JinkoSolar Holding Co., Ltd. Q4 FY2021 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for JinkoSolar Holding Co. Limited Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode, and 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, Ms. Stella Wang, JinkoSolar's Investor Relations. Please proceed, Stella.

Thank you, operator. Hi, everyone. Thank you for joining us today for JinkoSolar's fourth quarter 2021 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. Li Xiande, Chairman of the Board of Directors and Chief Executive Officer of JinkoSolar Holding Co. Limited; Mr. Gener Miao, Chief Marketing Officer of JinkoSolar Co., Limited; Mr. Pan Li, Chief Financial Officer of JinkoSolar Holding Co., Ltd; and Mr. Charlie Cao, Chief Financial Officer of JinkoSolar Co., Ltd. Mr. Li will discuss JinkoSolar's business operations and the Company highlights, followed by Mr. Miao, who will talk about the sales and marketing, and then Mr. Pan Li, who will go through the financials. They'll also 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 applicable law. It is now my pleasure to introduce Mr. Li Xiande, Chairman and CEO of JinkoSolar Holding. Mr. Li will speak in Mandarin, and I will translate his comments into English. Please go ahead, Mr. Li.

We were very pleased to close a very challenging 2021 with excellent results. We were able to swiftly respond to supply chain volatility and logistic challenges, thanks to our competitive advantages in supply chain management and the comprehensive advantages of our global network. Revenues and insurance grew significantly in the fourth quarter as a result of the increasing proportion of our in-house large-sized production capacity and large-sized product sales. Our integrated costs declined further, and our profitability improved. Sequentially, operating profit quadrupled, and non-GAAP net profit increased by approximately 13 times. In the first quarter of 2022, our principal operating subsidiary, Jiangxi Jinko, completed its listing on the Shanghai Stock Exchange Science and Technology Innovation Board. The capital raised provided greater momentum for the development of our state-of-the-art technology and business. Our ability to successfully compete in the future rests on our comprehensive strength. We will continue to increase our competitiveness in technology, our global marketing network, and also our comprehensive measurement scales. Despite a challenging 2021, the demand from end users continued to increase compared to 2020. More flexible business models and a lower price sensitivity are helping the distributed generation business achieve rapid growth. China's installation capacity reached 55 gigawatts for the full year of 2021, with distributed generation contributing more than half of the new installations due to its higher economic returns. We hope this trend remains the driving force for newly added installations in 2022. We are highly optimistic about the development prospects in the distributed generation market and we continue to grow our brand influence in this market. With the strategic needs for energy transformation and energy security in major world economies, we expect the PV industry to continue its strong growth momentum in the coming years. Advanced and high-efficient products will support the continued growth of the global PV industry. We continue to lead the industry with our innovative technology and in-depth market knowledge. In our handling facility, our mass-produced N-type cell reached an ultra-high conversion efficiency of up to 24.5% in the fourth quarter last year, with an energy yield similar to that of PERC. We have roughly 16 gigawatts of N-type cell capacity operational in the first quarter of 2022 and are currently ramping up our production capacity. Our integrated costs are expected to further decrease as our integrated production capacity structure consistently improves. In light of the rapid industry transition from P-type to N-type and growing demand for higher efficiency products, we have launched the next generation of ultra-efficient anti-PERC modules. These models have received worldwide acclaim from our customers for better power generation performance, allowing us to obtain premium pricing. In the long run, our stable supply and localized after-sales service network will continue to guarantee the reliability and consistency of our products and services. These core qualities have become our competitive advantage. We will reinforce the leadership position of our N-type products globally and further enhance our global market share and profitability. Our 7-gigawatt mono wafer plant in Vietnam became officially operational in the first quarter of this year. This integrated mono wafer-cell-module manufacturing capacity of roughly 7 gigawatts overseas further consolidates our global supply chain advantage. We are coordinating with our upstream and downstream partners to leverage all complementary resources and enhance our strategic cooperation. This will help us mitigate raw material shortages and production weak links. At the same time, we are committed to building an industrial ecosystem to solidify our supply chain. Vertical integration is essential to compete in the global PV market. By continuously consolidating our diversified industrial chain infrastructure, we believe we will continue to strengthen the competitiveness of our core products and bring great value to our global customers with high-quality, reliable modules and premium services. Before I turn it over to Gener, I would like to go over our guidance for the first quarter and full year 2022. We expect total shipments to be in the range of 7.5 gigawatts to 8 gigawatts for the first quarter of 2022. The annual mono wafer, solar cell, and solar module production capacity is expected to reach 50 gigawatts, 40 gigawatts, and 60 gigawatts, respectively, by the end of 2022. We expect our full year 2022 shipments, including wafer sales and modules, to be in the range of 35 gigawatts to 40 gigawatts.

Thank you, Ms. Li. Total shipments in the fourth quarter were 9.7 gigawatts, of which module shipments were 9 gigawatts, a significant increase compared with the third quarter of 2021 and the same period of 2020. ASP outside North America improved sequentially, thanks to the sales of high-efficiency products in high-end markets. In terms of regions, module shipments in Asia Pacific and emerging markets increased sequentially and year-over-year. China outpaced all other countries by contributing the largest portion in the fourth quarter, increasing from less than 10% in the first half of the year to nearly 34%. As distributed generation gradually becomes the main driving force for newly added installations in China, the sector is expected to increasingly contribute to incremental market volume, encouraged by incentives from the government and the policy framework that guides the country's climate action plan on peak emissions and other policies. We are optimistic that China's demand will exceed 100 gigawatts in 2022, and we expect shipments in the China market to further increase in 2022. In Europe, one of the most developed PV markets, clients have accumulated mature awareness for PV and have a higher acceptance of new products such as the Tiger Neo Modules. By the end of 2021, we had shipped our products to more than 30 countries across Europe. Europe has become one of our top contributors for 2021. With increasing electricity prices making solar energy more economical and the strategic necessity of energy transformation and energy security, Europe is expected to maintain strong growth momentum. We are confident in maintaining our competitiveness in the European market by leveraging our local network and the next-generation N-type ultra-efficiency module, Tiger Neo. We launched the next generation N-type Tiger Neo Module in the fourth quarter of 2021 and increased the global promotion and sales, delivering high energy density, high bifacial factor, and lower linear degradation. The new module brings clients better power generation performance and obtains a competitive premium. Meanwhile, we are heavily invested in the future of the distributed generation sector. The proportion of distributed generation in our shipments is expected to reach around 40% this year. We will continue to explore the global market demand for distributed generation based on market trends and customer needs and proactively increase our presence in China, the United States, Europe, Brazil, Australia, and explore other potential markets. Countries around the world have adopted various strategies in response to COVID-19 supply chain disruptions and soaring household gas and electricity prices as the energy crisis bites. The backdrop of the global PV market has been driven by green, low carbon, and long-term energy security investments, which will usher in a new period of rapid development. Market demand in 2023 is expected to grow by over 20%. We will continue to track market conditions and adjust our business strategy accordingly. We are confident that we will contribute to the global energy transformation with our high-efficiency products and support customers with our sound marketing and global service network. With that, I will turn it over to Pan.

Thank you, Gener. Our fourth quarter results expectations. Total revenues grew significantly quarter-over-quarter. We continued to take effective management of integrated production costs and operating expenses. Sequentially, gross profit doubled, operating profit more than quadrupled, and non-GAAP net profit increased by 13 times. Operating efficiency improved as a result of our efforts to closely align inventory management with market supply and demand dynamics. Let me go into more details now. Total revenue was $2.57 billion, an increase of 91% sequentially and 74% year-over-year. Gross margin was 16.1% compared with 51% in the third quarter this year and 16% in the fourth quarter last year. Excluding anti-dumping and countervailing due to its reversal benefit, gross margin was 14.3%. Total operating expenses nearly doubled year-over-year due to a substantial increase in motor shipments during the fourth quarter, which increased shipping costs. On one hand, we increased shipments to China to reduce the impact of shipping costs on profitability. On the other hand, we leveraged our long-term agreements with major shipping companies to obtain more competitive prices compared with the rest of the market. In general, the impact from changes in shipping costs on profitability was relatively under control. Total operating expenses accounted for 13% of total revenues in the fourth quarter this year, flat sequentially, and slightly improved compared with 15% in the fourth quarter last year. Operating margin was represented in the fourth quarter of 2021 compared with 1.3% in the third quarter and 0.8% in the fourth quarter last year. EBITDA was $183 million, doubled compared with $89 million in the third quarter of 2021. Non-GAAP net income was $34 million, an increase of 13 times sequentially, resulting in diluted earnings per ADS of $0.67. Now, I'll brief you on our 2021 full year financial results. Total module shipments were 22.2 gigawatts, up 18% year-over-year. Total revenues were $6.41 billion, up 16.2% year-over-year. Increase in motor shipments, higher production volumes, together with cost reductions from our industry-leading integrated cost structure resulted in improved profitability. For the full year of 2021, gross profit was about $1 billion, an increase of about 8% year-over-year. Gross margin was 16.3% compared with 17.6% last year. Operating margin for the full year of 2021 was 2.7% compared to 5.1% in 2020. Operating expenses were 13.6% of the total revenues in 2021, compared to 12.5% last year. EBITDA was $538 million in 2021 compared to $463.5 million last year. Non-GAAP net income was about $88 million in 2021 compared to $147 million last year. This translates into non-GAAP basic and diluted earnings per ADS of 1.84 and 1.7, respectively. Moving to the balance sheet, at the end of the fourth quarter, our cash and cash equivalents were $1.4 billion, up from $1.14 billion at the end of the third quarter and $1.24 billion at the end of the fourth quarter last year. Our operating efficiency continues to improve quarter-over-quarter. Accounts receivable turnover days were 52 days in the fourth quarter compared with 65 days in the third quarter of 2021. Inventory turnover days were reduced to 88 days in the fourth quarter compared with 171 days in the third quarter of 2021. Net debt was $4 billion at the end of the fourth quarter compared to $2.8 billion at the end of fourth quarter last year. With the listing of Jiangxi Jinko earlier this year, our financial structure is expected to improve with access to competitive financing. This concludes my prepared remarks. We are now happy to take your questions. Operator, please proceed.

Our first question comes from Brian Lee with Goldman Sachs. Please go ahead.

I guess maybe just to start off on the guidance. I appreciate you giving the views for shipments here in Q1 and for the full year. I think customarily, you've given gross margin guidance, not for the year per se, but at least for the out quarter. Any reason, I might have missed this, but did you provide the gross margin guidance and revenue guidance for Q1? And if not, kind of what's the rationale? And I guess, what are the puts and takes around the outlook for those metrics in Q1?

Brian, this is Charlie speaking, and you're right. In terms of guidance, we made some small changes compared to the previous quarters, and we plan to only give guidance on shipments. In terms of gross margin revenue, firstly, we want to align with regulations in China, as our subsidiaries in China have been listed in the Chinese capital markets, where entities do not provide gross margin guidance or revenue ranges. Secondly, regarding gross margin, the supply chain is so volatile that we don't believe it's feasible at this stage to give a reliable gross margin range.

Okay. That's fair enough. Maybe at a big-picture level, gross margins came in sort of right above the high end of the range for Q4, so kudos to you for good execution on that. Are you saying that the supply chain/margin environment is more uncertain in Q1 2022 than what you saw in Q4 '21?

The polysilicon part is still well above our expectations. So in terms of gross margin, we expect some pressures from that perspective. But from a long-term perspective, we think the price will return to a more rational level, particularly with increased production volume from polysilicon producers in the second half of the year.

And then for Q4, there was a good amount of non-module shipments. What was your kind of gross margin delta roughly between modules and non-modules? Were they in the same range or higher on the non-modules? And if higher, what sort of percentage or basis points difference?

You mean Q4 last year or Q1 of this year? Sorry.

Asking about Q4 and then I guess the follow-up to that would be what's embedded in your shipment guidance for '22 and Q1 in terms of wafer and non-module versus module?

Okay. So for the 2022 guidance for Q1 as well as the full year, the majority will be module-related shipments. So, you can take the guidance as primarily reflecting module shipments. Regarding Q4 last year, we did have about 600 megawatts of wafer and cell shipments as part of the low-efficiency wafer sales, which had a very low margin. Excluding the low-margin wafer and cell sales, the module margins will be a little better than the overall total average.

Last two housekeeping ones and I'll get back in the queue. The CapEx guidance for 2022, I might have missed that, but do you have a CapEx range or a number for this year? And then, I noticed the tax expense was much higher than usual in Q4. Maybe what was the driver of that? And should we be modeling a similar tax rate in 2022? It seems like it was in the high 20%, sort of close to 30% in Q4?

Yes. For CapEx for last year 2021, it was approximately $1.3 billion, and we expect some new capacity this year. So it might be around $1.8 billion to $1.9 billion.

And just lastly, on the tax rate?

Yes. The tax rate is in the range of 15% to 20%.

Our next question comes from Philip Shen with ROTH Capital. Please go ahead.

I would like to revisit the margin question for the first quarter. With just three days remaining in the quarter, you probably have an understanding of where margins stand. What do you think might still influence or significantly change your outlook, considering how late it is in the quarter? Also, can you provide insight into your expectations for margins in Q1 compared to Q4, or whether they could potentially weaken due to the increase in polysilicon prices?

In terms of margins for Q1, I think it will be roughly flat quarter-over-quarter and maybe slightly lower because of the polysilicon prices and related R&D costs in January and February.

Okay. And shifting back to some comments, I think Gener made about Europe and the demand there. I was wondering if you could provide a little bit more color on how demand has changed over the past four weeks in the European market? You also serve the European market from your Southeast Asia facilities, any kind of color there would be really helpful.

Thank you, Philip. This is Gener. For the global demand of '22, we are pretty optimistic, especially considering what has happened in the last three to four weeks in Europe. We have observed a stronger-than-expected demand coming from Europe, India, and a recent strong push from China. So adding everything together, we are looking at global demand ranging around 240 to 250 gigawatts. For Europe, we believe the European market will exceed 30 gigawatts pretty soon as a whole. Currently, we still supply the European market from our manufacturing base in China. Our non-China base is mainly servicing the U.S. market right now. I hope that answered your question.

Yes, Gener, that's great. As it relates to the capacity expansion, I think last quarter, you guys were expecting wafer, cell, and module capacities to be 40 gigawatts, 40 gigawatts, and 50 gigawatts, respectively, and now you're expecting it to be 50, 40, and 60. I wanted to see if you could help us understand what drove that increase? It seems like it could be related to stronger demand, but I was wondering if you might be able to share more there. Can you also talk about how much of the 2022 shipments of 35 gigawatts to 40 gigawatts are booked already for the year? You often have bookings well in advance. So, do you think that's 50% booked or possibly even more?

Phil, let me briefly talk about this topic. For the capacity expansion, yes, we have seen stronger-than-expected demand. However, we are focusing on the long-term momentum of the stronger global demand, which is very important. The reason we are expanding our capacities is primarily due to this sustained demand. Meanwhile, we anticipate that a lot of the capacity will be released in the second half, even by year-end, which will help us meet demand not only in '22 but also in '23 and '24. Regarding booking, we are looking at our bookings and it is roughly around half booked based on our plan. The key point here is that we are witnessing a stronger-than-expected demand for anti-PERC products.

Great. One last question for me. As it relates to the shipments from Vietnam and Southeast Asia into the U.S., have you guys been able to get new volumes of shipments into the U.S.? I think you guys have non-China polysilicon going into modules. If so, when do you expect those shipments to arrive at U.S. shores without being impacted by the regulations?

We have seen some positive feedback in the last couple of weeks, and we have seen some small volume net samples being accepted and passing through inspection. We expect to build a trustworthy overseas tracking system to ensure that all shipments going to the U.S. market will be fully compliant with regulations. We restarted our non-China production around one to two months ago. However, we have not received any massive shipments, like 100-megawatt level, arriving at U.S. borders yet, but we remain optimistic about future shipments to the U.S. market. There are still concerns regarding regulation compliance, but we will keep a close eye on it. In general, I believe we have one of the best solutions in the industry with our vertically integrated non-China production base.

Our next question comes from Alan Lau with Jefferies. Please go ahead.

Thanks a lot for the management for holding the meeting and congratulations on the good results. My first question is about the new TOPCon product. What premium do you expect for TOPCon products compared to PERC products?

Thank you for your question. This is Gener speaking. Regarding the premium, it's hard to justify a general number, but we are building the business model based on a profit-sharing model with our customers. In some cases, we might see a larger premium, while in other cases, it might be smaller based on different markets, radiation conditions, system designs, etc. Overall, we are seeing anti-premiums in the current stage fluctuate around $2 to $3, but we expect that to vary. Nonetheless, we are optimistic about the stronger-than-expected demand for the anti-PERC product.

Yes, this is Charlie speaking. It is for sure that the new N-type product should achieve a premium over PERC products. We are working towards ramping up our capacities to ensure that the integrated production cost is competitive with traditional PERC products.

Next question relates to the European markets and their ambitious installation targets with the repower EU initiative, etc. However, the euro is depreciating, which might mean higher module costs for them. Do you think you'll still see strong demand from the European market in the second quarter compared to the first? Do you see quarter-over-quarter growth with probably higher module prices?

This is Gener. The European demand is stronger than expected, especially in the last three to four weeks. We can feel this stronger-than-expected demand, primarily from both the distributed generation market segment and the utility side. Also, despite challenges such as currency exchange rates and logistics costs affecting demand, we are confident that even with slightly higher module prices, solar energy remains one of the most competitive electricity contributors in Europe. This is why we maintain strong confidence in the European demand, not just for the upcoming quarters but for the next three to five years.

Our next question comes from Rajiv Chaudhri with Sunsara Capital. Please go ahead.

First of all, I want to congratulate you on an amazing fourth quarter as well as on a very successful IPO. Those are big game changers for JinkoSolar going forward. The question I wanted to ask you, I have several questions. The first question is about operating expenses. You had noted that the significant change from quarter-to-quarter in operating expenses was almost $100 million, attributed to shipping expenses. And yet when I look at the line items, the G&A went up from $60 million in Q3 to $122 million in Q4. So, is there any shipping expense included in the G&A? Or can you explain why G&A increased so much and what the components are of that, as well as how sustainable it is on a go-forward basis?

This is Charlie speaking. The increase in G&A expenses in the fourth quarter is primarily due to travel and entertainment expenses related to year-end bonuses and additional expenses from our significant company listing activities. Some of these expenses are non-recurring. For 2022, we are planning a significant increase in revenue with projected shipments of 35 gigawatts to 40 gigawatts, so we expect to benefit from economies of scale as operating expenses versus total revenues will continue to decline quarter-over-quarter.

So, absent the employee bonuses, would you say that in the first few quarters of the year, G&A will revert to the $60 million range and that the bonuses will kick in later in the year?

No, the increase was mainly due to IPO-related and legal expenses. We have been doing a lot of legal work, particularly concerning U.S. litigation related to patents. For year-end bonuses, we accrued on a quarterly basis, and due to our performance, particularly in the fourth quarter, the bonuses were higher than expected.

Okay. My next question is about shipping costs. It's evident that shipping costs will stay elevated longer than anticipated—are you having success in passing those costs onto consumers, or are you still absorbing most of that volatility?

Shipping costs will indeed remain high throughout 2022. However, given the strong demand for solar energy, we are finding some flexibility from customers in accepting higher module prices, including shipping costs. Based on our customer experiences, we believe we are able to pass through most of the shipping costs to our customers.

As you look ahead to Q2 and beyond, it's clear polysilicon costs have also surged and may stay high longer, especially in Q2. Does that mean that module prices will keep rising? Were module prices in Q1 higher than in Q4, and will Q2 module prices be higher than Q1?

In Q4 last year, module market prices peaked, reaching over RMB2 in some cases. Prices dropped slightly in Q1, but given the high polysilicon prices in the first half of the year, we expect strong demand and a relative shortage of polysilicon to maintain upward pressure on module prices. However, in the second half of the year, with increased polysilicon supply, we are cautiously optimistic about a downward trend in polysilicon prices.

Are you structuring your long-term contracts to provide pricing flexibility so that if silicon prices stay elevated, you won't be squeezed?

We have various arrangements with different customers. Some contracts link module prices to spot polysilicon prices, while others are fixed.

Are variable contracts increasing in prevalence?

It varies depending on customer sentiment and perspectives towards polysilicon price projections, making it hard to draw a general conclusion.

On N-type products, you mentioned having 16 gigawatts operational now, but you said the target for N-type capacity at the end of this year is also 16 gigawatts. I don't understand—why isn't the N-type cell capacity increasing this year?

The 16 gigawatts of N-type is coming online in the first quarter. That capacity is ramping up, and we expect it to reach full operational capacity by the end of the second quarter. Right now, we don’t have plans to increase capacity beyond that.

So you're saying it will not be ramping by 4 gigawatts per quarter?

Let me clarify. We have 16 gigawatts of N-type TOPCon capacity online in the first quarter. The 16 gigawatts represent our annual capacity and is in the ramp-up stage. By the end of this year, we plan to maintain that capacity level but won’t have a current plan to add more.

Our next question comes from Tony Fei with Bank of China. Please go ahead.

I have two questions. The first one is a follow-up on the N-type products. Can you speak about how N-type products compare to P-type products in terms of polysilicon consumption?

Yes, you're right. We have advantages with N-type, including less polysilicon consumption, which will help us reduce production costs.

Since you mentioned not planning to add new N-type capacity this year, will you continue investing in the future and eventually retire your existing P-type cell capacities?

For future capacity expansion, we are still evaluating our plans. If we decide to invest, we will focus solely on expanding N-type capacity.

So my last question is regarding your product mix. Last year, I assume your DG shipment was around 30% to 35% of total market shipments. Do you think the share of DG products will be higher than last year? How do you expect margins to perform? Some of the new DG sales are likely to be from the China market so we may see higher, perhaps, contraction in sales expenses on the pricing side?

The prepared remarks indicated that DG sales are expected to increase to around 40% compared to 30% to 35%. We will focus on both overseas and Chinese DG markets. Yes, DG customers tend to be less sensitive to prices. Therefore, we expect to achieve higher margins from DG products compared to regular utility-scale projects.

Thank you. This is the end of today's call. Thank you all for participating. You may now disconnect your lines.