JinkoSolar Holding Co., Ltd. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you. And welcome to JinkoSolar Holding’s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host today, Ms. Ripple Zhang, JinkoSolar’s Investor Relations Manager. Please proceed, Ripple.

Thank you, operator. Thanks everyone for joining us today for JinkoSolar’s third quarter 2020 earnings conference call. The Company's results were released earlier today and are available on the Company's IR website at www.jinkosolar.com 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 the 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 and 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.

During the third quarter, our total solar module shipments reached 5,117 megawatts, generating total revenues of US$1.29 billion, with a gross margin of 17%. In the fourth quarter, the company’s profit encountered pressures due to several factors: a shortage of raw materials that raised production costs, along with the effects of US dollar fluctuations and increased logistics and transportation expenses. As the global pandemic continues to stabilize, the photovoltaic (PV) sector has gained substantial support from many economies, and the raw material supply issues are anticipated to gradually improve. We are confident that the PV industry is entering a golden era. Nonetheless, we remain cautious about global market conditions and should not underestimate the economic challenges and changes anticipated in the coming years. Government policies have been favorable, with China setting a strategic goal to reach peak emissions before 2030 and achieve carbon neutrality by 2060, marking a significant advancement in combating climate change. The upcoming 14th Five-Year Energy Plan announcement is anticipated to emphasize non-fossil energy sources, establishing new energy generation targets. Additionally, the extensive construction of energy storage necessary for a higher share of renewable energy, alongside investments in significant transformations and the introduction of supportive policies, could yield positive developments following President Elect Joe Biden's inauguration. In January 2021, his administration is expected to promote new energy developments that exceed current expectations. Over the next five years, US solar demand is projected to more than double. In September 2020, the EU unveiled its 2030 climate target plan, aiming to increase greenhouse gas emissions reduction goals from 40% to 60% below 1990 levels by 2030, which will likely accelerate the growth of renewable energy consumption. In summary, as the economic viability of solar energy becomes increasingly established, solar power will be crucial in facilitating the transformation of energy generation and consumption in major economies after COVID-19, with the future market opportunities expected to expand remarkably. With grid parity on the horizon, leading companies in the PV sector will benefit the most from technological advancements and cost reductions. High-performing companies are well-positioned to increase their market share through competitive products, backed by strong research and development and the leverage of their established brands and global distribution networks. Moreover, through effective supply chain management and simultaneous growth in supply chains, leading players are likely to achieve quicker technical innovation and product updates while elevating industry standards. The company’s strategic growth has consistently focused on investing in technological advantages and enhancing our operations and product lines. In July 2020, our N-type module achieved a maximum solar module conversion efficiency of 23.01%, establishing a new world record verified by TÜV Rhineland. By August, our TOPCon cell conversion efficiency reached 24.9%, confirmed independently by the Institute of Solar Energy Research in Hamelin, setting another industry record. Simultaneously, we have proactively optimized supply chain management by ensuring a stable supply of raw and auxiliary materials through long-term purchase agreements and strategic collaborations. We have adapted our technology and utilized substitute materials to mitigate volatility in the supply chain resulting from unprecedented growth. Module products are currently undergoing rapid changes, and we believe that gradual adjustments will be more advantageous. The development of the supply chain, product safety and reliability, and the application of standardized processes will significantly benefit the industry’s healthy growth. We are dedicated to producing the highest quality products that enhance system energy density and lower costs for our customers. So far, our next-generation Tiger Pro Series has received orders totaling over 2 gigawatts, with the first mass-produced Tiger Pro modules shipped in October, achieving a maximum mass production power of 585 watts. The Tiger Pro series continues to set new industry benchmarks for high compatibility and adaptability. By the end of 2020, our anticipated in-house annual production capacities for mono-silicon wafers, solar cells, and modules will be 2011 and 30 gigawatts, respectively. Additionally, to meet broad market demand and the expected rapid shipment growth next year, we are currently assessing our production lines to expand capacity accordingly. The global demand for solar energy is accelerating, and the company is well-positioned to meet these expectations. We believe the company has the capability to further increase its global market share and strengthen our leading position in the PV industry. Before I pass it over to Gener, I want to briefly discuss our guidance for the fourth quarter of 2020. We expect total solar module shipments to range between 5.5 gigawatts and 6 gigawatts. For the fourth quarter, we anticipate total revenue to fall between US$1.31 billion and US$1.43 billion, with a gross margin expected to be between 13% and 15%. For the full year of 2020, shipments are projected to be between 18.5 and 19 gigawatts.

Thank you, Ms. Zhang. In the third quarter of 2020, total shipment of solar modules reached 5,117 megawatts in line with our guidance. During the quarter, while we faced challenges from the pandemic and the changes in the market supply and demand, we primarily adjusted our geographic mix in response to any market volatilities. Overall, shipments to Europe increased significantly compared with the previous quarter. Shipments to the Asia Pacific region remained strong, while shipments to North America and China were consistent with the performance in the second quarter. In terms of market demand, since the beginning of the third quarter, delays in the supply of some raw materials and auxiliary materials, together with increased downstream demand, led to price increases along the entire supply chain. With the gradual recovery in supply and strong demand brought by the installation rush in the fourth quarter, we are seeing that price increases for some raw materials have been absorbed because of strong market demand. We expect the market pressure to gradually ease next year. The Chinese PV market will no longer enjoy subsidies starting in 2021 and will enter the era of great parity on a large scale. And with a 2030 carbon emissions reduction target and the 2060 carbon neutrality goal, China will have to gradually replace traditional thermal power; as a result, it is estimated that China's annual average installation capacity will reach 60 to 70 gigawatts over the next five years, delivering phenomenal growth to the renewable energy markets. The COVID-19 pandemic continues to intensify in the US, and the latest daily average number of confirmed diagnoses has exceeded 200,000, reaching a new peak. While the situation continues to evolve in the US, in the long term, the Biden administration is expected to support the development of new renewable energy, including plans for the US to rejoin the Paris Agreement and to achieve net zero emissions by 2050. Other measures are also expected to promote the development of renewable energy in the post-pandemic era in the United States. According to the forecast by the consulting firm, Wood Mackenzie, assuming ITC does not extend it and the current policy remains unchanged, US PV power plants are expected to add about 100 gigawatts of installed capacity from 2020 to 2025, with an annual capacity of about 20 gigawatts added from 2021 to 2023. Recently, the European Commission announced the economic recovery plan to provide renewed confidence and stimulate growth for economic development in the post-pandemic era. It is worth noting that the plan recommended accelerating the development of renewables and encouraged investment in innovative clean energy technology as important considerations for economic recovery. It also proposed supporting this initiative with €45 billion in funds dedicated to the development of renewable energy, which further reinforces Europe's long-term commitment to the renewable energy sector. The EU Council has endorsed a €1.5 billion public sector loan facility to support energy transitions and green investments. The credit will be available to governments of 27 EU member states and cannot be used for nuclear power or fossil fuel projects. These measures are expected to further stimulate the development of renewable energy in the post-epidemic era and promote the EU-wide target of generating at least 32% of energy from renewables by 2030. Economic activity in the Asia Pacific region has basically recovered and returned to normalcy, and market demand remains strong. In the first three quarters of 2020, the average monthly newly added rooftop installation in Australia exceeded that of last year. If the COVID-19 situation does not worsen for the rest of the year, residential installation capacity may reach 3 gigawatts in Australia for 2020. We now may consider imposing tariffs on imported components in the future. But it is still in the early stage of discussion, and the impact on demand is expected to be relatively limited. In addition, the Ministry of Industry and Trade of Vietnam stated that after more than three years of encouraging FIT rates to develop more solar power plant projects in Vietnam, it is now working on a pilot program to determine the price of solar power with the aim of transitioning from FIT to a bidding system, which may relieve investor pressure to a certain extent. Japan's new prime minister announced that in his first policy address Japan will achieve zero greenhouse gas emissions by 2050. In the future, Japan will actively promote research on next generation solar cells and carbon recycling technologies and is committed to reducing reliance on thermal power generation. Overall, it is expected that the Asia Pacific region will sustain healthy growth in the fourth quarter and into next year. Emerging markets have been greatly impacted by the pandemic for a relatively long time. Brazil has been severely affected by the pandemic and has yet to continue. However, local coronavirus transmission continues to ease in other countries such as Chile, UAE, and South Africa. The number of newly diagnosed cases in a single day has steadily declined, and we believe there will be increased demand as economic activity recovers. According to the statistics from the Brazilian Photovoltaic Solar Energy Association, Brazil has added about 162,000 new solar generation systems over the past 12 months, an increase of more than 130% year-over-year. Saudi Arabia is pursuing an ambitious renewable energy strategy. It plans to add nearly 60 gigawatts of clean energy installed capacity to the state grid by 2030, of which 40 gigawatts will come from PV power plants. Some African countries are also actively promoting the installation of PV power generation systems to solve the problem of rising power demand in their countries. In short, volatility and fluctuations of the supply chain in the short term and the resurgence of COVID-19 pose some immediate challenges, but in the long term, the competitiveness of renewables will provide strong support for the long-term development of the renewable energy market. Among renewables, solar power has had the largest cost reduction in recent years, as LCOE and the cost of energy storage continue to decline over time. Solar energy will continue to lead to tremendous opportunities in this growth sector and accelerate the transformation of the global energy system, which has been further encouraged by policy support for energy conservation, global emissions reduction, and the sustainable development of renewable energy sources. It is estimated that global installation will exceed 300 gigawatts in 2025 and exceed 1,000 gigawatts in 2030. We are confident about the future development of PV. In terms of customer value, we have always been committed to building reliable applications that will reduce LCOE for our customers. Since the successful launch of the new Tiger Pro Series in May 2020, we have held over 50 online webinars to convey the technology highlights of the product line to investors, EPCs, upstream and downstream suppliers. This is one of the channels we adopted in this unusual time in order to provide comprehensive customer service and to demonstrate the optimal LCOE and the return on investment due to the excellent compatibility and adaptability qualities of these popular products. We maintained solid relationships with participants in the supply chain and obtained timely feedback from customers to help us make forward-looking predictions and strategic decisions. Our next generation of high-efficiency Tiger Pro modules have been well received by our clients worldwide. As of the end of October, we have already secured orders for a total of 2 gigawatts. Recently, the company has been awarded the highest rating for National Customer Satisfaction Enterprise credit service platform in China, which also reflects our consistent commitment to product quality. In future, large-sized products with advanced technology will most likely stand out more in the mightiest of fierce market competition. By leveraging the innovation of our advanced technology, extensive and forward-looking market strategy, and long-term brand loyalty among our global customers, we will continue to adjust our PV product mix, while maintaining the premium quality of our products to meet the needs of global market demands. With that, I will turn it over to Charlie.

Thank you, Gener. In the third quarter, we reported strong operational and financial results with total shipments, total revenue and gross margins all in line with our guidance. Although the significant increase in silicon material costs and volatility of exchange rates brought some pressures on our performance during the quarter, the company benefited from our in-house production capabilities and some cost controls which allowed us to maintain financial indicators such as revenue and gross margin at stable levels. Let me go into more details about the quarter now. Total revenue was US$1.29 billion, an increase of 3.8% sequentially and an increase of 17.2% year-over-year. Gross margin was 17%, which remains stable quarter-over-quarter. Income from operations was US$80.4 million, an increase of 25.6% sequentially, excluding anti-dumping and countervailing duties, to reversal benefits. Income from operations increased 28% year-over-year. EBITDA was US$144 million compared to US$100 million in the same period last year. Non-GAAP net income was US$47 million, an increase of 7% year-over-year. This translates into non-GAAP diluted earnings per ADS of US$1.06. Taking into account the loss from the change in fair value of convertible senior notes and call option, due to the sharp increase in the stock price of JinkoSolar, in the third quarter of 2020 GAAP net income was close to breakeven. Total operating expenses in the third quarter accounted for 10.8% of total revenue, a decrease both sequentially and year-over-year. Moving to the balance sheet, by the end of the third quarter, our balance of cash and cash equivalents was US$943 million compared to US$969 million at the end of the second quarter of 2020. AR turnover days were 61 days compared to 63 days in the third quarter of last year. Inventory turnover days were 97 days, compared to 93 days in the third quarter last year. Total debt was US$2.5 billion, of which US$128 million was related to international short-term projects, compared to US$2.3 billion at the end of the second quarter. Net debt was US$1.59 billion compared to US$1.37 billion at the end of the second quarter of 2020. By the end of October, we announced that our principal operating subsidiary, Jinko Solar Co., Ltd Jiangsu Jinko, had completed equity financing of RMB3.1 billion, completing an important step towards our plan to go public in China's capital markets. This additional capital raised is helping to expand our capacity and further strengthen our leading position in innovative R&D. Recently, we announced our plan to sell a 20% stake in Abu Dhabi Sweihan Power Stations to Jinko Power, which will help us focus our core business and continue to sustain our long-term growth in the global PV industry. This concludes our prepared remarks, and we are now happy to take your questions. Operator, please open the call.

Thank you very much. We will now begin the question-and-answer session. First, we have Philip Shen from Roth Capital Partners. The floor is yours, Mr. Philip.

Hi, everyone. Thank you for taking my questions. The first one is on the margin outlook for Q4. I think for Q3, your cost per watt was roughly $0.203. And if we take your guidance into account for Q4, it's just the cost per watt, maybe closer to $0.207, $0.21. Can you help explain how your cost per watt can be flat in Q4 when polysilicon prices have gone up so much along with glass? I think glass alone is up $0.02 per watt? And then freight is up meaningfully. So where are you? How are you able to maintain that flat cost structure despite the rising input costs? Thanks.

Hey, Philip, this is Charlie. The gross margin, 13% to 15% for the fourth quarter. Firstly, I want to just summarize clarification as we believe that gross margin is reaching the lowest level in Q4. Looking forward, we expect gross margin in the first half of next year to gradually improve quarter-over-quarter. As for glass, the combination of in-house production cost quarter-over-quarter has increased because of the polysilicon cost. The glasses and many materials are on the outside trend. At the same time, we expect the average selling price (ASP) to increase a little bit. Additionally, we have, I think, a good mix in terms of shipments in the US versus some relatively high ASP ratings, which helps us deliver relatively, a slightly reduced margin in the fourth quarter compared to the third quarter.

Okay. Great. So, were you saying the pricing is helping to offset, but from a cost standpoint, can you specifically highlight what area is helping you drive that cost structure lower and did you specifically find, you know, for example, independent the ASP? Were you able to keep costs flat? And if so, where are you getting that specifically?

Philip, I’d say the in-house production cost has increased a little bit quarter-over-quarter. However, the material cost is up dramatically, particularly for the silicon and the glasses. But we are hoping the offset will come from our production efficiencies and we have relatively more production volume, and as such, the production cost is relatively lower, but the material cost is higher. The second most important factor is that the ASP is relatively higher quarter-over-quarter. With the increase in ASP rates in China and our higher mix in the US and other regions with relatively higher ASP, this improves the overall margin.

Great. Thank you for the clarification, Charlie. As we look to next year, you talked about margins improving in Q1 and Q2. I know you haven't provided official guidance, but can you share how much improvement you see and also what kind of bookings do you see for Q1 and Q2? And is the pricing also higher in those quarters relative to Q4?

Phil, this is Gener. Let me take this booking question first. In our last quarterly call, we established our strategy that Jinko as a tradition always targets to achieve a 50% level of the bookings before the year began. So I think that is still our strategy, and we are on the right track to close that. On the marketing side, we expect that material costs will come down a little bit, including polysilicon. We are also seeing the polysilicon prices decreasing to RMB 25. The glass supply side will be relatively stable, but the total Q1 and Q2 global demand is expected to be lower, so we think material costs will contribute positively. On top of that, we are promoting the large size 182, the Tiger Pro series, and the production costs associated with these larger products are lower. We expect next year, as combined with increasing volume and the rollout of the 182, it will help gradually improve our gross margin quarter-by-quarter as well.

Great. Yes, that larger format should be helpful. Thank you very much for the questions, guys. I'll pass it on.

Thank you.

Thank you very much. Next we have Mr. Gary Zhou from Credit Suisse. The floor is yours.

Hello, management. Thank you for taking my questions. I have three questions. Firstly, can management share with us the latest update on your subsidiary's stock market listing? And do you expect the timing of the Asia listing would have any impact on our capacity expansion decisions into the next one to two years? The second question is about solar glass. Given the currently relatively high solar glass price, are we kind of holding back our module production plans a little bit? In other words, if there weren't such high raw material costs, would our fourth quarter module production levels be otherwise higher? Lastly, regarding bifacial solar modules, have we tried any ultra-wide floating glass as the backsheet for the solar glass instead of solar glass? And if possible, can management share with us the economic comparison between two pieces of solar glass versus using the backsheet as floating glass, or compared with a transparent backsheet solution? Thank you.

A couple of questions. Firstly, regarding our subsidiaries, Jiangxi Jinko, we closed the equity financing just by the end of October and we started preparing for the IPO in China immediately. The process is smooth and we will keep the market informed when we reach significant milestones. And secondly, about capacity and funding for the capacity; this will not depend on the IPO process. We closed RMB 3.1 billion and we believe we have sufficient funding for the capacity expansion next year. We will focus on solar cell capacity and some mono wafer capacity. As mentioned in our CEO’s remarks, we aim to remain stable while slightly increasing our integration levels and maintain returns at 75% to 80% while having good control of our capabilities. Regarding bifacial glass, I think we have retained some flexibility to adjust our capacities and plant output based on market turbulence. That said, both bifacial products and transparent backsheet solutions have been well received in the industry. Regarding ultra-wide floating glass, we have made some progress in that direction together with our peers but current supply is still below demand. I hope that answers your question, Gary.

Yes. Thank you very much. That's very clear. Thank you, management. I’ll pass on.

Thank you.

Thank you very much. Next we have Mr. Tony Fei from BOCI. The floor is yours.

Hi, management. Thanks for the questions. I have three from my side. The first one is regarding your operating margin. In the third quarter, we see your operating margin has increased Quarter-on-Quarter despite your gross margin declining a bit. Can you explain the reason behind it? We see you have quite a bit of savings in sales and marketing expenses, despite the fact that shipping costs have increased recently. If possible, can you provide your guidance on shipping costs in Q4? The second question is regarding your integration plan. I think for 2021, your priority will be increasing your in-house sales capacity, but there has been quite a debate regarding the economics of PERC versus HJT on the cell technology route. Have you made a decision on how much of the new cell capacity will be PERC and how much will be HJT? My third question regards exchange rates. Because of the recent RMB appreciation, do you see any impact on your order intakes, especially in overseas markets? If possible, do you have a plan on how much of your China order will increase in your sales mix in 2021? Do you expect to have increased hedging costs for currency next year? Thank you.

For the first question, I believe the operating expenses will remain relatively stable against revenues, around 11% quarter-over-quarter, including in Q4. Regarding the cell capacity, we have not finalized the decision but expect to expand the PERC capacity while maintaining the flexibility to upgrade to the entire TOPCon technology as we have reached a relatively mature stage now. Exchange rates have put pressure on our operations, with roughly a 50% RMB appreciation against the US dollar. However, we believe the pricing won't impact demand significantly and our customers will be able to absorb this potential impact. Therefore, we don’t predict significant adjustments regarding the mix between China and international markets due to the exchange rates.

Great. Thanks for the color. I'll pass on.

Thank you.

Thank you very much. Next we have Mr. Brian Lee from Goldman Sachs. Mr. Brian Lee, you may ask your question.

Yeah. Hi, guys. Thanks for taking the questions. Charlie, could I go back to the previous question on OpEx? I didn't capture, but why was SG&A so much lower this quarter? And what's the expectation for Q4 in terms of either absolute dollars or percentage?

In the third quarter, the total revenue increased, which contributed to the savings in operating expenses. Additionally, we have lowered marketing activities, and the relatively lower ASP also resulted in reduced warranty costs. This was a combination of one-off operational savings and revenue increases. For Q4, we expect it to remain roughly the same at about 11%.

Okay. So OpEx in total, including R&D, not just SG&A?

Yes, operating expenses accounted for total revenue is 11% roughly in the fourth quarter.

Okay. I think you mentioned earlier, at one of the questions, the ASP for Q3 was about $0.03 to $0.04 per watt. The guidance for Q4 is down about sequentially. So maybe I misheard you, but it sounded like you were expecting Q4 to be lower, or is that just part of the mix? The overall ASP, I think, is still likely to go down in Q4?

The ASP is slightly down, but I understand the calculation. We use total revenue with the P&L and total shipments. In Q3, there were other revenues from lower efficiency solar cells and modules. So when calculating ASP in Q3, it would be relatively lower. For Q4, our guidance revenue will not consider revenues, focusing only on module revenues as a reference.

What percentage increase in pricing are you expecting across the module mix for Q4 versus Q3?

ASP is expected to see a slight increase in Q4 compared to Q3; however, we anticipate the overall ASP will still be lower due to a mixture of factors including higher volumes from the US and higher ASP regions.

Fair enough. Two more if I could squeeze them in. Did you have the CapEx, depreciation and free cash flow numbers for the quarter?

The total CapEx for the first nine months is roughly US$350 million, with an operating cash flow of roughly negative US$200 million due to increases in inventory levels. Depreciation each quarter is around US$40 million.

Okay, great. Last one, I'll pass it on after this. Is the Abu Dhabi sale of the 20% stake expected to close this quarter? I thought you had been carrying a $50 million value on the balance sheet but sold it for $20 million? So is that the correct math? If so, why are you booked at your last year? Also, why did the non-controlling interest on the balance sheet go down so much this quarter?

Regarding the Abu Dhabi project, we are currently in a long-term investment as it's an equity investment at 20%. We signed a sale purchase agreement with Jinko Power, and the valuation is based on independent third-party valuation firms. However, the closing will take a longer time, potentially six months, as it's subject to various regulatory approvals. We do not expect a significant impact after closing, but it’s a very small, you know, depending on the timing. As for non-controlling interest, it's due to our equity financing for Jiangxi Jinko, where some arrangements with government-funded energy funds included redeeming some funds in the near future.

Okay. Thanks a lot, guys. I’ll pass it on.

Thank you.

Thank you very much. In absence of time, we will take the last question from the participants. Next we have Mr. William Graben from UBS. The floor is yours.

Great, thank you. I just have one quick, quick one here. Just wondering if you could clarify if there are any AD CVD true-ups that are impacting the fourth quarter guidance?

It could be up a little bit, but it's not a significant impact. So when we give the margin guidance, we did not consider the positive impact.

Okay. Very good. Thank you.

Thank you.

Thank you very much. Ladies and gentlemen, with that, we have come to the end of the conference call. Thank you for your participation, and have a pleasant evening ahead. You may now disconnect from this call.