Jinko Solar Q1’16 GM at more than 21%

Jinko Solar (NYSE:JKS) is one of the lowest cost manufacturers of solar panels in China. The company is vertically integrated across the entire solar product supply chain and also has a decent presence in the downstream project business. Jinko Solar is amongst my favourite solar stocks since the company is expanding its capacity, geographic reach, downstream business while continuously reducing costs and improving efficiencies. Its new Malaysian capacity is helping to serve the overseas market at a better margin. The company also has good credibility in the market and is able to secure loans easily. Jinko Solar has been showing good performance after each quarter, giving double digit gross margin consecutively. Q1’16 marked another quarter with high double digit gross margin at 21.3%.

Jinko Solar is amongst the leading manufacturers of solar products in China and acquired the third largest module supplier position in USA as well. The company is already amongst the top suppliers in China and with an increasing presence in USA, JKS will be able to capture extensive marketshare in two of the largest solar markets globally. Jinko Solar recently signed important agreements in USA, including a 1 GW supply agreement with sPower, and a partnership with GreenSky in the residential sector. The company is aiming at shipping 2 GW to USA this year, double from what it did in the last year. Its Malaysian facility will play an instrumental role in supplying to the USA market, as it will allow the company to circumvent the duties.

Increasing Shipments Worldwide

The company experiences strong demand not only from China and USA, but also from emerging markets such as Chile, South Africa, Mexico, Thailand and Australia. Jinko Solar has thus reached a decent level of geographic diversification expanding in the emerging markets as well. Jinko Solar is now the third largest module shipper worldwide, with more than 4500 MW module shipments in the last year. The company is expecting shipment to increase to 6.5 GW by 2016. Total shipments in the first quarter of 2016 (~1.6 GW) increased more than 100% Y/Y, making it the largest module supplier.

Module sales by Region (as a % of total)

Read Jinko Solar Panels Review

China has been a large market for solar. The country installed ~18GW of solar in 2015, making it one of the largest markets for solar energy. USA is another large and growing market for solar energy, with the US government extending the investment tax credit. Jinko Solar is currently amongst the top three module suppliers in USA, as mentioned by the CEO in their quarterly CC. With the ITC now extended, USA is poised to witness more than 40GW cumulative solar capacity, entailing a growth of 25-50% by the end of 2016 and Jinko Solar can leverage from this opportunity.

Large Manufacturing Capacities to support demand

Jinko Solar has industry leading manufacturing capacity, which will help in serving the large gigawatt size orders of the industry. The company is also expanding capacity by the end of 2016 and its Malaysian plant is already live serving the international markets.

Manufacturing Capacity (in MW)

The solar industry today has been witnessing a trend of large gigawatt sized orders and Jinko Solar with its vertically integrated model and large annual production capacity will leverage from this opportunity. The company is expecting to increase its annual production capacity to 3.5 GW for wafers, 3.5 GW for solar cells and 6.3 GW for solar modules by 2016 end. This entails a growth of more than 50%, 90% and 120% in annual capacities for silicon ingots and wafers, cells and modules as of September 2014.

Strong project Development Business

Another reason why Jinko Solar is a good solar stock to invest in is the company’s strong focus on system development business. The company continues strengthening its pipeline of projects and increasing electricity revenues annually from these solar power projects. Jinko Solar has come a long way from just being a Chinese distributor of solar products. Today Jinko Solar is a global brand. Jinko Solar has connected more than 1000 MW of solar projects during 2015, which was a 100% growth from 502 MW connected by end of December 2014. Out of the 1000 MW, more than 770 MW was in utility scale and remaining 235 MW was in distributed generation, mostly in China.

As of March 31, 2016, the Company had connected 1,007 MW worth of solar power projects. Both electricity and revenues generated from solar power projects increased 36% from Q4’15 and 82% Y/Y.

Increasing EPS

The EPS during the last year has followed an increasing trend, increasing 600% from the first quarter of 2015 to $1.68 during the last quarter as can be seen from the table below. The trend in EPS is likely to continue in 2016 as well, with 2016 EPS expected to range between $4.88 and $5.25. EPS during Q1’16 stood at $1.44.

Data from Jinko Solar’s Quarterly Results

Reducing per watt cost of Production

Not only has the company prudently increasing capacity, but is also reducing its in-house cost of production owing to its continued R&D efforts and lower material cost. Jinko Solar has reduced costs to 39 cents per watt currently, from 50 cents per watt in March 2015. First Solar’s (NASDAQ:FSLR) cost of production is currently ~40 cents/watt.

The solar industry is a highly competitive one and the companies can only succeed through new product innovations and technological advancements. Jinko Solar introduced high efficiency all-black poly module designed to perform even in low light conditions, available in 60-cell and 72-cell versions and especially targeting the US and Japanese markets.

Low Valuation is like Cherry on the cake

The stock is highly undervalued in my opinion, with industry low valuations. The market capitalization value stands at more than $657 million with a P/E of 6.9x. Though the Chinese stocks are cheaply valued than most of their western peers like First Solar and SunPower (NASDAQ:SPWR), I always feel Tier 1 Chinese solar companies should demand a better valuation. Some of the good performing ones like Jinko Solar, Trina Solar (NYSE:TSL) and Canadian Solar (NASDAQ:CSIQ) have good potential and are also expanding their horizons to compete on an international level. In contrast FSLR and SPWR have market capitalization value of $5 billion and $2.4 billion respectively.

Challenges

However Jinko Solar’s long term debt to total asset ratio for the fiscal year ending December 2015 was 0.2, which increased from 0.17 in the previous year, denoting that the company is using more debt to grow its business. The debt-to-equity ratio is currently 2.96, higher than the industry average.

The people following solar industry closely, will realize the importance of maintaining a sound financial position. The once poised to be global renewable energy leader Sunedison has now filed for Chapter 11, because the investors were convinced that the company’s financial position could no way support its aggressive expansion strategy. Solar business is highly capital intensive and thus require huge funding. Jinko Solar is a Chinese company and enjoys full Government support too. The company has a history of receiving financial aid from the Chinese Government. Its strong relation with the Chinese government and banks is another major factor that works in favour of Jinko Solar. The company continues to maintain good business relationships with the commercial banks of China and thus remains successful in securing credit, which is vital for the company’s growth.

Conclusion

The recent Paris summit and ITC extension further solidify the world’s stance towards solar, which is set to grow at rapid pace. I remain long on this industry and would recommend building a position in Jinko Solar to leverage from the double digit secular growth of the solar industry.