Jinko Solar's Operations Poised To Improve Throughout 2012

Aug.21.12 | About: JinkoSolar Holding (JKS)

The first quarter of 2012 was similar to the previous quarter for Jinko Solar (NYSE:JKS) as it continued to bounce along the bottom of a vicious industry downturn. The collapse in average selling prices ("ASP") for photovoltaic components across all verticals continued to take its toll on the entire industry as less competitive manufacturers were gradually forced to shut operations. Unlike already defunct peers, Jinko Solar has been able to dramatically reduce its manufacturing costs which has enabled the company to maintain positive gross margin on its core module business. Until the solar industry consolidation cycle has been completely played out, nearly all component manufacturers including Jinko Solar will likely continue to post losses as it sets to report second quarter results on August 23.

On an operational basis, Jinko's business remained weak in the first quarter which has typically been the weakest quarter for the entire industry. Similar to the prior quarter, JKS once again missed its module shipment guidance of 170-190MW with actual shipments of 157.1MW. Despite a large sequential module ASP decline to $0.83/watt from $0.96/watt, Jinko was able to maintain the $0.09/watt gross profit estimated in my prior article as manufacturing costs dropped to $0.74/watt in the first quarter.

Compounding to shortfall in module shipments, Jinko shipped higher than expected volume of non-core silicon wafers and solar cells in the quarter. As noted in my prior Jinko Solar review, the company sold non-core products into a dysfunctional pricing environment at steep losses. On approximately $38m in silicon wafer and solar cell revenue reported in Q1, Jinko inked slightly over 25% negative gross margin vs. a 10.8% positive gross margin on core solar module revenue. As a result, the company's consolidated gross margin fell to only 0.7%.

In addition and as also noted in my Jinko Solar Q1 preview, the company posted a number of non-operational charges which caused US GAAP losses to balloon. Unlike larger US listed Chinese solar peers Trina Solar (NYSE:TSL), Yingli Green Energy (NYSE:YGE), and Suntech Power (NYSE:STP) which all posted large tariff provisions related to the recent US anti-subsidy and anti-dumping rulings, JKS reported a more modest $3m provision in the first quarter. Pre-payment charges most likely linked to Hoku Polysilicon's collapse totaled $20.6m vs. a $20m approximation in my preview.

In total, these negative issues resulted in a Q1 2012 US GAAP net loss of $56.6m or -2.55 in earnings per share. This was only a marginal improvement from the $58.9m in US GAAP losses reported in Q4 2011 which was also tainted by a number of legacy non-operational charges. Looking forward, the second quarter should show minor improvements for Jinko Solar. Nevertheless, another meaningful stair step decline in module ASPs will likely result in continued losses.

For Q2 2012, Jinko officially guided for module shipments to range between 200-240MW which would be a substantial boost from Q1's module shipments of 157.1MW. Additional information provided in the company's Q2 earnings conference call also suggested module ASPs may range between $0.73-0.76/watt for the second quarter. Based on this and other information provided by JKS, a second quarter earnings estimate has been compiled below. As usual this estimate is solely based on metrics within the parameters provided by the company and excludes any potential additional unannounced gains or charges.

JKS Q2 Earnings Estimate:

Revenues: $177m

Shipments: 220MW module, 40MW wafer/cell

Asps: $0.74/watt module

Module Unit Cost: $0.69/watt

Gross Profit: 220MW x $0.05/watt = $11m - $3m wafer/cell loss = $8m

Gross Margin: 4.5%

Operating Expenses: $30m

Net Interest Expense: $10m

Net Foreign Exchange Loss: $8m

Convertible Capped Call/Derivative Gain: $7m

Tax: $0m

Net Loss: -$33m

Diluted Share Count: 22.5m

EPS: -1.47

While certain non-operational numbers may vary such as the estimates for Jinko's Q2 net foreign exchange loss as well as the net effect of its derivatives linked to the company's convertible bonds, operational results should fairly mirror the estimates above. Due to continued losses, Jinko may also realize a net tax benefit although tax assumptions are estimated as neutral above.

As noted in a prior Jinko Solar review, earnings in the second half of 2012 could witness a meaningful boost. While operations as a module manufacturer may not see much in terms of incremental improvement over first half results, Jinko has stated an additional 100-150MW of self developed solar projects based in China are expected to be sold in the second half. The revenue recognized by the sale of these projects at gross margin estimated by JKS could be enough to tip the company's corporate results into the positive in either Q3 or Q4.

More important than results Jinko Solar may post in the short term, the company remains one of the better houses in a very bad neighborhood. Large fully integrated scale has made Jinko Solar one of the lowest cost manufacturers of solar modules. In a dysfunctional pricing environment, low cost has not been low enough but should margins normalize to more sustainable levels once industry consolidation weeds out weaker players, Jinko Solar should be positioned to be a margin leader within the industry as it has shown in the past. Jinko Solar's exposure in China in combination with its expanded focus on downstream project development business should also provide an extra profit buffer until the component side of the business recovers.

Disclosure: I am long JKS, TSL, YGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No position in STP.