JinkoSolar Holding Co., Ltd. Q1 FY2020 Earnings Call

Welcome to today's First Quarter 2020 JinkoSolar Earnings Conference Call. Please note that all participants will be in listen-only mode for the first part of this call and afterwards, there will be a question-and-answer session. Now, I'm pleased to present Ms. Ripple Zhang. Ms. Zhang, please begin.

Thank you, operator. Thank you everyone for joining us today for JinkoSolar's first quarter 2020 earnings conference call. The Company's results were released earlier today and are available on the Company's IR website as well as on Newswire services. We have also provided a supplemental presentation for today's earnings call, which can also be found on the IR website. On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Charlie Cao, Chief Financial Officer; and Mr. Gener Miao, Chief Marketing Officer. Mr. Chen will discuss JinkoSolar's business operations and company highlights, followed by Mr. Miao, who will talk about sales and marketing, and then Mr. Cao, who will go through the financials. They will all be available to answer your questions during the Q&A session that follows. Please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks is included in JinkoSolar's public filings with the Securities and Exchange Commission. JinkoSolar does not assume any obligation to update any forward-looking statements, except as required under the applicable law. It's now my pleasure to introduce Mr. Chen Kangping, CEO of JinkoSolar. Mr. Chen will speak in Mandarin, and I will translate his comments into English. Please go ahead, Mr. Chen.

Thank you, Ripple. Good morning, and good evening to everyone, and thank you for joining us today. Total shipments of solar modules during the first quarter were 3,411 megawatts, excluding the impact of the disposal of overseas solar power plants. This quarter generated total revenues of $1.03 billion and a gross margin of 19.7%, all within our guidance range for the quarter. The COVID-19 pandemic impacted the solar industry, creating numerous challenges from difficulties obtaining supplies of raw materials to logistics and transportation disruptions. Despite all these challenges, we are still successfully achieving the highest historical shipments in the first quarter, which we believe demonstrates our strong ability to execute and incorporate flexibility to carefully navigate and adapt to our difficult global economic environments. Thanks to containment efforts across the country, all our factories in China have reached full production in much of the quarter. The major challenges so far during the second quarter have been overseas demand. The pandemic has impacted logistics to varying degrees, causing project delays in most overseas markets. In Malaysia, we immediately implemented measures to ensure the health and safety of our employees while complying with government containment measures. This rapid response has brought our production back to normal safely by the end of April. We replicated these health and safety measures for our employees in the U.S., and we're able to keep production running smoothly throughout the pandemic. With global demand falling significantly and the price of raw materials declining as a result of the pandemic, we focused our attention on coordinating production logistics and sales to fulfill new orders while carefully controlling inventory levels. Shipments of epidemic prevention materials continue to be made from China to our Malaysia and U.S. facilities. We have been doing all we can to care for our employees, clients, suppliers, and other business partners during this challenging time. Recently, China's Ministry of Industry and Information Technology began seeking public opinion for its draft standard conditions of the PV manufacturing industry. This draft consultation will raise the standards for new production facilities in order to promote the application of new clean technologies. Under this new standard, all existing production facilities will be required to implement industrial integrations and accelerate the replacement of outdated equipment and infrastructure. This will help accelerate the industrial application of new technologies and strengthen leading manufacturers as they expand their scale. In addition, policies governing the construction of ultra-high voltage projects and grid absorption capacity expansion will support the long-term development of the industry. We believe governments around the world will increasingly focus on energy security and localization, especially after the COVID-19 pandemic, due to the competitiveness of solar energy over traditional energy and the acceleration of global parity cost resulting from the fall in the price of industrial trends during the epidemic. This will result in more countries implementing policies to support solar energy and driving its deeper penetration in the post-pandemic era. In 2020, excess supply in the market will rapidly drive outdated production capacity out of the market and accelerate the application of technology that will better reduce the levelized cost of energy. Smaller manufacturers will find it harder to compete and will exit the market, which will create an opportunity for larger global players to expand their market share. We expect global installation to fall by around 25% compared to estimates at the beginning of the year due to the impact the coronavirus pandemic is having. Our order book for the year remains strong, and shipments are rolling out, allowing us to reaffirm our guidance on total solar module shipments for the full year 2020. Faced with the COVID-19 pandemic, we adjusted our internal production and management processes and facilitated a greater flow of information across our external network, which further improved the efficiency of our crisis management response and information sharing. As outdated capacity is removed from the market, and with accelerated adoption of high efficiency premium products by our partners, standards for PV modules and components were introduced into the 500 watt ultra-high efficiency era earlier than expected. This ultra-high efficiency product also sets higher standards for wafer quality and cell technology that have been duplicated across the supply chain from R&D to the mass production of modules. Technology remains central to strengthening our competitive edge in the market. We will continue to lead the industry in offering innovative products that generate solid returns on investment for our clients by leveraging our high-skilled R&D team, industry-leading research platform, and our ability to produce newly developed cutting-edge products. Recently, we launched a new Tiger Pro series module with a maximum power output of 580 watts. This breakthrough will set new industry standards for power generation and efficiency and will support a wider array of installation scenarios as the globe accelerates towards greater parity. The pandemic has, in fact, raised the technical standards for the industry. The competitiveness of leading players' products will drive further innovation in clean energy technology as well as in the industry. We are developing and adapting our products for project developers, engineering contractors, design institutes, and downstream suppliers. Their feedback has been key to assessing and mitigating technical risks when building our market-oriented products, which strengthens our competitive positioning. In short, the pandemic has adversely impacted the industry, but we are still on track to continue generating growth and expand our market share. On the capacity side, our in-house mono wafer production capacity was 18 gigawatts in April. Sales capacity reached 10.6 gigawatts by the end of the first quarter, including 800 megawatts of ultra-high efficiency N-type cells that have the highest conversion efficiency currently in the markets. On the module side, module capacity was 16 gigawatts by the end of the first quarter, with an additional 9 gigawatts of new high-efficiency capacity expected to gradually be brought into production in the second quarter. We will continue to refine our management of cost and efficiency in 2020. Before turning over to Gener, I will introduce our guidance. Based on our current estimates for the second quarter 2020, total solar module shipments will be in the range of 4.2 to 4.5 gigawatts, total revenues will be in the range of $1.1 billion to $1.18 billion, and gross margin will be in the range of 16% to 18%. We maintain our guidance on total solar module shipments for the full year 2020 to be between 18 to 20 gigawatts.

Thank you, Mr. Chen. The total shipment of solar modules reached 3,411 megawatts, a historical high in Q1, despite the challenges that COVID-19 created for our sales and production. Over the past few months, we have been carefully monitoring industrial developments, real-time market trends, and firsthand client feedback, which provided us with a detailed understanding of how the pandemic is impacting our clients and allowing us to offer better support. At the same time, we launched the emergency response mechanism developed from our experience facing previous challenging and unpredictable market hurdles, which provided us with a flexible and pragmatic tool to navigate during the crisis. The impact of the pandemic is expected to shrink global market demand by approximately 25% in 2020 to 110 to 120 gigawatts. Nevertheless, our high-quality products remain in strong demand and reaffirm our guidance of annual shipments in the range of 18 to 30 gigawatts. With our order book for the year growing and shipments rolling out, we continue to drive growth. The China market was oversupplied in Q1. Some delayed projects from 2019 are now under pressure to complete installation before the June 30th deadline, which is helping to stabilize market prices lately. New bidding rounds for utility plants in 2020 are expected to start construction in the third quarter, reaching peak installation in Q4. In 2020, the capacity of solar power connections is expected to reach 48.45 gigawatts. Ultra-high voltage projects are being extensively promoted by the government as a strategically important source of energy integration and power transmission from China's west to the coastal coal regions over the long run. According to the latest policy from China's NDRC, each province is required to set the lowest non-hydro renewable generation ratio ranging from 5% to 25%. Additionally, reforming policies in electricity trading and distributed power trading plants will also improve solar power utilization efficiency, accelerating the diversification of China's energy mix. The distribution market in the U.S. has slowed during the epidemic shutdown in March, while the construction of large-scale power processes continued as planned. Given the situation, the U.S. Department of Treasury announced that the ITC for renewable investment would receive a one-year extension. Just a few weeks ago, the Government of Virginia signed a bill requiring the state to achieve 100% carbon-free power by 2045. A number of large-scale renewable energy projects continue to be funded adequately by global financial institutions despite the unpredictable turmoil in the energy market. Many European countries have begun easing travel restrictions since May. Economies there are bouncing back, and businesses are becoming active again. Portugal awarded a 1.15 gigawatt solar auction in 2019. In early 2020, Portugal announced another solar auction for 700 to 800 megawatts to be carried out within the year. The Netherlands launched a 10-year net metering program to support residential solar and lower annual electricity costs by 9% from 2023 to 2030. According to the regulator, homeowners willing to install PV systems will benefit from reasonable investment returns. Germany also lifted the 52 gigawatts cap for subsidies of small-scale solar projects. The market is expected to recover strongly in 2021. The economic stimulus package, which includes renewable energy, is anticipated to have a significant positive effect across all of Europe. Turning to Asia, the lockdown in India since March 24th has greatly impacted the flow of personnel and materials. The extension of the lockdown has prolonged these restrictions, further impacting public transportation, project suspension, bidding, and the operation of power plants. Recently, customs, banks, and other institutions began gradually returning to work. Several large utility companies such as SECI and NCPC have extended the bidding deadline for PV power generation projects. In April 2020, SECI extended the bidding deadline for solar projects and wind-solar hybrid projects totaling 8.7 gigawatts. In Vietnam, the lockdown has been lifted, resulting in fewer projects getting back on track. The Deputy Prime Minister of Vietnam issued a policy in April to encourage the development of solar power projects. According to the decision, 13 new FITs for all three types of solar energy systems - namely floating, ground-mounted, and rooftop - will be lowered. The pandemic in Japan has gradually eased, and the Japanese government terminated the emergency state on May 25th. PV installations continue, but at a much slower pace, with completion of large-scale projects delayed into 2021. Markets in Asia such as Australia, Singapore, Malaysia, and the Philippines have slowly kicked off. The Brazilian market has continued to be significantly impacted by the pandemic, which has affected approximately 70% of installations. The market downturn has forced many small installers and distributors to halt operations, with some large-scale projects delayed until 2021. The Middle East and Africa regions began opening up in June, with some businesses reopening and construction activities returning with limited labor mobility. In conclusion, we are confident in the long-term growth prospects of the PV industry despite all the short-term challenges. Going forward, we will continue to adapt our products and services to meet the needs of customers who are increasingly demanding high quality for stable supply and strong brand recognition. The pandemic will accelerate the removal of outdated capacity and leave only the strongest companies standing. We were recently recognized as a Top Performer for the sixth consecutive year in the PVEL's DNV PV Module Reliability Scorecard and were one of only two global manufacturers recognized as a Top Performer every year since 2014. This recognition reflects our dedication and commitment to the research and development of high-quality PV products. Overall, while obsolete capacity in the solar industry is visible, high-efficiency PV products remain short in supply. Competitive products underpin their market-added value and overall sustainable development. As a leading market player, JinkoSolar has always been customer-oriented, focusing on optimizing power plant designs and reducing the LCOE. Recently, we launched our latest Tiger Pro series, reaching a maximum power output of 580 watt peak. This launch took place during an online live-streaming event with approximately 200,000 participants from all over the world. Not only did the Tiger Pro series receive significant exposure, but it also marked a milestone for the PV industry. As the industry turns a page, we will strengthen our position as the supplier of choice with the lowest LCOE, strongest system compatibility, and overall economic value. With that, I will turn it over to Charlie.

Thank you, Gener. Results in the first quarter were in line with our guidance. Key financial indicators including total revenue, gross margin, and net income have increased significantly year-over-year. This is due to the continued increase in the integrated production level. By the end of March, we closed the sale of two solar power plants with a combined capacity of 155 megawatts in Mexico, which reduced the total debt by about $421 million. Our wafer capacity reached 18 gigawatts in April, which will support our expected total shipments of 18 to 20 gigawatts for the full year. To go into the details, excluding the sales of overseas solar power plants, total revenues were $1.03 billion, an increase of 25% from the first quarter of 2019. Gross margin improved to 19.7% compared to 16.6% in Q1 last year. EBITDA was $100 million, compared to $49 million in Q1 last year. Non-GAAP net income was $32 million, significantly increasing year-over-year. This translates into non-GAAP diluted earnings per ADS of $0.65. Excluding the sale of overseas solar power plants, total operating expenses accounted for 12.6% of total revenues compared to 11.9% in the fourth quarter of 2019 and 12.5% in the first quarter of 2019. The sequential increase was primarily due to an increase in shipping costs as a percentage of total revenue associated with a higher percentage of shipments through the overseas markets in the first quarter of 2020. Moving to the balance sheet, our balance of cash and cash equivalents was $678 million compared to $895 million at the end of last year. Accounts receivable turnover days were 66 days compared to 94 days in Q1 last year. Inventory turnover days were 110 days compared to 120 days in Q1 last year. Total debt was $1.8 billion compared to $1.9 billion last year, with $162 million related to international solar projects. Net debt was $1.1 billion compared to $1 million at the end of Q4 2019. Total CapEx for 2020 is expected to be around $350 million, which is used for the 5 gigawatts of certain phases of mono wafer capacity and additional 9 gigawatts of module capacity. This concludes our prepared remarks, and we are happy to take your questions.

Thank you. We will now start the question-and-answer session. Our first question comes from Philip Shen of Roth Capital Partners. Please proceed.

The first one is on pricing. We calculate an implied module ASP of about $0.30 per watt in Q1 on a blended basis for you. Based on the guidance, the pricing might be closer to $0.262 for Q2. This is just maybe a 13 percentage point decline. Are we accurate with these numbers? And perhaps you can comment on what we might be missing? Specifically, how much in Q1 did you have from module-only revenue, for example?

Yes, Philip, it's Gener. Thanks for the question. Yes, for Q1, the ASP compared with Q1 and Q2, we are seeing because of market turbulence and also the pandemic impacts, the market price dropped by around, let's say, 10%. So, if we look into our Q2 pricing, I think we are around that range as well. So, compared with Q1 ASP, Q2 ASP, we're expected to drop by approximately a high single-digit range.

Okay. And then, how do you expect that pricing to trend in Q3? Do you expect another drop as well? Or do you see more stability in Q4? How do you see ahead? Thanks.

Yes, sure. Our strategy is always to follow the market, so we're not against the market. When we see the market price dropping, definitely our pricing will drop. That's our strategy. I think everyone will follow that, not only Jinko. So, the number-wise, it's hard to define right now what the exact numbers for Q3 are. It's still too early to talk about the Q3 final pricing. But from the observation of the market price side, we do feel the expectation from all the customers; in fact, they expect the market price to continue dropping compared with Q2. But actually, when we look into the whole year pricing, I still believe there will be some bounce-back in late Q3 or even early Q4 because of expected strong demand in China rushing by the year-end and there will be shortened supply around that time.

And then from a housekeeping standpoint, can you share what the CapEx depreciation was, if you want?

Yes, Philip. The depreciation on a per quarter basis is roughly $40 million, and the CapEx is roughly $100 million for the first quarter.

Okay, thanks, Charlie. And then one bigger picture question. In your prepared remarks, you commented that the dropped ITC policy should drive capacity lower. Can you comment a little bit more on how you expect this policy to work? And how do you expect this to impact the industry? I can see marginal capacity expansion going away, but I was wondering if you could just comment more on what you see as the impact of this policy and when you expect it to be beneficial? Thanks.

Phil, you're talking about ITCs, right?

No, I'm talking about the Ministry of Industry policy to force the industry to have higher efficiencies in the capacity expansion.

You mean the China manufacturing industry standards, right?

That's right, yes.

Yes, Phil, I think this is a national standard that continues to encourage the latest technology adoption. There are a lot of thresholds which are minimum thresholds. If the industry participants want to expand capacity, I believe all-in-all, this will be very positive for industry consolidations, particularly for the Tier 1 companies, given their technology advantages. This will lead the capacity expansion to meet anticipated sustainable growth in the near future. For the Tier 2 and Tier 3 companies, they will be under pressure. This is not only from the customer perspective, but a lot of the Tier 1 companies are leading in this product mix, and we are promoting our over 500-watt modules. Tier 2 and Tier 3 companies will be under significant pressure from both supply and government policies, which are positive for leading companies but negative for the Tier 2 and Tier 3 companies.

Our next question is from Tony Fei at BOCI. Please go ahead.

Thanks management. It's Tony from BOCI. I have two questions. First is regarding the order book front. So among the 4.2 to 4.5 gigawatt shipment target for Q2, could you give us some color regarding how much of that will come from domestic orders and how much from overseas? And how about that mix movement in the second half maybe?

Yes. So, you're talking about future numbers, right? I assume your question is mainly about the China mix during Q2 and also the rest of the year's shipment or plan, right? From my observation, so Q2 numbers for the shipment mix, China will occupy not a significant number. The number range we're looking at is around, let's say, 10% to 15%. However, it will rapidly increase, especially when the China market starts to boom in the second half. We expect the ratio to be higher. Even by the peak time of Q4, we're expecting the number could be even 30% plus. For the total year, our targeted China market is still taking a fair ratio compared with all the other regions we are servicing, so approximately one-fourth of our total shipment is expected to ship to China.

And my second question is regarding the financials. So looking at your results in Q1, all the revenue and gross profit were quite in line with your previous guidance, but the net profit was dragged by the change in fair value of some derivative products. So, in the second quarter, are we seeing the RMB still weaker year-on-year? Should we expect more losses or fair value changes in a quarter? Thank you.

The change of fair value is split into two parts. One part is linked to our international projects, specifically the interest swap, and that had a significant negative impact in the first quarter because of the low, even close to zero, U.S. treasury rates. I think it's unlikely we will see this in the long term. However, the U.S. treasury rates are rebounding to standard levels. For the currency, the forward currency to lock our sales orders is also influenced by the RMB's depreciation in the first quarter, particularly given the recent tensions between the U.S. and China. Now, the RMB is stabilized and has relatively appreciated, so we don't expect significant impacts in the second quarter. Regarding the financial instruments, I mentioned we have two items, and we don't expect significant impact in the second quarter.

Our next question is from Brian Lee at Goldman Sachs. Please go ahead.

Maybe just a follow-up on an earlier question regarding gross margins. You're getting down about 250 basis points at the midpoint for the second quarter versus the first quarter. Pricing really started falling in late March and April. We've heard from other companies that a lot of that volume could flow through more in Q3 compared to real time in Q2. So, is it fair to assume gross margin is down again sequentially in Q3? And how should we think about the cadence from there?

The decline in gross margin for the second quarter reflected the slowing wage demand, particularly from the international market. Our factories are facing downward trends in ASPs given the recent market conditions. However, from the cost perspective, we are improving simultaneously. Therefore, I expect that in the second half of the year, gross margin will continue to be under pressure, but we are targeting to achieve relative stability in gross margin compared to the second quarter. We expect that as we rapidly expand our capacity on the mono wafer side, we will improve our integrated production costs soon after this challenging period, which will offset the negative impact of the ASP decline in the second half of the year.

That's helpful. And then, Charlie, just a question around inventory. I know that in past years, you've successfully made a pretty big move up in inventory from 4Q to 1Q. It seemed a little bit bigger this year. At the same time, accounts receivable was pretty flat. Is this just a shipment timing issue? I would have thought they kind of moved together. Are you seeing some cancellations on our modules? Now, you haven't remarked on those. Can you give us some sense of what's happening between the AR and inventory balances here at the start of the year?

Because we have set a target of 18 to 20 gigawatts, right, it's a quarter on average. We are planning 4 gigawatts to 5 gigawatts. Therefore, by nature, the inventory level will increase slightly quarter by quarter. In the first quarter, the inventory level is relatively higher because last time we disclosed a logistics challenge in China, and we shipped around 400 megawatts to 500 megawatts in the second quarter. Throughout the second quarter, given the challenges of international demand, we have proactively managed our operations, including controlling the inventory levels. Based on order cancellations or delays, we have swiftly shifted our production, particularly to customers or new customers with less impact from the virus. In general, I think the inventory levels will be healthy given our target of 18 to 20 gigawatts; we expect the inventory level to increase a little bit over the next two quarters.

Our next question is from Karl Liu at CIBC. Please go ahead.

I have two questions. The first, could you please give us some color on the order visibility in the third quarter and the first quarter? If we see further delays or cancellations in the second quarter due to the coronavirus, will it move through the second half or maybe first half of next year? How do we look at these things? And the second question is that we are seeing some strong demand in Mainland China coming from dual-glass modules and maybe other higher efficiency products. Could you give us more color on our product mix in the second quarter? What will our mix look like in terms of higher efficiency modules versus the normal efficiency modules? Can we have a percentage breakdown?

So, this is Gener. Thanks for the question. Firstly, regarding order visibility, we have developed a very strong order book, compared to the past three quarters, our order book has been fulfilled. So, we are very confident in achieving our target in 2020. This is part of the reason why we are keeping our guidance for 2020 at 18 gigawatts to 20 gigawatts without any changes. For possible market delays, we have seen some regions or countries show tolerance for delaying parts of their projects into, let's say, two or even three quarters, especially for countries like India, which was expected to install over 10 gigawatts in 2020. With the current lockdown prolonged, we believe the market size will shrink to less than 10 gigawatts, perhaps around 5 to 6 gigawatts. However, we are confident that the majority of these projects will not be canceled but delayed into 2021. That's why we are also confident about the strong demand in 2021. This is also part of our reason for continuing to expand our high efficiency capacity. For your second question about the China demand, especially for dual-glass modules, we see that this product has certain advantages in some environments. However, I do not see such products becoming a universal standard or industry standard yet. When I look at our Q1 book, I see less than 5% of our total shipments as dual-glass, which is a very small number compared with total shipments. With China demand picking up in the second half, we believe that ratio will rise, but I do not believe that such products will become standard production in the short term. However, in the long run, as more technology challenges are solved, I believe these products will have a promising future.

Yes, yes. I have two follow-up questions. The first is that for the Indian orders that you mentioned are delayed for two to three quarters. Will there be renegotiations on our module prices? Or will we ship these at the previously set prices? That's my first follow-up question. And the second is that, maybe I should rephrase my question. What I want to ask is that we kind of see a structural demand increase in high-efficiency modules. In China, it might be dual-glass; overseas, it could be other products. So, we also have the Swan, right? It's not dual-glass, but it's lighter. So, generally, how do we see the high-efficiency modules? Will we see much more higher demand growth compared to the normal efficiency modules? How do we see that and the percentage change in the first quarter and maybe the second quarter?

Thank you for your follow-up questions about project signs and contract terms. Over 95% of the contracts signed have been honored. We both parties respect the contractual obligations and we continue with contract execution, despite some impact from the pandemic. Very few contracts have been renegotiated or canceled due to force majeure. However, I emphasize that this is not because customers want to exploit market price changes; it is primarily driven by the realities of their projects and their home countries. Regarding the dual-glass demand, we do see growing interest in China, which is quite evident. However, I do not have the presentation numbers at my disposal. We can provide some feedback after our call.

Thank you. That's all for today's conference call. Thank you all for your participation. You can disconnect.