 350 million plus or minus. So that hasn’t mentioned yet, because our -- it’s in the plan, it hasn’t been changed. They will stay, maintain the same. On the PERC, we have roughly close to 700 megawatt on an annualized basis. So at the end of this year, we may further increase our production to 1.3 to 1.4 gigawatt so that’s our plan for the expansion.

James Bardowski

Great. And then finally on the depreciation and again thank you.

Herman Zhao

Deprecation this quarter compared to previous quarter did not really change that much, because most expansion will be online, third quarter or fourth quarter, that’s why depreciation for the current quarter is still around $30 million, but in later quarters, it may go up to $33 million plus or minus.

James Bardowski

Perfect. Thanks.

Herman Zhao

Thank you.

Operator

Your next question comes from the line of Patrick Jobin from Credit Suisse. Please ask the question.

Jennifer Ky

Hey, this is Jennifer Ky on the line for Patrick. Thanks for taking my question. I saw margins in the quarter declined due to higher wafer pricing, what trends are you expecting for this year?

Herman Zhao

Well, this years, really it depends on the cost production effort. I think in the previous questions, I did give you a breakdown for the ASP for the major market. So that definitely will give some pressure for the second half of the year and for Q2, well, we compare to Q1, we will expect slightly declined. But in the second half, it really depends on the cost structures. We have a good estimation on ASP, but the cost really depends on the material cost. So that definitely would have some pressure on the second half on the gross margin.

Jennifer Ky

Got it. Thank you for the downstream update. What have you been hearing on the NA subsea catalog and when those payments will start coming in?

Herman Zhao

Well, yeah, good questions. So let me update you the first part that we completed last year in January of 2015. The good thing for that project is, we are included in the next payment. So basically we get approval for that project. So whenever the next payment comes out will be included. And based on what we heard, the next payment from finance, Minnesota finance department will come later part of this year towards Q4 of this year. That’s what we heard, but we don’t have the exact date on that.

Jennifer Ky

Got it. Thanks. And do you have any updates on curtailment?

Herman Zhao

Curtailment, well, curtailment is our -- you get higher percentage on curtailment. When we come in the spring or come to the summer time, the curtailment situation will be less serious than winter time, but there are still some curtailment issues.

Jennifer Ky

All right. Thank you very much.

Herman Zhao

Thank you.

Operator

Your next question comes from Ken Tuck from -- he is a private investor. Please ask the question.

Unidentified Analyst

Hi. Thank you guys for taking my question. Your management team has done a really good job, obviously growing a profitable business, but in relation to the outstanding taking private offer, it’s also management’s responsibility to try to maximize shareholder value, you guys are now up to close to 2 billion a year in revenue with an offer on the table for I think 500 million roughly. I know you may not answer the question, but maybe analysts will take note, shouldn’t that offer just be rejected while we wait, I think, over a year for a response as opposed to indirectly implying that the company truly is worth somewhere around 500 million.

Herman Zhao

Well, thank you for your good comment for the management part first. In regards to going privatization part, at this time, we have nothing new to really report. So we will update the market if any progress is made. So far, we haven’t got any different instruction from the Chairman yet. So basically, the management team still focuses on business execution. So regarding this work, I think focus on business execution and focus on fundamental business is a core part to consider now.

Unidentified Analyst

Yeah. Is there a timeframe where that offer will naturally expire or can it just remain for indefinitely?

Herman Zhao

Well, I think technically that can really stay indefinite, but that will be not likelihood to happen, right. If for whatever reason, we think there are some other things, maybe we should consider will give a better value to shareholder, of course, Chairman and the company board will consider. But at this time, I think we should give them little more time.

Unidentified Analyst

Thank you.

Herman Zhao

Thank you.

Operator

[Operator Instructions] There are no further questions at this time. Please continue.

Herman Zhao

Thank you, operator and thank you all for participating on today’s call and for your continued support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Operator

Ladies and gentlemen, that does conclude our conference call today. Thank you for participating. You may all disconnect.

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