JinkoSolar Holding Co., Ltd. Q2 FY2022 Earnings Call

Hello everyone, thank you for joining the JinkoSolar Holding Company Limited Second Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded. I will now hand over the meeting to your host, Ms. Stella Wang, for today's call. Please go ahead, Stella.

Thank you, operator. Thank you everyone for joining us today for JinkoSolar’s second quarter 2022 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 Company, Limited; Mr. Gener Miao, Chief Marketing Officer of JinkoSolar Company, Limited; Mr. Pan Li, Chief Financial Officer of JinkoSolar Holding Company, Limited; and Mr. Charlie Cao, Chief Financial Officer of JinkoSolar Company, Limited. 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, who will go through the financials. They'll 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 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 had a good quarter despite challenging market conditions. Total solar shipments in the second quarter were 10.5 gigawatts, with module shipments at 10.2 gigawatts, representing a sequential increase of around 27%. Total revenues reached $2.81 billion, also up 27.6% sequentially. As upstream costs continue to rise, we are actively managing internal costs through technical advancements and process improvements, which help mitigate the impact of higher costs on our profitability. Our gross margin stood at 14.7%, relatively unchanged from the first quarter, excluding the effects of convertible senior notes and share-based compensation expenses. Adjusted net income for the second quarter was $55 million, reflecting a sequential improvement. The energy transition in various countries and the energy supply crisis due to the Russia-Ukraine conflict have significantly increased demand for solar products across multiple markets. According to InfoLinks' analysis of China's customs export data, China's exports of modules in the first half of the year reached 8.7 gigawatts, a small year-over-year increase of 2%. Exports to Europe amounted to 42.4 gigawatts of photovoltaic modules, which marks a substantial year-over-year increase of 137%. The demand in the Chinese market has also been robust. In the first half of the year, solar photovoltaic installations in China hit 30.9 gigawatts, reflecting a year-over-year increase of 136%. However, the growth in demand outpaced the release of polysilicon production, which was further impacted by annual maintenance, power rationing, and anti-epidemic measures in certain regions of China. Consequently, polysilicon prices have been rising, recently reaching a high of RMB 310 per kilogram, which has driven up module prices. Some clients have reported that the elevated module prices have negatively impacted project yields, leading to a slowdown in demand. We anticipate that polysilicon prices will continue to rise and peak in the third quarter. As polysilicon production increases in the fourth quarter, we expect price increases to moderate, which should help recover downstream demand. Recently, the local government in Sichuan province implemented power rationing measures, temporarily affecting our manufacturing facilities in the region. We cannot yet determine how these power rationing measures will impact our overall business operations and financial performance for the full year 2022, as the duration of these measures is uncertain, and we do not know when our facilities can resume full production. We are closely monitoring the situation and have taken steps to minimize the adverse effects, including reallocating production to other facilities and engaging with local authorities regarding power supply issues. We have also adjusted our module production volumes and shipment plans to ensure timely delivery to our clients. During the second quarter, the proportion of larger capacity increased sequentially, enhancing our integrated structure. The 16 gigawatts of TOPCon cell capacity that began production at the start of the year reached full output by the end of the second quarter, achieving mass production efficiency of over 24.8% with yield rates and costs meeting our expectations. We have also initiated production of an additional 8 gigawatts of N-type cell capacity in Hefei and started construction on another project for 11 gigawatts of N-type cell capacity in Haining. The growing share of our in-house high-efficiency capacity will continue to boost our competitiveness. As an industry leader in TOPCon technology, we have made significant breakthroughs that create barriers in core processes and technology, achieving industry-leading mass production efficiency, yield rates, and cost-effectiveness. We believe TOPCon represents the most valuable high-efficiency cell for commercialization and mass production in the post-pandemic landscape, with substantial opportunities for development ahead. We are committed to maintaining our leadership through ongoing technical innovations. Our N-type modules have been well-received by global customers, and we currently have strong visibility in our order books. Compared to P-type products, N-type products command a competitive premium due to their enhanced technical performance and increased power generation capabilities. We are confident in achieving our four-year N-type shipment target, and with new capacity becoming available in 2023 and increased market penetration, we expect the share of N-type shipments to rise further. In light of the current and anticipated supply chain and market conditions, we have revised our capacity expansion plans for wafers, cells, and modules for the remainder of this year. We now expect our annual production capacity for mono wafer cells and modules to reach 55 gigawatts and 65 gigawatts, respectively, by the end of 2022. Before I hand it over to Gener, I would like to share our guidance for the first quarter of 2022. For the third quarter, we expect total shipments to fall between 9 to 10 gigawatts and maintain our full-year shipment forecast of 35 to 40 gigawatts for 2022.

Thank you, Mr. Li. Total solar shipments in the second quarter were 10.5 gigawatts, of which over 97% were module shipments, up nearly 27% quarter-over-quarter and doubling year-over-year. Since the Russia-Ukraine conflict, global energy transformation has accelerated and shown strong growth momentum, especially in Europe. In the second quarter, our shipments to the European market grew steadily, and the proportion of shipments in Europe remains high, reaching the 25% to 30% range. In China, the distributed generation business demonstrated strong momentum. Newly added installations in China in the first half grew remarkably by 136% year-over-year. In the second quarter, our shipment to the Chinese market grew exceptionally year-over-year, more than doubling sequentially. Our shipments to emerging markets also registered stable sequential growth. While demand was strong, we also noticed some potential challenges. For example, demand in some European countries for the second half is expected to slow down sequentially due to issues affecting the logistics chain. Additionally, some of our domestic clients are waiting to fully assess the impact of the continuous rise in supply chain costs. Furthermore, the execution of some large-scale utility projects might be delayed until 2023 due to issues with grid connection and power transmission. Taking these challenges into consideration, we have been adjusting our geographic mix as well as our sales and contract timing strategy while keeping in close communication with our clients. So far, both our contract signing and execution are maintained at satisfactory levels. In the U.S. market, tightened supply chain issues have dampened demand in the short term. In the long run, with President Biden's executive order to spur clean energy manufacturing and recently passed Inflation Reduction Act of 2022, which includes US$369 billion in climate and energy-related funding, we expect demand to remain positive. To improve our resilience to risk, we will continue to closely monitor market and quality developments, adjust production and marketing strategies accordingly, and further strengthen our overseas supply chain and global sales and marketing network. The proportion of large-sized product shipments gradually increased to nearly 90% in the second quarter, further optimizing our product structure. Shipments through distribution channels, where demand growth is strong, accounted for nearly 50%, with shipments through distribution channels in the European and some APAC markets accounting for more than half. Tighter Neo modules continue to be sought after by clients globally, with high order book visibility and pricing premiums in line with our expectations. We estimate that Tiger Neo shipments for the full year of 2022 will reach approximately 10 gigawatts. The transformation to clean energy is now an irresistible trend, and with the need for energy security, global PV demand is expected to achieve rapid growth this year. Nevertheless, some markets are experiencing temporary pain due to the short-term volatility that comes with rapid growth. As the market continues to adjust, we remain optimistic about global PV development. We provide a variety of materials and configurations based on Tiger Neo to cater to diversified client needs in different countries. We expect to achieve shipment growth that exceeds market growth, further increasing our competitiveness in global markets. With that, I will turn the call over to Pan.

Thank you, Gener. For the second quarter of 2022, both solar module shipments and total revenue increased significantly year-over-year. Nevertheless, gross margin remained relatively flat compared to the first quarter and decreased year-over-year, primarily due to an increase in the material cost of solar modules. Due to the significant increase in the company's stock price in the second quarter, we recognized a loss from a change in the fair value of the convertible senior notes of US$80 million in this second quarter. Excluding the impact of the convertible senior notes and the share-based compensation expenses, adjusted net income attributable to JinkoSolar Holding Co., Ltd.'s ordinary shareholders in the second quarter was US$55 million, improving sequentially. Let me go into more details. Total revenue was US$2.8 billion, up about 27% sequentially and a significant increase of 137% year-over-year. Gross margin was 14.7% compared with 15.1% in the first quarter and 17.1% in the second quarter last year. Total operating expenses were US$457 million, up 40% sequentially. The increase is mainly attributed to an increase in shipping costs for solar modules, an increase in disposal and impairment loss on property, plant, and equipment, and an increase in share-based compensation expenses. Total operating expenses accounted for about 16% of total revenues in the second quarter, up from about 15% in the first quarter and 13% in the second quarter last year. EBITDA was US$186 million compared with US$126 million in the first quarter this year. Excluding the impact of a change in the fair value of the notes and share-based compensation expenses, adjusted net income attributed to JinkoSolar Holding Co., Ltd. ordinary shareholders was US$55 million, improving sequentially. Due to the continued appreciation of the U.S. dollar against RMB, we realized a net foreign exchange gain, including change in fair value of foreign exchange derivatives of approximately US$34 million in the second quarter this year compared with a net gain of US$12 million in the first quarter. Moving on to the balance sheet. At the end of the second quarter, the company had cash and cash equivalents of US$2.15 billion, slightly down from US$2.66 billion at the end of the first quarter and up from US$1 billion at the end of the second quarter last year. AR turnover days were 69 days in the second quarter compared with 66 days in the first quarter. Inventory turnover days were 104 days in the second quarter compared with 117 days in the first quarter. Total debt was US$3.8 billion at the end of the second quarter, down sequentially from US$4.3 billion. Net debt was US$1.7 billion compared with US$1.6 billion at the end of the first quarter this year. This concludes our prepared remarks. We're now happy to take your questions. Operator, please proceed.

First question of today we have from Lawrence Sun from ROTH Capital Partners.

This is Lawrence Sun on behalf of Philip Shen. I was wondering if we could get some more color on the Sichuan power shutoff. Specifically, from what we gathered, JinkoSolar is about 18 gigawatts of new capacity in Sichuan? It's about half of your total capacity. So given that you've shut down for about 10 days, would that be an estimated 5% of Q3 in grid capacity offline so far?

Yes. So thinking about the impact from China's Sichuan province power cuts, the impact is progressive for our wafer capacities. We faced about 10 to 15 days of impact for our wafer capacities, which is roughly 25 gigawatts for annual capacities. If we convert that into monthly production, it's about 2 gigawatts a month. So we estimate a rough impact of around 700 megawatts for the wafers; however, we have full factories in various locations, including three factories in China. So we try to maximize the production from our other wafer capacities. From the management team's perspective, we are minimizing the impact, though there will still be some effect on production and costs in the third quarter.

Okay. I believe the impact on the cost side, would there be any effect from the purchase of external wafers in order to meet your shipment guidance? If so, what?

Yes. I think not because, if you look at our guidance, which is 9 gigawatts to 10 gigawatts, we have taken this situation into consideration. So we don’t plan on purchasing wafers from a third party.

Okay. So would it be safe to say that the leading indicator for recovery in Sichuan is the recovery of water levels? You guys are mostly driven by hydro power, right?

Yes. It's already in the recovery stage and it's getting better. Moreover, our capacity is expected to return to full capacity in the next couple of days.

That's really great to hear. I had another set of questions on the tightened supply chain tracing. Does that have to do with the US LPA? And if it is related to the U.S. LPA, could you please help us quantify the number of gigawatts that you've maybe shifted from shipping to the U.S. towards other countries?

Yes, I think we are preparing this traceability topic not only for the U.S. market, but also for other markets as well. In recent months, we have received a lot of inquiries from different countries or customers about traceability topics, which is why we believe we need to enhance our capability for increasing traceability of our products, including polysilicon and other key materials as a necessary step for the future, particularly for the U.S. market. We are still working diligently together with CBP and our consultants to comply with these regulations, so our customer clearance process isn't as smooth as usual, especially under the U.S. LPA, and we have to address numerous details to make it happen.

Okay. Could I just get a bit more on specifics? You mentioned it's not smooth. What type of modules is it not smooth for? Is it German poly, Southeast Asian modules; China poly, Southeast Asian modules; U.S. poly, Southeast Asian modules; or all? Just a little bit more color.

Based on our knowledge and awareness, I don't see any difference between China polysilicon or European polysilicon or American polysilicon as we have to provide the right documents to meet CBP officials' requirements.

Okay. One last question before I hand it off. What's the utilization rate of your Southeast Asian facilities? Can you maintain it around the same level by shifting module shipments to other countries? And what's the rough mix?

Yes. We have to consider different parts across the whole value chain. In the upstream, like wafers and cells, I think the demand is currently exceeding supply not only for the U.S. market, but also for other markets. For the module side targeting the U.S. market, we must be very careful about traceability. We won’t ship or manufacture products if we cannot guarantee the right traceability.

Next, we have Alan from Jefferies.

So my first question is about the expectation or the current situation of the TOPCon products. And what is the premium out there like? Is it US$0.01 or US$0.015 compared to PERC?

Yes. Firstly, about the product itself, I think the TOPCon product that we call Tiger Neo is highly competitive compared with the standard PERC product. Based on the 72-piece product, Tiger Neo is almost 20-watt peak higher than the standard product, which also considers other features like degradation among others. So definitely, it generates extra benefits for customers and brings additional value to the project side or solar system installations. That's why we are able to obtain a premium from the market. Currently, the premium we are expecting or looking at is around US$0.01 to US$0.015. Sometimes it is up to US$0.02, but in general, the range is US$0.01 to US$0.015.

And so it's actually pretty decent. So in terms of production cost perspective, have we already achieved cost parity versus PERC in terms of the production cost of TOPCon? And what is the current yield like right now?

In the second quarter, the TOPCon capacity is in the right stage, and our R&D and operational team is working hard to improve output efficiency and costs. The integrated cost of the TOPCon modules, compared to traditional P-type modules, is currently within the range of lower than RMB 0.05. Our plan is to continue improving the cost structure, targeting by the end of this year for the TOPCon integrated cost to reach the same level as PERC.

Understood. So it means that you will have the same costs and then you will make an extra US$0.01 or US$0.015 of net profit on top of PERC, right?

Yes, that's correct. We do see the TOPCon modules with the premium that Gener mentioned. We are focused on continuously improving the cost structure, and we are on the right track. We expect by the end of this year to reach cost parity.

Understood. And just another question is about one of the major polysilicon players who is entering into the module space. So this is a hot topic in the market recently. What is your view on this?

I think there is a very big market. Even in the existing market, growth is strong over the next decades. If you look at the top five module companies, their market share now is 60% to 65%. There are many Tier 2 and Tier 3 companies taking 30% to 35% market share. We expect a growth rate of around 30% over the next couple of years. So there is potential room for big players to enter the markets. However, the module business is not purely about production; it requires global manufacturing, marketing, sales, bankability, and strong relationships with customers. What we are doing is continuing to solidify our strong branding, marketing, and product competitiveness.

So, also, the management has mentioned the Inflation Reduction Act in the U.S. One of the key incentives in the Act is the subsidies for installation, but also there are product subsidies for building factories in the U.S. Is JinkoSolar considering further expansion into the U.S. in terms of factories?

Yes. I think this is a hot topic. The IRA will become effective in the U.S. starting next year and will provide a lot of subsidies for manufacturing in the U.S. We already have a small module capacity of 400 megawatts, which will be eligible for incentives. We are in the early stages of further evaluations for expansion, but we expect there will be more local U.S.-based capacities over the next couple of years due to the strong support from IRA policies.

Understood. So I think my last question is regarding your outlook on solar installations for this year and next year, and possibly from 2022 through 2025, the global installation numbers along with a brief breakdown, if you may provide.

Yes. We estimate roughly 250 gigawatts of installations this year. Next year, assuming the bottleneck in polysilicon is resolved, we expect strong growth in China, the U.S., and the European markets, estimating roughly 25% to 30% market growth next year.

Understood. So that's more than 300 gigawatts? Are we talking about around 300 to 320 gigawatts, right?

Yes. In general, we are optimistic, not because polysilicon is at a very high level, but it is delaying utility-scale projects in China and other regions. Next year, with more volume input, we expect installations to accelerate.

Which company will benefit from strong demand and the upside of the TOPCon product? I'll leave to some of your other investors.

We have a question from Rajiv Chaudhri from Sunsara Capital.

Actually, I have a few questions. The first one is just on the model. As I look at the unit shipments that you had in the second quarter and compare them to the first quarter, it seems that your average price realized per module went down quarter-to-quarter by almost US$0.01 or maybe more. Can you explain why that would be happening in an environment where prices in general were stable or increasing?

Sorry, are you asking about the Q1 to Q2 ASP changes?

Yes.

I think according to our data, the Q1 to Q2 prices are pretty close. The Q2 average prices saw a very tiny drop compared to Q1 ASPs, mainly because of some historical orders we have to execute that were lower than the market price. The rest are pretty normal. So, in our view, we believe the quarterly ASPs are staying consistent with market conditions with no significant changes.

Yes. I mean, just based on the revenues and the unit shipments, it looked like the average selling price in the first quarter was around US$0.284, and the second quarter was around US$0.272. So that looks like a pretty decent drop. But you are saying that some of it was because of legacy shipments at a lower price? Are those legacy items behind you?

No. Let me clarify. The revenues include many factors, right? Not only module revenues. Even module revenues make up the majority of it, but we still include other parts in the revenue. That's why you cannot use the revenue to divide by the shipment to determine ASPs; that methodology won't be accurate enough.

I think an additional factor might be the RMB depreciation. If you're using the U.S. dollar, that could also reflect the drop. Also, in the second quarter, there was a larger portion from China. But again, the ASP remains stable, and the second quarter saw a slight drop, which is very minimal.

Yes. Okay. Sorry, I understand. So along the same lines, can you give us some feeling for what the ASP will be in the third quarter and the fourth quarter for the year?

Yes. For the third quarter, we expect the ASP to remain stable as it was in the first and second quarters. As for the fourth quarter, while it has not been fully closed yet, we are closely monitoring the market situation. However, personally, I expect the market prices to remain stable in the fourth quarter compared to Q3.

You're expecting the fourth quarter to be flat as well?

Yes, more or less flat. But since we are still some way from the fourth quarter, there are still unknown factors to consider, so we don’t have any disclosures on the fourth quarter ASPs yet. But my personal expectation is that the fourth quarter's ASP will be similar to Q3.

And another question is on the stock-based compensation. Can you quantify roughly how much it is per quarter? What was it in the second quarter? And what is its expectation for the third and fourth quarters?

The stock-based compensation we granted in the first and second quarter is a one-off item. In the future, we expect that amount to be very small. For the second quarter, the exact amount can be calculated based on our disclosed adjusted net income of US$55 million. Including the convertible bonds and stock-based compensation, I believe it's roughly around US$20 million to US$25 million, but you can confirm that through calculation.

So US$20 million to US$25 million. And you're saying that in the third and fourth quarters, that number will go down?

Yes, it will be very small in the future.

Okay. So the shipment costs on a per watt basis, did the shipment costs go up quarter-to-quarter, on a per watt basis?

Yes, shipment cost is at a high level. I think it's roughly US$0.015 to US$0.02 per watt, and quarter-to-quarter it's relatively stable. The shipment costs will maintain at a high level. However, given the more mix to China in the second half of the year, the blended costs will be lower for the second quarter. Next year, we expect, given the global economy is weak, that shipment logistics costs will trend downward.

Okay. And can you also tell us what the depreciation and CapEx numbers were for the second quarter? What is your expectation for the full year now?

First, for CapEx. In the first half of this year, it reached US$1.4 billion, and for the full year, we forecast it will remain around US$3 billion.

And depreciation?

Depreciation is roughly RMB 0.05 to RMB 0.06 per watt, translating to approximately RMB 55 million to RMB 60 million for the second quarter.

Okay. And the final question is on the polysilicon business. As you know, the polysilicon gross margins are right now in excess of 70%. Even though they will come down as prices decrease, the expectation is that the polysilicon business will maintain gross margins around 35% or 40%, much higher than the module business. Canadian Solar has expressed an intention to get into the polysilicon business. Do you have any thoughts about getting into the polysilicon business yourselves?

Polysilicon has been a bottleneck in the last two years. However, next year, the supplies should be vastly improved, and prices are expected to trend downward. We don't expect polysilicon to serve as a bottleneck for our business moving forward. Our supply chain team is working on partnerships with leading polysilicon producers and designing long-term supply contracts. We do not currently plan to enter the polysilicon business ourselves.

Okay. And my final question is regarding storage. Can you provide an update on your activities in the storage space? What sort of orders, revenues, and feedback are you receiving from the marketplace?

Well, the storage business is still in its early stages. Therefore, we believe it is not the right time to discuss it. We will share our strategy and plan once they are ready. Thank you for your question.

Next question coming from Brian Li from Goldman Sachs.

This is Grace on for Brian. Just a quick question on margin expectations. Given the elevated polysilicon pricing and the power control in Sichuan, which may impact your utilization rate, how should we think about your gross margin in Q3 and also for the next couple of quarters?

The gross margin is expected to expand slightly in the coming quarters. We do face elevated polysilicon prices and power cuts in Sichuan; however, our TOPCon module cell capacities are operating excellently and will contribute more to our revenue with higher gross margins. Therefore, we are confident that margins will expand in the second half of the year compared to the first half.

Okay. Understood. And then on your OpEx, your OpEx increased significantly in Q3. I assume this is partly due to TOPCon. You mentioned that TOPCon will be very minimal in Q3. Could you discuss your OpEx expectations in the second half?

Regarding operating expenses, given we expect higher shipments in the second half, we anticipate that operating expenses as a percentage of revenue will decline slightly in the latter half of the year.

At this time, there are no further questions. So that does conclude our second quarter conference call. You may all disconnect now. Thank you so much, everyone.