Jinko Solar's Time May Have Come

| About: JinkoSolar Holding (JKS)
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Summary

Solar stocks have bottomed.

Demand for modules is higher than expected.

Solar has become the cheapest source of energy in some parts of the world.

Jinko Solar seems to be interesting for investors looking for low value with potential.

Introduction

Since the beginning of last year, Chinese stocks have reached a low and are now on an upward trend. Solar stocks seem to have bottomed in a similar manner. At the same time, according to the Lazard Report, solar has become the most economical source of energy in some parts of the world.

Still in the same period, SolarCity (NASDAQ:SCTY) has been acquired by Tesla (NASDAQ:TSLA), Trina Solar (NYSE:TSL) has revealed plans for going private, and Jinko Solar (NYSE:JKS) has spun off part of its business. There is a chance the smart money saw an opportunity too good to miss, despite the recent financial troubles of peers like SunEdison (OTCPK:SUNEQ).

In this article, I argue that Jinko Solar merits the attention of investors who are looking for value and growth at a low price. First, I'm going to point out that the fear of a slump in global demand for modules is probably exaggerated, particularly in the case of Jinko Solar. The second part of the article attempts to demonstrate how Jinko Solar is currently the best choice among global module producers because of its cost leadership and relatively solid financials. To complete the picture, we will look at a schematic pro-forma balance sheet and income statement, which depict the financial standing of Jinko Solar after the spin-off.

Demand Side

Lately, there have been some concerns about the future of the solar industry in the U.S. under the incoming president. Also, a new glut in China caused by lower installation targets was feared to lead to tumbling module prices worldwide. On the other hand, if one listens to the last conference call of Jinko Solar, one may think these fears are not entirely justified: the average selling price (APS) for Jinko has fallen by around 20%. However, it has stabilized since then, leaving the company with acceptable margins. Overall, demand in China seems to have contracted less than expected after in November the National Energy Administration had cut its target from 150 GW of installations to just 110 GW by 2020, together with announcing lower feed-in tariffs (FITs). It turns out that this number is a minimum target, and that additional programs, such as the Front Runner Program, and the Power Alleviation Program, will create further demand. In addition, for the municipalities of a handful megacities including Beijing, as well as for the region of Tibet, less stringent limits apply (source). Keep in mind that in these areas have in total over 100 million people.

There also is new demand from players in the emerging markets where solar parks have become the most economical source of energy without incentives. Jinko's sales numbers reflect this: from Q2 to Q3 sales to emerging markets were still small with respect to China and North America, but they have grown by almost four times in the same period. And there is more to come: the Saudi government just announced a plan to extend its investment in solar by 10GW (about a quarter of all solar panels installed in the US).

One can expect good news from Europe as well: more module producers are leaving the Minimum Import Price (MIP) agreement creating fair competition, while at the same time the calls for scraping the agreement all together are becoming louder (source). This leaves us only with the U.S. market being an uncertainty, but perhaps in the long run Chinese solar firms are in a winning position either way: if the new Administration cuts funding and embarks on a protectionist trade policy, it will probably hurt the US producers more than the Asian ones because it will become more difficult for them to reach scale and compete outside the United States.

Source: Jinko Solar, Sales by region, Q3 slides.

Why Jinko Solar?

On the supply side, it is more difficult to have clear a picture of the future. The past is littered with numerous players being pushed out of business, and it seems that in the short run a lot more small firms will encounter difficulties. This, however, should play out in favor for the big ones. From a different perspective, there is a substantial risk that supply will increase more than demand in the years to come, leading to a market with minimum margins and cutthroat competition.

This brings us to the conclusion that long-term investors should prefer top-tier companies with solid balance sheets, with the lowest production costs in the industry, and with large market shares. The top three companies in these terms are Trina Solar, Yingli Green Energy (NYSE:YGE) and Jinko Solar. With Trina Solar going private, and Yingli having been unprofitable over the last years, Jinko Solar seems the way to go for a more cautious investor. Below are the efficiency/performance-adjusted module supply stack estimates for 2011, 2013 and 2015. Even though the most recent numbers are missing (the blended cost for Jinko is currently $0.40, expected to go to $0.35 by next year), they show that Jinko Solar is within the top three, and has battled its way up there while being profitable in four years out of five. I think it is reasonable to expect the company to become the leader in production cost and market share in the near future (if this hasn't happened already).

Source: PV Technology, Production and Cost Outlook, Greentech Media Research

Financials after Spin-off

Jinko Solar was founded 10 years ago by Chen Kangping, Li Xiande and his brother Li Xianhua following the example their elder brother Li Xianshou, who had founded ReneSola (NYSE:SOL), another PV company (which however is not doing so well). Chen Kiangping and the Li brothers are still in charge of Jinko Solar and hold roughly 30% of all shares. During the last decade, they took on adding cell and module production to their initial wafer production facility to create a vertically integrated business, which eventually would also start building solar parks for selling power.

One of the most recent developments at Jinko Solar is the spin off of the power generation business in Q3 in change for $250m in cash and a 1,252 reduction in debt. The management has provided some preliminary numbers during the last conference call, but it remains to be seen how the spin-off will exactly impact the balance sheet in the upcoming annual report. Using these preliminary numbers and rough estimates based on past reports, one can come up with the following financials for the end of Q3, i.e. post spin-off:

Q3 after spin-off, BS

Statistics

Cash and restricted cash

571

Market cap

500

Acc. Receivable

750

ADS outstanding (dil.)

31950740

Intangible assets (?)

19

EPS

4.38

Tot. assets (?)

2776

P/E

3.65

Book value

305

Tot. debt

918

P/B

1.64

Other liabilities (?)

1534

Debt/Capitalization

0.74

Tot. liabilities

2452

Debt/Equity

2.83

Equity (?)

324

Working capital

-40

PL

Revenues

777

(Cost of rev.) (?)

622

Gross profit

155

(Fixed Costs) (?)

70

EBITDA

85

(Interest )

14

(Depreciation)

18

Taxes (?)

14

Net (?)

39

(?) are own calculations or estimates based on past reports, all numbers in m$

What strikes the eye is the low valuation in terms of P/E and P/B. On the other hand, the working capital is negative, and also the debt ratios could be better. In particular, it is not clear which part of the total debt is current and which part is long term. It would be also good to have a breakdown of what is hidden under the difference between "Total Debt" and "Total Liabilities," here reported as "Other Liabilities."

Looking towards Q4, I expect the spin-off to generate some pleasant side effects, such as an increase in revenues because the module business keeps selling to the spin-off.

Conclusions

It seems that Chinese solar stocks have bottomed and are poised to rise again because of higher than expected demand. Jinko Solar is in my view the best choice to benefit from this development because of its cost-leadership position. The company seems to be a bargain but has negative working capital and its debt position could be better from the point of view of a cautious value investor. To be fair though, the spin-off has improved the situation significantly, and the firm is in a better shape compared to most competitors.

Personally, I've opened a small speculative position. Before enlarging it, I would like to see the annual report to have more clarity about liabilities and on how demand from the US plays out. I am going to write an update with this new information.

Disclaimer: The article reflects my personal opinion and reality to the best of my knowledge, but I can't guarantee for content or outcomes. Please do your own research before making any investment decisions. Be aware that investing in a single stock may lead to complete loss of capital.

Disclosure: I am/we are long JKS.

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.

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