They had reported Q1 earnings about three weeks before the end of Q2, so it seemed that their guidance for Q2 should have been stable. Unfortunately that was not the case. They drastically cut Q2 module and wafer shipments, revising a projection of 200-plus MW of module sales down to 80 MW of sales for Q2. (In the Q2 conference call, I remember the management proudly announcing how module sales were strongly rising each month.)
On a full-year basis, just to add insult to injury, they lopped off $1 billion from the top-end revenue guidance, from $3.7 billion down to $2.7 billion.
With this news, our estimate of 51 cents per share for Q2 will drop to a loss of about 22 cents. The 22-cent loss could increase with additional one-time expenses, such as forex losses. In addition, our one-year estimate of $2.66 per share will now drop to $1.20 per share.
What is most irritating is the fact that they could be so far off the guidance of three weeks prior to the end of the Q2. What were they thinking? In our opinion (and to be blunt), the discrepancy in guidance is disgraceful.
On the other hand, on August 16, Jinko Solar (JKS) managed to beat the Street's Q2 estimates, and they met exactly our estimate of $1.82. Our main concern, at this time, is the very large accounts receivable growth over the past six months.
During the conference call, they were very forthright in their somber assessment of Q3 and Q4. (A few notes are provided below.) With JKS, we remain confident that they will continue to execute almost flawlessly even in this very tough solar environment.
We will most likely reduce our full-year EPS estimate for JKS to about $7.50. We will wait for the rest of the ERs and then produce a set of quarterlies for all eleven solars.
In spite of our reduction in the full-year EPS for JKS, we believe that JKS retains very good medium-term upside. On the other hand, LDK now holds a limited upside potential for this year.
However, if we go out to 2012/2013, the share price appreciation picture becomes compelling for both companies. So for those investors prepared to hold for a two-year period, we believe both stocks provide excellent upside from current levels. We plan to publish 2012 estimates for all eleven solars in a few months. Relative to 2011 EPS numbers, the JKS and LDK 2012 numbers look very good.
Friday it is possible that LDK will plunge 20% tor 30% or more. For a true bargain-hunter, one might place an order at the unlikely Hail Mary price of only $3. That should be a bargain.
At some point over the coming weeks, the price should stabilize, and maybe even rise. For medium-term investors, this might not be a good hold, but for those planning to hold for a few years, LDK should turn out to be a pretty good hold.
A Few Notes From JKS:
1. Non-silicon processing costs fell from 73 cents/watt to 70 cents/watt. They expect to reach 67 cents by the end of Q4. They feel that they could achieve 60 to 62 cents by Q4 2012. A large part of this reduction would be due to reductions in material prices. 51 cents of the current 70 cents is in materials. I believe they mentioned that they could purchase even more of the material portion from Chinese sources.
2. Poly costs on a signed-contract basis appear to be hovering between $51 to $53 per kilogram. Although a bit hard to understand, it appears that spot prices would range between $40 to $50 per kilogram. Together with outstanding inventory, we will assume the average cost of poly will be around $50.
3. For Q4, depending upon module pricing, they assume poly pricing could fall to $35. Although that's logical, it seems prudent to model $40 to $45 for Q4.
4. They mentioned a lot of the non-listed Chinese manufacturers were either going out of business or reducing production. JKS has been at 100% production over the past two quarters.
5. Module ASP: For Q3, they expect a range of $1.20 to $1.30 per watt for the quarter. This seems very low. Are they being overly conservative? We are now at the midpoint of Q3, and I was hoping that they would have provided a point estimate for Q3. Guess one of the analysts should have been more precise. For Q4 they are projecting around $1.15 to $1.25.
6. I was surprised that no one mentioned the fairly large growth in accounts receivable. Not sure if it was even mentioned in the formal part of the call.
7. The Q3 and full-year guidance do not really reconcile well. I can only assume that the 250 MW for modules is understated, and that Q4 will see around 360 MW of sales. Just with rough calculations, total revenue would then reach the high end of revenue guidance of $1.5 billion.
They gave a pretty interesting picture of the solar landscape today. It was not a very rosy picture. If we use $1.28 ASP, then we are looking at an EPS of $1.80 for Q3. This could change with the flood of ERs over the coming week. If we use $1.22 ASP for modules, then the EPS number will fall to $1.21.
Disclosure: I am long LDK, JKS.