JA Solar Holdings' (JASO) Management on Q3 2016 Results - Earnings Call Transcript

| About: JA Solar (JASO)

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

Q3 2016 Results Earnings Conference Call

November 17, 2016, 08:00 AM ET

Executives

Victor Yang - Director, IR

Jian Xie - President

Herman Zhao - CFO

Analysts

Philip Shen - Roth Capital

Maheep Mandloi - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter 2016 JA Solar Holdings Company Limited Earnings Conference Call. At this time all participants are in listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advice you that this call is being recorded today 17th of November 2016.

I would now like to hand the conference over to your first speaker today, Mr. Victor Yang. Thank you. And please go ahead.

Victor Yang

Thank you, and welcome to JA Solar's third quarter 2016 earnings conference call. Joining on the conference 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 will 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. We made these statements 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 would turn the call over to Mr. Jian Xie.

Jian Xie

Thank you everyone for joining our conference call today. Third quarter performance was inline with our expectations, as we anticipated shipments for our domestic market of China declined significantly from the first half of 2015. Demand slowed as the market digested less surge in the half shipments used by project trying to connect before the June 30 FIT reduction. We are prepared for a demand slowdown by diverting to international markets and are locating more shipments to overseas customers.

Like our customers, we also conducted much of our own project pipeline in the first half in order to capture a higher FIT.

Even with soft near-term demand we are optimistic about our long-term prospects, the US and the Indian market represent meaningful growth opportunities for us and that we are well positioned in those to capture market – market this year as they grow. We are cognizant of the near term demand situation and thus managing our advances with caution.

Now let us discuss the details of shipments. Total shipments were 1.24 gigawatt, which include a very small modules used in our own projects, external shipments are 1.24 gigawatt increased approximately 10% year-over-year. As total shipments in Q3 exited at a low end of our guidance range of 1.2 to 1.3 gigawatt.

In terms of geography broader Asia represented 58% of shipments in the third quarter, despite the slowdown in Chinese demand. The countries dominated our own shipments in the quarter with 32% of the total. That is down from 64% in Q2. To compensate we shipped more products to overseas marketing Q3.

For example, APAC was up sequentially from 12% to 26% of shipments and the North America increased from 9% to 13% of shipments. Our extensive reinvestment in South America is also starting to pay off. The region demonstrated solid growth in the quarter, representing 20% of total shipments, up from 10% in Q2.

As China continues to slow in Q4, relatively through the first half of 2016 we intend to continue deduction production toward overseas markets, in particular, we expect the market to pick up in the coming quarters.

In the mid term, the industry in facing several challenges. In China our largest market, the 35 year plan for solar reduced the targeted installation to 110 gigawatt from 150 gigawatt originally planned. In the US, where our experienced team in making meaningful progress in rebuilding our presence there, the whole industry will be waiting to see if the new administration changes, the investment tax credit which of course would affect demand.

Let me now provide an update on our project development efforts. We have conducted approximately 250 megawatt of projects year-to-date and have allowed 50 megawatt under construction. We intend to develop another 150 to 200 megawatt in 2017, mostly in China.

Let me now address the outlook. For the first quarter we expect shipments in range of 1.2 to 1.3 gigawatts, essentially all of this being sales. This brings our full year 2016 shipment guidance to between 4.9 and 5 gigawatts, that is somewhat lower than our previous guidance of 5.2 to 5.5 gigawatts and reflects the slowdown in demand in China, guidance include shipments to our own downstream projects.

Now, let me take a minute to discuss our production capacity with our production capacity for our long-term needs and a time not be influenced too much by short-term demand fluctuations. We continue to expect annual wafer capacity to reach 2.5 gigawatts\ and annual sales and module capacity to surpass 5.5 gigawatt by the end of the year. Due to slow period we will remain committed to prudently managing our operations with a tight expense control.

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. I will walk through the details of our financial results. For the convenience of our listeners, I will present all monetary figures in US dollars. Our press release presents the figures in both renminbi and US dollar. Note that all figures refer to the third quarter of 2016 unless as stated otherwise.

So let's look first at our prior shipments in the third quarter. As Mr. Xie mentioned, shipment growth was solid. We shipped 1240.9 megawatts to external customers, up 10.1% year-over-year and up approximately 1% sequentially.

Modules, representing a 96.7% of total shipments and were up 11.8% year-over-year and up 5.8% sequentially. Sales and sales tolling shipments of 40.9 megawatt decreased 22.8% year-over-year and 57% sequentially.

Looking at the geographic mix, demand in China slowed as expected, which brought the country down to 32% of our total shipments during the quarter. This compares to 63.9% in the last quarter and 53.1% in the same period last year. As we enter into the fourth quarter, we are seeing continued slowing in China as Mr. Xie discussed. We have incorporated that into our guidance.

Japan remained a key market for us representing 8% of total shipments in the third quarter. Meanwhile, both North America and South America saw sold surge sequentially and represented a 13% and 20% of our shipments respectively. Indian has emerged as another important growth market for us representing 12% in Q3. European represented 6.5% of total shipments in the quarter.

Moving on to the income statement, net revenue was $624 million, up 9% year-over-year and up 1.2% sequentially. The increase in net revenue reflected higher module shipments in the quarter. Gross profit was $86 million, down 15.2% year-over-year and down 8.6% sequentially.

Gross margin was 13.8% which compares to 17.7% in the prior year period and 15.3% in the second quarter of 2016. The decrease in gross margin on both year-over-year and sequential basis was primarily due to a inventory provision, coupled with decline in ASP during the quarter.

Total operating expenses were $67.9 million, representing 10.9% of revenue. This compares to operating expense of 9.9% of revenue in the year ago quarter and .10.7% of revenue in the second quarter of 2016. Within operating expense, we invested approximately $7 million in R&D and spent approximately $61 million on SG&A.

R&D was up nearly 37% year-over-year. The increase in R&D spending reflects our continued commitment to leading the industry in technical advancement. SG&A expense was up approximately 18% year-over-year and up 2.5% sequentially. This is primarily due to increased oversea shipping cost during the quarter.

Operating profit was $18.2 million in the third quarter of 2016, resulting in operating margin of 2.9%. This compares to 7.8% in the prior year period and 4.6% in the previous quarter.

Below the operating line, we incurred interest expense of 11.3% - $11.3 million, a positive impact from the non-cash warrant revaluation of 3000 and income of $1.6 million of other items. Taxes were $1.9 million.

Net income was $6.6 million which was down approximately 83% year-over-year and down nearly 73% sequentially. GAAP diluted earning per ADS were $0.13. Our non-GAAP earnings per ADS were $0.13, representing a sequential decrease of 58.1%, this compared to non-GAAP earning per ADS of $0.65 in the same quarter last year.

Now the balance sheet. At the end of the third quarter, we had cash and cash equivalents of $298.2 million, compared with $302 million at the end of the second quarter of 2016. Day’s sales outstanding decreased from 71 days to 69 days during the quarter and inventory days decreased to 66 days from 84 days in the second quarter of 2016.

Inventory decrease by approximately $94 million sequentially. Debt decreased to approximately $897 million from $930 million last quarter. Debt was 31% of our capitalization, largely flat with Q2.

Now, I would 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] The first question comes from the line of Philip Shen of Roth Capital. Please ask your question.

Philip Shen

Hi, everybody. Thank you for the questions. On the Q2 earnings call you guys had mentioned that you saw a one-year downturn, now that we're three months later, do you continue to see that or do you see something else altogether, can you share your latest review on how long this downturn could last?

Herman Zhao

Philip, well, Chinese FIT will be reduced another time and current FIT will be expired by September 30. We see the market demand come up again. So we don’t see there is a downturn, but after September 30 next year we'll see whether downturn will last. Currently you know, we don’t see the downturn under current situation. This can be…

Philip Shen

Okay…

Herman Zhao

Everybody's production capacity, as you recall, a couple of months ago production was in 60% plus, minus, now, I think the most companies production capacity really pick up to close to 100%.

Philip Shen

Okay. Good. So, how do you see China, how much demand for modules do you see for China in 2017? And then can you give us the breakdown of the demand by quarter that you see?

Herman Zhao

For next year we still believe China still have 24 gigawatt market, breakdown number its hard to predict. I think first three quarters definitely will be a strong quarter, even though the Chinese government announced reduction for the 13 – 5 years plan, but the number need to be connected by Q3 of next year, plus what we call poverty alleviation project, we do think Dunhuang, Gansu [ph] for China is durable. Currently for this year for poverty alleviation project granted for this year is already at 65 gigawatts.

Philip Shen

Okay. Great. And how do you see ASPs evolving in Q4 for you and then how do you see them trending through 2017 on a blended basis?

Herman Zhao

On the blended basis, this quarter for us was a $0.49 and we expect the Q4 blended ASP will be roughly low 40s and going to next years we believe half probably will be in - blended base will be high 30s range, in the second half next year probably will be around mid 30s.

Philip Shen

Mid 30s, okay. And then can you go through same process for how you see your blended module cost structure?

Herman Zhao

Module cost for this quarter still in the high 30s range because the summer demands was not really fully utilizing our production equipment. Again, as I said last quarter, if no production – reduction of course, you know, mid 30s is durable, but with some reductions for this quarter really the cost part was like $0.38 plus, minus range. I think for first half of next year we have good trends to reach mid 30 on the module cost.

Philip Shen

And then as you exit 2017, how low could it go?

Herman Zhao

Quarter end of 2017, we will receive low 30 as durable, right, low 30 durable.

Philip Shen

Okay. Great. I think that’s it from me. Thank you. I'll pass it on.

Herman Zhao

Thank you.

Operator

Your next question comes from the line of Maheep Mandloi of Credit Suisse. Please ask your question.

Maheep Mandloi

Hey, thanks for taking my question. Could you just talk about your guidance, it’s coming down from 5.3 to 4.95 gigawatts, what's driving that reduction in Q4 specifically any specific market or is it related to the shipment delays you had spoken about in the last quarter?

Herman Zhao

Good questions. I think the guidance down was really - I think US market was one of the reasons for us to really lower our guidance. US market in the fourth quarter and the first quarter of next year really the demand is kind of slow for us, so that’s one of the reasons and China was not as strong as what we expected. So those are the two reasons, other then that other or other market are really pretty normal.

Maheep Mandloi

Thanks. And just on the previous question, I think I probably missed it, but what was the ASP expectations for the first half, I think you said low $0.40 in Q4, but how do you think about first half next year?

Herman Zhao

First half next year blended base will be high 30s.

Maheep Mandloi

High 30s. And then in terms of mix when you look at the ASP guidance, could you just guide us which regions would you be shipping to next year?

Herman Zhao

Next year basically for us China, Japan, US, India and Europe, South America, those are the five major markets for us.

Maheep Mandloi

Thanks. And I know, you guys are not talking about the going private concern – sort of deal over here, but any more color over that would be appreciative and apart from that on the downstream business you would have around 400 or 500 megawatts by next year, what are your plans for that business, which is mostly in China?

Herman Zhao

Okay. First question, I think while there is no update on the privatization proposal, so basically we heard anything new from Chairman, so unfortunate there is no update to share with you. For the second question for downstream project, I think our plans for next years beside the 50 megawatt under construction, we'll actually do another 150 to 200 megawatt downstream project, mostly in China.

Maheep Mandloi

And do you plan to continue developing that business in '18 and going forward do you plan to spin it off or IPO it?

Herman Zhao

Currently we don’t have any plan to spin that off, how aggressively or how slow we'll do downstream depends on the environmental change. Currently we have not being too sure for that far.

Maheep Mandloi

Got you. And probably last question from my side and then I'll jump back. In terms of the capacity expansion, you did say that you might experience some equipment delays on the last call, any further updates on that matter?

Herman Zhao

Well, yes, we did some switch you know, originally we expect to up with some production equipment in China, so now we see next year as a demand for USA, we see a strong demand. So we may ship some of the production equipment upgrades to our Malaysia facility. So basically we'll just make some change internally based on the market demand globally.

Maheep Mandloi

Thanks for taking my question.

Operator

[Operator Instructions] Your next question comes from the line of Mike Cantera of [indiscernible] Please ask your question.

Unidentified Analyst

Yes. Thank you for taking my question. A couple of quick questions, where do you see the source of demand in South America, whereas is the demand coming from there any more detail on that?

Herman Zhao

This years mainly from Brazil and Chile, next year for South America market we see a demand from Mexico mainly.

Unidentified Analyst

Okay. And what expectations do you guys have for the gross margin next quarter in Q4?

Herman Zhao

Good questions. Q4 gross margin we expect you know, will trend lower due to ASP decline and we also expect – we expect margin will be in low teens range, since raw material really bounced back quickly and where our module price stay flat. So we do see some pressure in gross margin in Q4 this year.

Unidentified Analyst

And that dynamic in the market, Herman, what do you think is causing that raw materials bouncing up and the module price is staying relatively flat?

Herman Zhao

I think all of the strong demand from China really caused our balance of supply and demand, so just more demand the less supply that’s kind of a situation we are facing now. So that’s the kind of situation, so presently I don’t believe the raw material price will continue to go up, otherwise you know, really will slowdown the module sales again. So I will say this is a temporary situation and won't last for too long.

Unidentified Analyst

Okay. And in Q3 what were the electricity revenues and gross margin for the electricity sales?

Herman Zhao

The electricity revenue you know, roughly US$10 million and gross margin on that part about a 54% gross margin.

Unidentified Analyst

Okay. And one last question from me, I think for Q4 that you guys said that there would be no volume shipped to owned projects. I just wanted to make sure I heard that correctly?

Herman Zhao

You are right. Q4 there was no module shipped to our own project, you are right.

Unidentified Analyst

Okay. Thank you for taking the questions.

Herman Zhao

Thank you.

Operator

[Operator Instructions] Currently, we don't have any question from the line. Please continue.

Jian Xie

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

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!