JinkoSolar's Capacity Expansion Is Out Ahead of Its Revenues

| About: JinkoSolar Holding (JKS)
JinkoSolar Holding’s (NYSE:JKS) second quarter filing is its first quarterly report since its initial public offering (IPO) on May 13, 2010. The offering price at $11.00 per American Depository Share (ADS), was a bargain compared to the current price of greater than $30 per share. Among its peer group, JinkoSolar is ranked 22nd in last 12 months revenue and 15th in market capitalization. At under nine times forward earnings the company trades at a 20% discount to its peer group. While short interest is substantially below the industry average, it has continued to increase as the share price has risen.
The company’s ranking has improved in six of our rankings. The company ranks in the bottom half of its peer group on three metrics, including: operating cash flow-to-net income, selling, general and administrative (SG&A) and debt-to-equity. Debt-to-equity has improved from 31st to 22nd as the market capitalization has more than doubled. The company ranks near the top in just one metric: cash conversion cycle where it moved from 16th to 9th. While free cash flow-to-net income has dropped from 7th to 15th due to substantial capital expansion.
The company provided necessary documents prior to its IPO as required by the SEC. Quarterly information provided for the second quarter filing was inadequate. Full financial statements were not provided; a cash flow statement was not included. Segment data provided in the IPO documents was not included in the second quarter filing. As a result we have downgraded to Ds the company’s disclosure and key performance indicators ratings. It appears that the company did the minimum in its required registration statements and less than that in its quarterly filing. No update on progress towards solving material weakness was provided.
The company does not disclose its actual cost per watt. Because the company does not provide its cost of goods sold for solar modules either annually or quarterly, calculating a meaningful cost per watt is impossible. Using total cost of goods sold to calculate the cost per watt based solely on solar modules megawatts shipped would inflate the amount. JinkoSolar provides its revenue for each of its products and services on an annual basis and for the first quarter of 2010; thus it is possible to calculate revenue per watt for the first quarter of 2010 and not the second quarter. The company started selling solar cells and modules in 2009.
The company’s lack of clear concise disclosures concerns us. The company’s incomplete disclosure makes analysis of its performance difficult. The company’s goal is to transition from a silicon wafer manufacturer to a leading vertically integrated solar module manufacturer. The company’s margin per watt has continued to improve as its manufacturing has moved up the value chain from ingots to modules.
We calculated annual revenue per watt of ¥8.75 for the first quarter of 2010 down significantly from ¥12.64 for modules in fiscal year 2009. The company stated that its revenue per watt in fiscal year 2009 was ¥12.7. This is very comparable to our calculated revenue per watt, which was just ¥0.06 below what the company claimed. Both revenues per watt are below the fiscal year 2009 industry average of ¥21.05.
Net income margin for the second quarter of 2010 improved to 20.1% from 13.4% in the first quarter of 2010. During the second quarter the company recorded a mark-to-market gain of ¥74.6 million on its forward contract derivatives. Without this gain we estimate the net income margin would have been 11.2%, a decrease from the first quarter of 2010. Additionally, the company has posted a positive net income margin for all of the past eight quarters and ranks third among its peers in that category.
The company’s pace of capacity expansion has accelerated at a time of low capacity utilization. Growth in product sales is only slightly ahead of growth in capacity. We have calculated capacity utilization based on sales since actual production is not disclosed by the company. The company only discloses MW sold. When inventory balances are increasing our capacity utilization calculation is understated and overstated when inventory is decreasing. Inventory balances decreased during the first and second quarter of 2010. Inventory balances increased during 2009.
By our calculation capacity utilization has continued to improve. Module capacity utilization increased to 21.7% in the second quarter of 2010 from 5.8% in the first quarter. Cell capacity utilization increased to 28.1% in the second quarter of 2010 from 16.9% in the first quarter, while wafer and ingot capacities have remained in the 28% range for both second and first quarters of 2010. The company says full year sales are expected to be $500 million to $525 million. Total product shipments of 395 MW to 415 MW are expected for 2010. Module shipments of 195 MW to 205 MW are also expected for 2010.
The company began production of monocrystalline ingots in August 2007 and had approximately 230 megawatts in annual manufacturing capacity as of March 31, 2010. Production of multicrystalline ingots began in June 2008 with annual manufacturing capacity of approximately 80 megawatts as of March 31, 2010. Production of monocrystalline wafers began in March 2008. Production of solar cells began in July 2009 following the acquisition of Zhejiang Jinko. Production of solar modules began in August 2009.
Solar module production capacity has increased by 100% since fiscal year 2009. Furthermore, the company is expecting to expand its silicon wafer and solar module production capacity to approximately 500 megawatts each and annual solar cell production capacity to approximately 500 megawatts. The company expects to achieve the expanded production capacities by Dec. 31, 2010.
Internal control problems were disclosed with the company’s filing of its IPO. The disclosed internal control problems should concern investors as well as the apparent lack of oversight by the audit committee. The company and its independent public accounting firm identified a number of control deficiencies in its internal control over financial reporting, including two material weaknesses and a significant deficiency. We are concerned the company provided no update in its second quarter 2010 filings. We believe investors should be kept informed as to progress made in solving internal control problems.
Disclosure: no positions

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Tagged: , Industrial Electrical Equipment, China
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