Suntech Will Not Impress In 2012 While Jinko May Join Ranks Of The Ordinary

by: Robert Dydo

Both Jinko (NYSE:JKS) and Suntech (NYSE:STP) reported financial results for the past year and for Q4 on March 8th, but there is an interesting connection beyond this, which in some ways helps to describe the difference between the two companies. This shared connection is poly supplier Hoku Corp (HOKU). Jinko is probably one of the very few Chinese companies that have managed to stay away from long-term contracts, with exception of one: Hoku. Fortunately, what started as a 10-year term commitment has now been amended to eight years, and considering that Hoku has not commercially produced any poly, future amendments will likely be much easier.

For Hoku and its majority shareholder Tianwei New Energy Holdings, things cannot be worse. Both need to spend money buying polysilicon off the market, in order to fulfill contractual obligations. Out of $139M in customer deposits, Hoku holds Jinko's $20M, Hanwha Solar One's (HSOL) $50M and Solargiga's $20M in the form of prepayments.

Last December, Hoku failed to pay its power bill and Idaho Power Corp. threatened to cut the electricity. Luckily, parties agreed to a payment plan and electricity is flowing, but in the latest filling with the SEC, the company appears to reconsider production in light of current poly prices. In addition, with the lack of financing from foreign sources, plant construction has been temporarily suspended until Q4 2012, while 20 full-time workers were laid off on March 7th.

Fortunately, Suntech, also a client, was also able to renegotiate its terms recently. The period of the agreement was shortened and all the fixed prices were deleted, putting a plan in place to renegotiate pricing on quarterly basis. Having only $2M in prepayments Suntech is not faced with a big risk, but just in case, all of the mentioned deposits are secured by interest in operations of the poly plant, which currently has $631M in capitalized construction costs. Those interests are subordinate to the interest held by Tianwei, obviously the company in charge at Hoku.

The Hoku episode has little significance to Suntech, particularly when it comes to the costs incurred in past investments. Suntech took literally hundreds of millions of dollars in losses in Shunda Holdings, with the costly purchase of Glory Silicon and stoppage of the thin-film R&D program.

So it is thought-provoking that on the same day Suntech announced its full-year results, news from Silicor Materials, formerly known as Calisolar, stated that 40% of its future production is going to go to Suntech from a yet-to-be-finalized new facility in Lowndes County, Mississippi. The plant will produce 16,000MT of polysilicon in 2014, by bathing metallurgical-grade silicon in melted aluminium to remove impurities made of boron and phosphorus. Through this process the company offers production costs at less than $20 per kg. The result of the production is solar-grade silicon with only four to seven "nines" behind the 99%. Today electronic-grade silicon made by OCI and GCL has up to eleven "nines" grade and also costs $20 per kg, all cost in at GCL, and at cash cost at OCI.

On its website, Silicor shows a record of 50MW of cells produced from polysilicon purified in Canada at its subsidiary N6 Silicon. The average performance of cells produced was 16.6% recently. In contrast, on the conference call Suntech's CEO Zhengrong Shi revealed the achievement of 20.3% conversion performance of "second generation" Pluto high-efficiency solar cells, the result of long-term collaboration with University of NSW, Australia.

Curiously, Suntech on one hand is within reach of the highest rating for the Chinese p type cell, whether mono or multicrystalline, and on the other hand enters a technology deal that may have difficulties achieving the purity required for high-conversion products, at a time when the polysilicon market is considered over-capacitated with inexpensive, yet high-quality polysilicon.

Even if this was a surprise, as expected, Suntech did not fail to disappoint when delivering its full-year and Q4 results. The impairments of goodwill, investment, long-lived and intangible assets were the major contributors behind a loss of $1B, though fortunately the majority of it was in the form of non-cash adjustments. The one exception, in July 2011 Suntech cancelled a costly wafer deal with MEMC, losing $120M in cash and equivalents, but saving $400M in long-term costs.

At the end of day the largest seller of modules in the world, with 2.09GW sold in 2011, is not really looking as lean as other Chinese companies. Suntech produced modules at $0.74 non-poly cost in Q4, essentially at the same price as in Q3, and predicts the same in Q1. The cause beyond the flat performance is the 80% utilization for the year, or perhaps less so in Q1. The company plans to sell 30% fewer modules in Q1 than it did in Q4. Future improvement efforts will move non-silicon costs to $0.64 per watt by the end of Q4 2012, a figure that Jinko and all other leaders achieved already this quarter.

Another reason for higher production costs, as stated by Suntech, is the quality required for materials to meet internal standards, particularly with EVA and glass. This subject took a different turn at Jinko, where those two items happened to drop by 18% in costs, moving the company's metrics more in line with other efficient producers.

For 2012 Suntech estimates 2.1 to 2.5GW in module sales, which at the low end offers no growth in MW volume, and essentially represents a substantial drop in revenue. Despite many improvements on the balance sheet, particularly in account receivables and inventory, with those dynamics Suntech is not looking to impress in 2012.

Jinko Solar is probably the only Chinese solar company to stay in the black on the year, an achievement commanding full respect in light of business conditions. Jinko had also done very well in sales, reaching 950MW of solar products, a 97% increase from 2010. Despite those deliverables, I have a sense of a mood change from an inspirational story of 2011, to almost a climaxing mode at current levels. Jinko projects 800 MW to 1GW in sales of modules, which at the lower end is only a 9% increase (module sales). Beyond that, similarly in concept to Canadian Solar (NASDAQ:CSIQ), Jinko is planning to develop solar plants in amounts of 100 to 150MW in 2012.

Q1 is expected to bring 170 to 190MW in modules sales, guiding flat to Q4. In the past Jinko's approach of buying cheap polysilicon differentiated the company from other verticals. In the conference call Jinko declared that current raw inventory has 134MT of poly at $37 per kg, which is essentially $0.20 per watt at 5.5g, and is buying poly in the range of $20 to $28 per kg, which should keep the company ahead of competitors. Yet contrary to verticals, which reported rising expectations for gross margin recovery in the second half of the year, Jinko is keeping its own at below 10%, suggesting acceptance of low ASPs in the future, despite costs in line with or better than others.

Furthermore, when everyone is expected to reach the same level of execution on polysilicon, perhaps Suntech being the only exception, Jinko's balance sheet and particularly low cash is a cause for the added attention for a potential and current investor. The company's cash has gone down by $58M quarter to quarter, noting that $40M went to plant development. Jinko is planning to roll over money from project to project to cover average upfront costs of $1.80 per watt, but in the long run, the condition lacks flexibility, which will lead to greater short-term borrowing, and further pressure on cash and operations.

The R&D budget, painfully small in comparison to Suntech's and those of other companies, could be flat-lining module ASP expectations, compared to premiums seen by others in Panda, Honey or ELPS. This could be an add-on reason behind the pursuit of plant development to up gross margins. The environmental accident, which had been addressed successfully in so many ways, perhaps still has a negative effect on sale channels, keeping Jinko's product aggressively priced. In my view, a lack of strong high-efficiency program commitment is bringing this agile performer in 2011 a notch down to average-player status in 2012.

As an illustration of things to come in Q1, Taiwanese companies' sales for February show 12% in sales month to month, but very few will have a chance to beat Q4 results. For companies like Motech, Gintech NSP or Green Tech Energy, considered Taiwan's solar revenue leaders, year-over-year results represent a 50% to 60% drop. As seen thus far, in Canadian's, Suntech's, and to a degree with Jinko's results, Q1 shapes up to be a challenge.

As we are awaiting more results in the coming weeks, perhaps companies that are capable of increasing their sales year over year, and sequentially quarter over quarter in Q1, present a healthy enough dynamic for risk-tolerable investors, while the timing of return to profitability remains unclear.

Disclosure: I am long TSL, YGE.