Thoughts on JA Solar's Q4 Earnings

| About: JA Solar (JASO)
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JA Solar (NASDAQ:JASO) reached 2 gigawatts (GW) of solar cell capacity and shipped 1.4 GW of solar cells. In 2010, the company has posted impressive sales growths and has surpassed its guidance for 2010 in shipments. Revenues for the year tripled going from almost $600 million in fiscal year of 2009 to just under $1.8 billion in 2010. (See earnings highlights here.)

With 2 GW projected for 2011 annualized shipments; the company expects capacity by the end of fiscal year 2011 to be 3 GW. The company is taking a risk building additional capacity in anticipation of significant increased demand. The company trades at less than 6 times forward earnings which is 43% below its peer average. The valuation historically is tempered by dependence on a limited number of key customers, limited quality disclosures and related party transactions. The company experienced substantial increases in revenues and an improvement in net income margin.

Most of our rankings for the company remained steady in the fourth quarter of 2010. The company ranks in the top half in seven of nine quantitative metrics. Operating cash flow-to-net income and free cash flow-to-net income both rank in the top 15 in the industry. The company fell one spot on the cash conversion cycle; however, the company still boasts superior inventory and receivables management relative to the peer group. Gross margin declined to 16th, despite an increase in our calculated margin per watt. Debt-to-equity fell despite a decrease in the use of short-term debt. The company’s peers are reducing outstanding debt more quickly than the company. The other rankings did not change significantly from last quarter.

Revenues increased 6.5% in the fourth quarter of 2010, significantly lower than the 53% increase in the third quarter and 25% increase in the second quarter. In 2010, revenues increased by 211.3% mainly due to an increase of almost 1 GW shipped during the fiscal year. The company has planned to expand its capacity by 50% and shipments by more than 50%.

The company said,

[We] currently expect total cell and module shipments to exceed 2.2GW in 2011, representing an increase of approximately 50% compared to 2010. Module shipments are expected to be approximately 500 MW to 600 MW. Sales contracts signed to date for 2011 delivery amount to more than 2 GW, representing approximately 90% of the Company's expected shipments for 2011.

When asked about near term projections, the company’s response was somewhat vague and sparse on specifics. On the earnings conference call an analyst’s question was,

Your gross margin is a little below your guidance of 20% and you mentioned the ASP is a little lower. Can you give us more color on that and you provide some guidance on how we should look at in Q1 and Q2?

The CEO’s response to the question was,

I think dip in the gross margin in Q4 mainly is due to the last month December. I think the -- with the module price is up hand is coming down relatively more and then the wafer price. So wafer price in Q4, the first two months is coming up but people are expected -- as the capacity increase were soften, but it’s not coming down as fast as expected. So that’s one of the major reasons. And as we’ve seen in the Q1, generally the price for solar cell is already changed as we see it. It’s moving up towards to the end of January and also for the wafer supply situation currently is not very clear.

However, in the medium-term like we said in Q2, we have almost doubled our supply with one of our strategic suppliers with low-cost wafer. And Q3, that situation was even more improved. So medium and longer-term, we think in the margin or the costs were getting better and for near-term like January and February, it’s very dynamic.

As a result the analyst said,

Great. Thanks for the color.

(Source Seeking Alpha Transcripts)

Additional analysis of JA Solar and its peer group can be found here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.