JA Solar Q4’16 Results

JA Solar (NASDAQ:JASO) is one of the largest solar cell and panel manufacturers in the world. The company is witnessing strong growth from its domestic market of China and emerging markets. It has a presence in all three segments – residential, commercial and utility. JA Solar has an annual wafer manufacturing capacity of 2.5 GW, cell capacity of 5.5 GW, and module capacity of 5.5 GW. JA Solar is further thinking of expanding its annual manufacturing capacity to 3 GW for wafers, 7 GW for cells and 6 GW for modules by the end of 2017. This makes the company the fourth largest PV module manufacturer globally in 2016.

You can also compare with latest First Solar results.

JA Solar Positives

i) Quarterly Performance – 5^th largest module supplier in 2016

Though the company reported an increase in fourth quarter shipment volumes both quarterly by 13.8% and on an annual basis (5.5%), revenues declined signifying a decrease in ASP levels. Revenues amounted to $575 million, a decline of 13.1% y/y and 4.1% sequentially. Gross margins declined too.

However, net income improved to $50.9 million compared to just $6.4 million in the third quarter of 2016. Earnings per share stood at $0.98, compared to $0.49 in Q4’15 and $0.12 in Q3’16. The company has been giving good results quarter after quarter.

JA solar was the fifth largest module supplier globally in 2016. The company’s full year shipment increased by almost 25% when compared to 2015. China represented the biggest market for JA Solar with shipments increasing to 58% from 32% in the previous quarter. Overall APAC regions accounted for 83% of total shipments.

Gross margin was 14.6%, compared to 17% in fiscal year 2015. Earnings per share also improved to $2.10, compared to $1.52 in fiscal 2015.

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ii) Technical & Efficiency Advantage

JASO manufactures high quality solar cells keeping costs low. It is the pioneer in the production of PERC monocrystalline, black polycrystalline silicon cells and modules. The company’s average Cypress2 efficiency is 19.7% for monocrystalline cells. Its ‘PERCIUM’ and ‘RIECIUM’ modules have achieved number of conversion efficiency records. JA Solar uses double printing technology in production to enhance solderability, which leads to less track breakage. It is the first module manufacturing company to guarantee the capability of double 85 anti-PID for all of its PV modules.

iii) Low Debt Level

The debt level is low which is a very good sign for the company. As of December the company had cash and cash equivalents of $370 million, and total working capital of $232.5 million. Total long-term borrowings were $464.7 million, of which only $75.7 million were due in one year.

Outlook

Full year 2017 shipments are expected to be in the range of 6.0 to 6.5 GW, including 200 to 250 MW of module shipments to the Company’s downstream projects.

Going forward the company pledges to focus on growth through R&D delivering high-efficiency solar products. The CEO also hinted at improving their cost structure. Strong demand in China is expected to continue in the first half of 2017.

Challenges

One of the challenges for the company is expanding its footprints in other key markets like U.S and Europe. Though China is a strong solar market, I believe the company should diversify its business footing to take advantage of the growth in other strategic market. Europe accounted for 3.3% of external shipments (declining from 6.5% in Q3’16). Americas’ shipments constituted 13% of total shipments declining from 33% in the earlier quarter. JA Solar had a target of capturing 10% of the U.S. market share in 2016. The company had a diversified foothold in 2015 when it gradually increased its presence in non-Chinese markets as well.

Valuation

The stock is undervalued with P/E of just ~4X. The market capitalization stands at $268 million and is currently trading at $5.6 levels. The Chinese stocks are much undervalued. They do not receive the valuation (on the U.S stock exchange) that could justify their talents, in sharp contrast to their western counterparts like First Solar (NASDAQ:FSLR) and SunPower Corp. (NASDAQ:SPWR). This has resulted in many of the large Chinese companies planning to de-list from these stock exchanges.

Trina Solar (NYSE:TSL), one of the largest solar panel manufacturers not only in China but also globally, approved its plan to merge with Fortune Solar Holdings Limited (Parent) and Red Viburnum Company Limited (Merger Sub) in December last year.

JA Solar is a good way to invest in one of the growing Chinese Tier1 companies at cheap valuation.