JinkoSolar Holding Co., Ltd. Q1 FY2021 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for JinkoSolar Holding's Co. Ltd. First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After 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 for today's call to Ms. Ripple Zhang, JinkoSolar's Investor Relations Manager. Please proceed, Ripple.

Thank you, operator. Thanks, everyone, for joining us today for JinkoSolar's first quarter 2021 earnings conference call. The company's results were released earlier today and are available on the company's IR website. 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. Li Xiande, Chairman of the Board of Directors and Chief Executive Officer; Mr. Gener Miao, Chief Marketing Officer; Mr. Pan Li, Chief Financial Officer; and Mr. Charlie Cao, Chief Financial Officer. Mr. Li will discuss JinkoSolar's business operations and company highlights, followed by Mr. Miao, who will talk about sales and marketing, and then Mr. Pan Li 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. 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. Li Xiande, Chairman and CEO of JinkoSolar Holding.

In the first quarter of 2021, our shipments, including wafer, cell, and module, totaled 5.4 gigawatts. Our total revenues reached $1.21 billion with a gross margin of 17.1%. The prices of polysilicon and solar glass continued to rise quarter-over-quarter due to shortages. Additionally, macroeconomic conditions affected commodity prices, leading to increases in several production materials, like solar junction boxes and EVA. We adopted a flexible business strategy and focused on managing our supply chain while speeding up manufacturing process improvements to alleviate cost pressures. The supply chain volatility, driven by the mismatch between polysilicon supply and high downstream demand, persisted into the second quarter. The overhaul of certain polysilicon manufacturing plants exacerbated the shortage, with polysilicon prices recently climbing to RMB220 per kilogram, more than double what they were at the end of last year. Although solar glass prices dropped significantly in the second quarter, this decline was insufficient to offset the production cost increases caused by rising polysilicon prices. Moreover, the pandemic and the Suez Canal incident reduced global transportation capacity further compared to the first quarter, with container shortages on key routes becoming problematic. This situation affected module prices and short-term demand from downstream customers. Despite these challenges, we are maintaining close communication with our customers to find viable solutions. Most of our customers understand the microeconomic and supply chain volatility and have some flexibility in accommodating higher module prices and lower IRRs. However, the ongoing increase in module prices is likely to impact demand. We have observed that decreased demand has restrained further price increases, and the stabilization and decline in material prices should boost downstream demand. Encouragingly, polysilicon output is sufficient to support 160 gigawatts of installations this year and a minimum of 210 gigawatts in 2022, indicating that there is no reason for polysilicon prices to continue rising. Based on the current high spot prices, we anticipate upstream and downstream fluctuations will stabilize in the latter half of this year. Considering our shipment projections for the next few years, we have strategically invested in Inner Mongolia Xinte Energy to ensure the stability of polysilicon material supply. We have also signed a strategic cooperation agreement with China COSCO Shipping Corporation, which will assist us in offering our customers long-term, high-quality transportation solutions. We have become one of 60 key accounts for China COSCO Shipping globally. At the end of the first quarter, we evaluated the market conditions and reduced module production volumes, while maintaining full production levels for mono wafers and cells. Regarding our business strategy, we leverage our integrated capacity to adjust external sales of mono wafers and modules, reserving some volume to support spot market orders, mitigating the impact of price volatility on our profit margin. The challenges in the PV industry have accelerated technological advancements, such as selling wafers to reduce polysilicon consumption and improving technology to enhance module output and production efficiency. Companies with advanced technologies can gain first-mover advantages and stabilize their economic benefits despite rising material costs. Our wafer selling capabilities have achieved industry-leading standards, and our smart factories are continually optimizing processes and enhancing automation. This initiative will consistently contribute to our economic benefits and strengthen our in-house manufacturing advantages. The shift in mainstream crystalline silicon cell technology from P-type to N-type cells is underway, suggesting a new wave of technological upgrades in the industry. Our cutting-edge R&D, collaborative systems across wafer, cell, module to system, and rapid commercialization of mass production have propelled JinkoSolar to a leading position, where we continue to drive technological breakthroughs in the industry. Two years ago, we started producing the 800-megawatt N-type TOPCon cell, which has set the industry benchmark for lab efficiency, mass production efficiency, and cost control. We have also completed constructing a high-efficiency laminated perovskite cell technology platform, expecting it to achieve industry-leading conversion efficiency of over 30% within the year. In the short to medium term, we will allocate additional resources to technology development to boost product competitiveness and expand our solar-plus business, while promoting technical and process enhancements to lower LCOE for our global customers. Regarding capacity expansion, we adjusted the growth of wafers, cells, and modules in light of this year's supply chain and market conditions. Our in-house production capacities for mono wafers, cells, and modules are projected to reach 30 gigawatts, 24 gigawatts, and 33 gigawatts, respectively. By the end of 2021, we will appropriately reduce capital expenditures in line with this year's supply chain status. Before handing it over to Gener, I would like to share our guidance for the second quarter of 2021. We anticipate total shipments to be between 5.1 and 5.3 gigawatts, including module shipments estimated between 4 and 4.2 gigawatts for the second quarter of 2021. Total revenue for the second quarter is projected to be between $1.2 billion and $1.25 billion, with gross margin expected to be between 12% and 15%. Our shipping guidance for the full year 2021, which includes wafers, cells, and modules, remains unchanged, anticipated to be between 25 gigawatts and 30 gigawatts.

Thank you, Mr. Li. In the first quarter of 2021, total shipments of modules reached 4.6 gigawatts, a new record for the first quarter. In addition, roughly 800 megawatts of cells and wafers were shipped to the Chinese market. From a regional perspective on module shipments, shipments to Europe and emerging markets both had significant growth sequentially and year-over-year. While shipments to the U.S. market remained relatively stable, in the second quarter, as challenges in the supply chain intensified, we proactively adjusted our strategy for the order book and responded to supply chain volatility by fine-tuning the proportion of wafer, cell and module shipments to maintain profitability. Faced with challenges in the material costs and transportation, our sales team kept close communication with clients to find mutually acceptable solutions. Based on their feedback, we know that many Chinese utility investors, including state-owned enterprises, have moderately lowered their expectations for yield. Overseas demand for certain installations has seen stronger tolerance for higher module prices due to advantages in electricity prices or lower costs of the system construction. Meanwhile, some clients have accepted delays in module deliveries. Expectations for yield vary across different countries, project types and scale, but overall market demand remains optimistic. So the imbalance in the supply chain is expected to continue for some time. Therefore, we are keeping our order book and execution at a flexible and sustainable level. Our product structure continues to be optimized according to the demand with a flexible business model and relatively higher prices. Demand for distributed generation continues to grow in regions like Europe, Australia, Japan, and the U.S., where we can leverage our global brand awareness and reputation. Clients have been favorable towards our premium quality products such as N-type and Tiger Pro products, which were specifically designed for residential, industrial and commercial distributed generation facilities. In terms of annual shipments for 2021, geographical demand has been roughly divided into North America, Asia Pacific both for 20% to 25%, while China, Europe, and emerging markets were 15% to 20%, respectively. This year, market demand has experienced multiple challenges, such as continued delay caused by the resurgence of COVID-19 in Southeast Asia, rising costs of PV power station projects due to price hikes in polysilicon and other commodities, and extended delivery delays caused by logistic disruptions. We believe these challenges will be gradually resolved over time. Meanwhile, we are constantly improving our mechanism of dealing with risks. We are optimistic about the growth in global market demand over the next few years and remain fully confident about our ability to capture a larger global market share year-over-year by providing sophisticated products and services for our global clients. With that, I will turn it over to Pan.

Thank you, Gener. Despite increased costs of production materials and logistics, our major financial metrics such as gross margin, operating margin, and net margin all improved sequentially. This is due to the sequential increase in our ASP quarter-over-quarter, and our continuous efforts to optimize our cost structure. Let me go into more details about this quarter now. The total revenue was $1.21 billion, up 9% year-over-year if we exclude the impact from the disposal of overseas power plants in the first quarter last year. Gross margin was 17.1% compared with 16.4% in the fourth quarter last year and 19.5% in the first quarter last year. Total operating expenses in the first quarter were $184.6 million, a decrease of 15.8% compared with the fourth quarter last year. The sequential decrease was mainly attributable to a decrease in disposal and impairment loss on property, plant, and equipment. Excluding impairment loss, total operating expenses accounted for 13.7% of total revenues in the first quarter this year compared with 14% in the fourth quarter last year. We're working towards further controlling operating expenses with increasing revenues in the second half of the year. Total operating expenses as a percentage of total revenues are expected to decrease further. Operating margin was 1.9% in the first quarter this year, compared with 0.8% in the fourth quarter last year. EBITDA was $123 million compared with $100 million in the fourth quarter last year. Net income was $33.7 million and non-GAAP net income was $7.5 million, which was increased sequentially compared with last quarter. Diluted earnings per ADS were $0.15. The impact from foreign exchange rates remained. We recorded a net exchange loss of $4.1 million in the first quarter this year. We will continue to hedge against foreign exchange risks to mitigate the impact on operating results. In terms of transportation, as demand in major economies worldwide regains strength, the pandemic caused further delays and inefficiencies in import operations. As a result, we expect that the overall freight rate will not decline until the first quarter of next year. In the face of the tough situation, we adopted a CFR model for coating and continued to foster deeper strategic partnerships with logistics companies. At the same time, as module power and the proportion of large-sized module shipments continue to increase, container transportation is expected to improve efficiency and result in a drop in freight cost per watt. Moving to the balance sheet. At the end of the first quarter, our balance of cash and cash equivalents was about $1 billion compared with $1.24 billion at the end of the fourth quarter last year. Accounts receivable turnover days were 59 days compared with 50 days in the fourth quarter last year. Inventory turnover days were 126 days compared to 97 days in the fourth quarter last year. Total debt was $2.67 billion at the end of the first quarter, compared to $2.8 billion at the end of the fourth quarter last year, gradually improving quarter-over-quarter. Out of the total debt, $17 million was related to international solar projects. Net debt was $1.59 billion compared with $1.56 billion at the end of the fourth quarter last year. In light of supply chain volatility and market conditions, we're reducing capital expenditures and expect total CapEx to be around $100 million for the year. This concludes our prepared remarks. We're now happy to take your questions. Operator, please proceed.

We will now begin the question-and-answer session. First, we have Philip Shen from ROTH Capital Partners. Your question please.

Hi, everyone. Thank you for taking my questions. Given the recent WRO in the U.S. on Hoshine, I was wondering if you can comment on how much Hoshine content you have in your modules?

Hi, Philip. This is Gener. Thanks for the question. Actually, that's a pretty recent development from the WRO side. We are still under internal investigation reviews about the whole process and reactions based on the WRO. So we will keep everyone updated once we get anything. Thank you.

Okay. Thank you, Gener. Is there something else? Sorry. Okay. Yeah, I have a couple of few more. Thanks. As it relates to your guidance, I think the implied shipments for Q3 and Q4 are roughly 17-ish gigawatts. What's the mix you think between Q3 and Q4? Is it evenly split? Or do you think it's heavily or more weighted to Q4? And then also, if you can comment on the outlook for 2022, what kind of - I know you gave global market growth, do you expect your shipments to grow in line with that market growth?

So yeah, that's a great question. Actually, the second half is always our peak season for solar, especially Q4 for the China market. We are expecting strong Q4 demand in the China market as well. Regarding the portion-wise, I would like to remind that the total shipment numbers contain both modules and wafers, even small volumes of the cells. So regarding the detailed breakdown between that, we will keep ourselves flexible enough to adjust that to market changes in Q4. But for me, I'm pretty confident that, with strong demand in Q4, we will deliver solid performance for the whole year's shipment and profitability. Regarding 2022, the market itself is believed to continue to grow. And we at Jinko itself plan to grow organically as well. So we will keep everyone posted, it’s still very early to provide any detailed number yet.

Okay, thanks. Yeah, I noticed the technology details around the perovskite cell reaching over 30% efficiency. That's a very - if you get that this year, that's great, that's incredible. Can you talk about when you think the perovskite cell could be commercially available? How stable is it now? And then I think on the last quarter, you talked about the N-type capacity for 2021 being 800 megawatts. Do you still - with the capacity expansion reduction, do you continue to see 800 megawatts for 2021? And then how much do you see in 2022, for N-type? Thanks.

For N-type, I think we currently stick to the 800 to 900 megawatts we have and those products are super popular in the distribution market. We can enjoy higher brand premium together with higher acceptance of the N-type products. For the future, we are closely following the development of the industrialization of the latest N-type cell technology even to some of the module technology to decide our roadmap. Right now, we cannot give very detailed numbers or options on the table yet. But definitely we are, we will be one of the early movers for the technology for sure. Thank you.

And Gener, did you address perovskite specifically? Do you think you could be close to 2021 or…

That’s for me I think that will be even longer-term. I think N-type definitely will be earlier than the other technologies to become a mature and massively applied industry. But definitely, we are not only looking to one or two years, that’s something we are looking for even three to five years' time, definitely we are investing in that.

Great. And in the Q1 quarter, you had about 800 megawatts of wafer and cell sales. Can you talk about the margins on those sales? Especially wafer, what kind of margin did you have there? Was it similar to your peers?

So let me look into the numbers. But as far as I can remember, it should be somewhere around 20% margins for the wafer side. The cell numbers are very small. The shipment is very small, so I don't have the margin yet.

Okay. Thank you, Gener. I'll pass it on.

No problem. Thank you very much.

Thank you, Philip. Next up, we have Brian from Goldman Sachs. Brian, please go ahead with your question.

Hey, guys. Yeah. Good evening. Thanks for taking the questions. I had a couple on the guidance. Maybe first off, a simple one, just it's the last week of June, the quarter is almost closed here. Your revenue and shipment guidance seems pretty tight in terms of the range, but there's still 300 basis points between low and high end on gross margins for 2Q. Can you give us some clarity or sense of why there's still such a potential gap and what the gross margins you realize for the quarter are going to be?

In terms of guidance or the gross margin is really close to the end of the quarter. The gross margins still have some impact from the polysilicon business and polysilicon price, as well as the foreign exchange rate, I mean, the RMB against U.S. dollars. So we just gave a relatively wide range, 12% to 15%. And I think it's probable the high end of the range.

Okay, fair enough. And then I think sticking with the gross margins. Obviously, polysilicon has been more volatile and seeing much faster appreciation than people expected heading into the year. You and your peers, I think, are generally - were thinking Q1 could be the bottom for those margins based on the guidance here, clearly 2Q is going to be lower. How should we be thinking about that in the context of gross margins for the rest of the year? We - in this low teens level, until probably starts to go down meaningfully or could we see another downtick into 3Q, given inventory of high-cost probably still has some timeframe that it needs to flush out of your cost structure?

We are observing, you know, the market price, including modules, is undergoing an upward trend and we are expecting the stabilized price of polysilicon. So, we think, you know, we have the capability to maintain a reasonable gross margin in the second half of the year. We hope it's better compared to the first half of the year because of the stabilization in polysilicon, as well as we continue to improve our production costs and mitigate the cost pressures on polysilicon. We will continue to maintain some flexibilities in terms of shipments of modules, which are mono wafers.

Okay, fair enough. And then maybe two questions on the revenue portion of the guidance. You mentioned some projects are delaying or seeing some timing issues, because of the high cost of panels and you have been raising prices throughout the year. Are you having to reprice any of these contracts or are you seeing pricing back half or early '22 delivery starting to go down again? Again, you have a view that polysilicon stabilizes. So, are you reflecting that in maybe firmer or declining module prices as well moving through the year?

Yeah, thanks for the question. I think for that part, it's true that some of the projects or some of our prize projects have to accept some of the delays because of unexpected high prices; not only module, actually, but if you take into the other factors into consideration as well, for example, logistics, labor cost, even the cost of the truckers, sometimes inverters. So, yeah, in general, so everything goes up. That's why some of the project which has very tight budget to the IRR or CapEx have to delay or even recap and somehow adapt themselves to the situation right now. For the next few years, actually we are expecting pretty stable years, because even when the polysilicon price becomes stable, and we are expecting more polysilicon capacity available by mid-2022. But when we compare with the demand side, actually, we are expecting more demand coming up compared to additional new polysilicon capacity, especially when so many projects and the demand get delayed into '22, as well as the new project coming up online. So, we are expecting a very promising year of '22 as well. Hope that answers your question.

Yeah, that’s helpful. I guess maybe just to simplify the question, Are you helping your customers at all with pricing, i.e., you raised prices to reflect the poly increases earlier in the year, now that poly may be peaking and could start to go down. Are you anticipating, are you quoting more aggressive pricing to keep these projects on track, on the module specifically…

Yeah, it varies case by case. It won't be a general solution for everyone. But we are dealing with every customer case by case. We have all different kinds of business models to try to find mutual solutions for the customers to solve their problems, including all the methods you just talked about, but not only limited to that, right, so…

Okay, fair enough. Last one for me, and I'll pass it on. You're maintaining the 25 to 30 gigawatt guidance. I know that shipment guidance for 2021 includes the cells and wafers, as well as module shipment. I'm not sure if you spoke to this, but what's the module portion of the 25 to 30 gigawatts? Just trying to get a sense of how much is baked into second half growth here?

Right now, we are expecting a majority of it, but we don't have a budgeted number yet because we are totally flexible up to the market. If, for example, if the polysilicon market is stable and the market demand starts to pick up, definitely we are more than happy to ship everything in modules instead of wafers themselves. But if you know, the market continues to be volatile, as it was in the last three to six months, we are forced or we have to be flexible to expose or ship more wafers in order to adapt to the market risk.

Okay. Thanks a lot, guys. Appreciate it.

Thank you very much.

Thank you, Brian. Next, we have Reddy from Santana Capital. Your question please?

Can you hear me?

Yes, please.

Yes. My question is about the gross margin. You had a very nice positive surprise on the gross margin in the first quarter. And I understand that part of it is because the wafer business is higher margin. So is it fair to believe or think that you are now managing the business to improve gross income and maximize gross income, rather than just maximizing revenues? And therefore, for the near term anyway, a better benchmark to evaluate progress is to be looking at gross income. And I noticed that the gross income number was higher than a year ago, despite a substantial decline in module prices, your gross income year-over-year was higher. So that's my first question. Is gross income the better benchmark to evaluate progress?

Yeah, I think that that's a very encouraging comment for the company. I think for the company strategy-wise, we are not only looking to one goal, right, to operate or to do our job. Actually, it will be a balance between different goals. Definitely gross revenues and gross margins are very important factors and targets for the company's management. But we also have to care for other factors, such as market share, customer long-term partnerships, as well as revenues or growth to ensure our company is growing sustainably. Long story short, it won't be a profit only or gross margin only. But definitely, that's a good angle to look into. Thank you.

And my second question is about the listing in the Chinese car market, can you give us an update on that?

It's still in the preparation stage. And we will release the news if we reach a significant milestone.

Can you give us a sense of what the timeline might be on that?

No, we're not in a position now to talk about the timetable. But just what I said, we expect to reach some milestone and will release the news if we reach that.

Thank you.

Thank you very much.

Thank you, Reddy. Next, we have a question from the audience. Please go ahead.

Hi, management. Thank you for taking my call. My first question is regarding the - we saw in June that many other module makers are cutting their usual production utilization rates again in June due to the high costs. Do you expect the utilization rate can rebound in July, given there will be more new projects released?

So, you're talking about the company's specific situation of the industry estimations. I think the polysilicon is still in the relatively highest stabilized state. If it stabilizes, it will be hard for the industry, the module makers to increase their utilizations in the third quarter. But I think July, once again, probably will stay low compared to the second quarter.

So when do you think the production rate can rebound for the sector?

It has a good indication right. If you look at the polysilicon, the wafer cell price is still obviously stable and nice and the downstream players are willing to take relatively high module prices. I think there is a high chance in the second half of the year, the utilization rate will be better than in the first half.

And also want to ask if there is any further ASP cut for polysilicon or the wafer? Are we seeing any potential for impairment loss for our inventory?

We don't expect that, because firstly, when we quote the module price, we estimate the potential pressures from a cost perspective. And the second one is, you know, because we are integrated production, we have relatively low costs compared to the players who don't have the module wafer capacities. So we don't expect inventory risk in the recent stage.

Thanks. And my next question is regarding our capacity expansion plan. We cut the plan for around like three gigawatts. Can you elaborate why we are so cautious on the expansion right now?

Given that polysilicon is still relatively tight, and the interest rate utilization, I mean, the model wafer utilization industry will not be 100%. And we make the CapEx investment relatively slowly to make sure we have relatively high utilizations, It doesn't mean we will not make the investment and some of the investment we will be - you know, invested in earlier next year.

Thanks. My last question is, do we have any guidance for the operating profit margin, because we're seeing some slight improvement in Q1, but still much lower than last year? So, will you have any guidance on the Op margin?

Operating margin, we don't have guidance, but there are some specific matters in the first quarter. Regarding the one-off impairment for the solar operating projects, international projects, we don't expect to have the impairment throughout this year. The operating expenses range will be roughly 12% to 13%.

Thanks, no further questions.

Thank you very much.

Thank you, Jen. Thanks, we have Reddy from Santana Capital. Your question, please?

Yes. My question is about the expectations for module prices in the second half of the year versus the first half. You know, obviously, many module companies have lowered their utilization rate, because of the shrinkage in margins recently. The question is, as you have a standoff between customers and suppliers on module, while the near-term utilization rate has come down, because customers are unwilling to accept the prices that you want to charge them. Is it fair to think that in the second half of the year it's just as likely that customers will accept somewhat higher prices than what they are paying in the second quarter?

Yeah, thank you for the question. I think for the ASP or the market price, let's talk about it for a second, right. So, for the market price for the second half, we have seen firstly, it's a stabilized polysilicon price. In the first half, the polysilicon raw material price jumped almost every day or every week. So it brings a huge uncertainty for the lower downstream, especially for the module market prices. Sometimes we had to update our quotes of prices weekly or even every two or three days. That brings a huge uncertainty for the customers. For now, we have seen the stabilized polysilicon prices, and many customers have started to take actions to build up their budgets and CapEx, even considering construction schedules based on the current market prices. So, that's why we are confident about the second-half demand continuing to be strong. Especially, we have seen strong China demand in Q4, which will become a significant cornerstone for global demand for the second half as well. Thank you.

Thank you.

Thank you, Reddy. I will now pass the call to Ms. Ripple.

Thank you, everyone for joining us on the call today. Have a good night. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.