JinkoSolar Holding Co., Ltd. Q3 FY2022 Earnings Call

Hello, ladies and gentlemen, thank you for standing by for JinkoSolar or Jonko Inc Third Quarter 2022 Earnings Conference Call. At this time all participants are in a 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 like to now turn the meeting over to your host for today’s call to Ms. Stella Wang, JinkoSolar’s Investor Relations. Please proceed Stella.

Thank you, operator. Thank you everyone for joining us today for JinkoSolar’s third 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 the 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 will all be available to answer your questions during the Q&A session that follows. Please note that today’s discussion will contain forward-looking statements, made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks is included in JinkoSolar’s public filings with the Securities and Exchange Commission. JinkoSolar does not assume any obligation to update any forward-looking statements, except as required under 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 are pleased to announce better-than-expected results for the quarter, despite challenges such as rising raw material prices, power rationing at our manufacturing facilities, and an earthquake in Sichuan province, where one of our facilities is located. Total solar shipments in the third quarter reached approximately 10.92 gigawatts, doubling year-over-year. Total revenues were $2.74 billion, reflecting a 127.8% increase year-over-year. We have continued to improve our supply chain management to enhance cost control. With our newly invested N-type cell capacity, we further optimized our cost structure as shipments of competitive N-type products significantly increased compared to the second quarter. Profitability in the third quarter improved sequentially, with gross margin at 15.7%, up from 14.7% in the second quarter. Net income was $77.3 million, marking a 183.1% year-over-year increase. Excluding the effects of convertible senior notes and share-based compensation expenses, adjusted net income was $60.1 million, up 16.1% sequentially. Since the beginning of the fourth quarter, polysilicon capacity has gradually increased, and demand in the China market remains strong, driven by non-hydro renewable consumption. Progress is being made in utility-scale projects and in a liberalized power market. Combined with demand from the distributed generation market, we anticipate total installations in China to exceed 40 gigawatts in the fourth quarter. Although supply has recently increased, strong demand is keeping polysilicon prices steady at a high level, with module prices remaining stable. With significant polysilicon capacity set to come online in 2023, we expect raw material prices to decrease and stimulate pent-up demand. We will pursue growth opportunities in the market by executing our globalization strategy and increasing resource investment in key markets. Additionally, we will manage inventory turnover effectively through our efficient supply chain. With our extensive global industrial chain and reliable products, we are confident in our ability to boost both shipments and market share next year. We have made further progress in efficiency improvements and cost reductions for N-type products, aided by our R&D team's ongoing work, building on our existing knowledge and mass production experience. During mass production, we reached full capacity of 16 gigawatts with efficiency at 25%, and we are closing the cost gap between N-type and P-type products. Recently, the maximum solar conversion efficiency for our 182 monocrystalline silicon TOPCon cell reached 26.1%, surpassing the previous record of 25.7% set in April. Coupled with process optimizations using SD technology, we expect mass production efficiency to further improve next year. In terms of capacity release and higher client acceptance, N-type module shipments were around 3 gigawatts in the third quarter, reflecting a nearly 160% sequential increase. We are committed to sharing the benefits from increased power generation with our clients. As our N-type products gain popularity, we are confident in our ability to lead the industry with improved market penetration and cost-effective performance. The second phase of our 8-gigawatt TOPCon cell capacity is progressing well, and the 11-gigawatt TOPCon cell capacity that began construction in the third quarter is expected to start production by the end of this year. The launch and ramp-up of new capacities will further optimize our integrated capacity structure and reduce blended costs. Based on our operational strategy and market demand, we adjusted the pace of capacity expansion for wafer sales and modules. By year’s end, we anticipate our newer production capacity for mono wafer solar cells to reach 65 gigawatts and for solar modules to reach 70 gigawatts. Before handing it over to Gener, I would like to share our guidance for the fourth quarter this year. We expect module shipments to be between 13 gigawatts and 15 gigawatts for the fourth quarter of 2022. We are optimistic about demand growth in the global market and committed to providing optimal solutions to our clients through technical innovation and reliable products. We forecast that total module shipments for 2022 will be between 41.5 gigawatts and 43.5 gigawatts.

Thank you, Ms. Li. Despite short-term headwinds such as power rationing measures and the earthquake, total shipments in the third quarter were 10.9 GW, of which approximately 95% were module shipments, doubling year-over-year on the back of strong global demand. Specifically, the markets, China, Europe, and the emerging markets contributed remarkable incremental growth. Solar module shipments to the Chinese market during the third quarter increased five times year-over-year, while the emerging markets grew approximately 180% year-over-year, and Europe over 60%. With a rush of installations in China in the fourth quarter, the Chinese market is expected to contribute an absolute majority, and we expect our penetration in the Chinese market to further increase. Demand was strong in Europe; however, the low logistics turnover, inflation, and the labor shortage during holidays remain short-term challenges. We accelerated inventory turnover through proactive coordination with logistics supply as well as flexible measures and trade terms to support energy transformation in the European market. In terms of the product, we enhanced the promotion and sales of our high-efficiency N-type Tiger Neo modules, leveraging our global marketing network layout and a localized marketing team. In the third quarter, shipment for Tiger Neo modules approached approximately 3 gigawatts, an increase of 160% sequentially, and acceptance from various client types and markets for the Tiger Neo further increased. The premium works in line with our expectations. We have been establishing a business model to share the benefits from the gain in power generation by Tiger Neo modules with our clients and are committed to providing them with solutions that continuously bring down LCOE. With the gradual release of N-type capacity and increasing acceptance for Tiger Neo, shipments and the penetration for Tiger Neo continued to grow in the fourth quarter, and the shipment proportion for Tiger Neo is expected to be about 60% of our total shipment in 2023. For business layout, demand remains strong in some markets, including Europe and emerging markets in China, and our business accounted for nearly 60% in the third quarter, about 10% higher than the last quarter. We expect the market demand to continue to increase in 2023, up over 30% year-over-year. Mainstream markets, including China, Europe, and the U.S. are expected to contribute to the growth under the backdrop of high prosperity in end markets. We will stick to our strategy for global market layout, focusing on the Chinese market while enhancing attention to and explorations in emerging markets. We will strive to achieve around 50% growth in shipments next year compared to 2022 and maintain a solid position for global competitiveness. With that, I will turn the call over to Pan.

Thank you, Gener. We are pleased to report another quarter of improved financial results. Total shipments doubled, and total revenues increased 128% year-over-year as a result of strong demand globally, thanks to our further optimized integrated capacity structure and shipment mix. Key metrics including gross margin, operating margin, and net margin all improved sequentially. Short-term headwinds such as power rationing measures and an earthquake, as well as new capacity ramp, had some impact on profitability in the third quarter. We believe that as these negative factors gradually recede, we will see a gradual increase in profit contribution from the additional release of N-type capacity and an increase in shipments, and the proportion of N-type products. Let me go into more details. Total revenue was about $2.7 billion, up sequentially from a significant increase year-over-year. Gross margin was 15.7% compared with 14.7% in the second quarter this year and 15.1% in the third quarter last year. Total operating expenses were $423 million, slightly down sequentially and up year-over-year. The year-over-year increase was attributed to an increase in shipping cost for solar modules. Total operating expenses accounted for 15.4% of total revenues in the third quarter, down from 16.2% in the second quarter this year and up from 13.8% in the third quarter last year. Excluding the impact from a change in the fair value of notes and the share-based compensation expense, adjusted net income attributable to JinkoSolar Holdings ordinary shareholders was $16 million, improving sequentially. During the quarter, we continued to optimize our foreign exchange hedging. We realized the net foreign exchange gain, which included changes in the fair value of foreign exchange derivatives of approximately $73 million in the third quarter compared with the net gain of $34 million in the second quarter of 2022. Moving on to the balance sheet. At the end of the third quarter, the company had cash and cash equivalents of $2.1 billion, slightly down at the end of the second quarter this year and up from $1.1 billion at the end of the third quarter last year. Accounts receivable turnover days were 69 days in both the third quarter and the second quarter of 2022. Inventory turnover days were 117 days in the third quarter compared with 104 days in the second quarter this year. Total debt was about $4.2 billion at the end of the third quarter, up from $3.8 billion. Net debt was about $2 billion compared with $1.7 billion at the end of the second quarter this year.

Thank you. The first question comes from Brian Lee from Goldman Sachs. Please go ahead.

Hi. Thanks for taking the question. This is Grace on for Brian. I guess first one on your capacity. Just given the practice of the inflation reduction as a number of your peers enhance U.S. capacity expansion. So I just wonder what is your strategy there in the U.S. if any and how are you going to fund that and what is the implication for your free cash flow? Thank you.

So you are talking about the IRA, right? The impact on our strategy for capacity expansion?

Yes. Yes.

So, I think from the company perspective, based on the initial assessment of the IRA Act, we believe this is very positive, and the incentive is very significant and makes production—local production in the United States relatively competitive. We are aware the details of the IRA are going to be released in the coming year. So we are closely following up on the details. And as we have a very small module capacity in the US, 400 megawatts, we are optimistic about the release of detailed IRA, and it is possible we expand our module capacity in the United States. However, at this stage, we are still in the evaluation stage.

Okay fair enough. And then maybe switching gears to your growth margin encouraging to see you print 15.7% this quarter. You mentioned it is helped by the module, the TOPCon module shipment. So I just wonder how much of your margin is helped by the N-type shipment module versus the current, because I assume a lot of your operations are in China. And also can you talk about your margin and ASP expectation for next quarters? Thanks.

Yes, we improved the margins slightly, I think, in this quarter, quarter-over-quarter. We delivered the 3 gigawatts N-type TOPCon modules, which account for around 30% now our total shipments in this quarter. The gross margin for the N-type is relatively higher than the P-type; I think it is around 2% from the gross margin perspective. On top of that, the prepared remarks by David Knee in the third quarter we did face the power outreach in provinces, which had some negative impacts. So, overall, we think the N-type we are leading the industries from the product perspective, as well as the cost perspective. Our penetrations and time will continue to improve quarter by quarter, which will help us to drive the probability increase, including the gross margin.

Okay, thank you. And can I squeeze in one more housekeeping question? You increase your module and wafer capacity, so what is your CapEx plan for 2022 and what was your G&A in Q3? Thanks.

Thank you for the question. The CapEx for this year we still keep on the US$3.

Okay, thank you. And the G&A current Q3.

So your question is G&A is the actual number or percentage or what is your specific—

Thank you for the question about G&A expenses. It takes about 4% to 5% of the total variance.

Thank you.

The next question comes from Philip Shen from ROTH Capital Partner. Please go ahead.

Hi everyone, thanks for taking the questions. As a follow up to some of the questions, I was wondering if you could talk about CapEx expectations for 2023. By the end of 2023, how much wafer cell and module capacity do you think you will have? Thanks.

By the end of this year, we have 65, 55, 20-gigawatts. So I think we have sufficient capacities, and we are in a good position to deliver our results next year. And we will continue to evaluate the market trends for next year. I think the markets are optimistic for next year. Our investment will continue to focus on the N-type, and module capacities next year to build sufficient capacity for both next two years according to our shipment guidance. So we are going to release the guidance capacity expansion next year in the next quarter. The key focus will continue to be on N-type TOPCon cell and module capacities.

Okay, thanks, Charlie. What is after TOPCon? I’m imagining you guys are already thinking about it with 60% N-type next year. Do you think you are going to move on to heterojunction or have you decided on the technology roadmap beyond TOPCon? Thanks.

No, we are leading the TOPCon technology and capacity on the product. Let’s say the increasing fees. We believe this gives us significant room to continue to deliver further high-quality products based on the N-type TOPCon technology. Our R&D teams have released laboratory tests, and the efficiency we reached 26.1%. Our target for mass production efficiencies by the end of next year will be over 25.7%. We have a technology roadmap, and we strongly believe the N-type TOPCon will dominate the next markets in the next two or three years. So TOPCon is our focus. From an R&D perspective, we closely monitor the new technology but we strongly believe that TOPCon is a trend.

Great. Okay, thanks again. In terms of the U.S. market, the UFLPA enforcement and the CBP process that you are going through, I was wondering if you could talk about give an update as to where things stand? My understanding is the process has come to a close and you are waiting on a decision. So how much longer do you think we need to wait, and also, let’s say you get released soon. Does that mean you can freely ship into the U.S., or do you think you have to secure something like an advanced letter of ruling to be able to freely ship into the U.S.? Thanks.

Yes, we did a lot of work on the U.S. LPA and the standards were very broad and challenging for the traceability systems. We prepared documents and had several rounds of discussion and communication with the PV. We believe our documentation is ready and we are waiting for the final feedback from CBP. We are optimistic about the results, but the detailed timing is still uncertain. However, I think it is not far away. For the second question, after the release of the detained modules, we will try to improve our internal efficiencies and continue to communicate with CBP to ensure that the bottleneck will be resolved. There are a lot of internal and external factors, including capacities from CBP that will impact the increasing fees. So we don’t know how we will be with increasing associates in the future. But after the learning curve in the last two or three months, we think it will become more and more smooth.

Okay. Charlie, can you talk about how many gigawatts of supply have been impacted for you since the first detention at the end of June between then and now end of October? Let’s say it continues through the end of the year. What kind of number can you share? How many gigawatts? I know that the detained modules are smaller. I’m talking about total impacted customers. Are we talking about 2 gigawatts or maybe even more? Thanks.

You are right. The detained modules were small, but because of the delayed process, it is going to have a rolling impact on shipments to our U.S. customers. We estimate this year, our shipments in the U.S. will be around 5%, which is lower than the original planning from the beginning of this year, which was about 10%. So that is roughly a significant impact.

Okay. 5% of the 44 or 40 plus gigawatts, roughly 2 gigawatts. So correct me if I’m wrong, of course. And then one last question for me. In terms of the growth for next year, I think Gener, you talked about a 50% growth that matches with your year-end module capacity roughly. Can you talk about the geographic mix you expect? How much, for example, are you expecting for the U.S. in 2023? And then what do you think is the rest? How much will China be, Europe, and emerging markets?

So, Gener, would you like to take the question? I think Gener is on a trip. Let me answer the question. So incrementally, we are thinking next year China will dominate, taking maybe 40% or 50% from the incremental value, volume, and the second one is the U.S. and the European markets. However, U.S. demand is not a concern; it is purely the supply issues, including the potential impact from the U.S. LPA. We believe that if everything goes smoothly, maybe there will be a demand for over 30 gigawatts for module installations. This year, polysilicon prices have been very high, causing module prices to rise, which has delayed the installation of a lot of utility-scale projects. Next year, with the elimination of the polysilicon bottleneck, production volume will significantly increase and provide a good timing for utility-scale developers to purchase modules and connect to the grid.

Great, thanks. So just to put numbers on it, let’s say China is 40% to 50%. Do you think the U.S. is 15% to 20% and similar with Europe?

Yes, from the incremental perspective, I think you are talking about the incremental, right? We believe the total market size next year will be larger.

I’m talking about the—not necessarily incremental. Just of the 65 gigawatts, how much would be U.S.? Maybe 15% or 5%. I mean, assuming you are able to flow the modules freely. Thanks.

Okay. Let’s say the total size this year may be 250 gigawatts for installations. Next year, maybe 320 or some 350 gigawatts. We believe China will take around 35% to 40% of the market next year, and the U.S. will take around 10%. Europe will be around 20%.

Thank you for taking my question, and congratulations for the extremely good results. So we would like to know what is the outlook for the gross margin in the next quarter? And also, as the company has maintained 10 gigawatts of anti-shipment, can I expect there will be around 6 gigawatts to 7 gigawatts of TOPCon shipment?

Yes. We have capacity, I think by the end of the year, 35 gigawatts. So you are right. If you do the calculations quarter-by-quarter, our shipments for Q4 will be around 5 gigawatts to 6 gigawatts, and Q1 next year will be a little bit higher. Regarding gross margin, it is because of the N-type taking more percentage in Q4. I believe there’s a potential for gross margin to continue to expand.

Thank you. And then, another question is, the company has realized around 3 gigawatts of TOPCon in Q3, and has mentioned it has reached the expected premium. So is it around RMB0.10 of premium for the 3 gigawatts that has been sold in Q3?

The price premium is around RMB0.07 to RMB0.08. Considering the cost differences and the profitability per watt basis, the N-type is relatively higher than P-type by RMB0.4.

Understood. That is quite a lot, actually. In terms of net profit, right? RMB0.04 higher.

Yes, right. RMB0.04 per watt.

Yes. Thank you. And so I have noted that the company has raised the TOPCon shipment in 2023 from 50% to 60%. What makes you raise the guidance, and should we expect a higher net profit for next year because of this increase?

No, we will continue to invest in N-type TOPCon module capacity next year. Based on our initial evaluations, we think we will be able to deliver around 60% N-type TOPCon modules next year. With relatively more TOPCon modules mixed in, we think profitability will increase due to this higher mix.

Thank you. And I think my last question is regarding the partnership with the equipment provider, Ottawa. So did JinkoSolar—let me put it this way. Has JinkoSolar sort of benefited from the partnership with them by having more competitively priced equipment?

In terms of the module equipment producer plan? Yes, we also invested as a minority interest in the business, and I think the volume is not very big, and it majorly serves for the R&D purpose. We want to have more development on technology and align with our suppliers to make the equipment more advanced, particularly for the impact of the N-type wafer production.

Understood. So thanks a lot. And once again, congratulations to the company, and I will leave it there. Thanks.

Thank you.

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

Hello. I have two questions. One is on shipping costs. We know that shipping costs have come down significantly in the last three to four months. Actually, they are close to the levels they were before COVID started. I’m wondering when we will start to see that in your numbers. How soon will those be reflected? And when that gets reflected, can we expect that shipping costs can go from 6% of revenues to maybe 3% of revenues? So that is my first question.

Yes, you are right. The global economy is weak, and shipment costs are resonating to amounts. The indexes have stopped a lot quarter-over-quarter and year-over-year, which will be very positive starting from next year. For this year, starting Q4, I think the impact is also—not so significant, because we have long-term arrangements with companies, as the long-term contract prices are really below the market price. With the market price suffering a lot, the expectation for next year continues to be a backdrop and lower standards compared to a couple of years ago. We will renegotiate the long-term arrangements for next year, which is going to impact positively.

Okay. And Charlie, the second question is about polysilicon cost. Can you give us your best guess or sense right now on when you expect polysilicon costs to start to come down, and what rate they will come down in 2023? For example, what do you think polysilicon costs might be by the end of 2023? Also, related to that, what is your plan for sharing the benefit of this cost reduction with your customers? You had mentioned in the last call that on the N-type you are sharing the benefit of the N-type 50/50 with your customers. Are you planning to share the benefit of polysilicon cost reduction also 50/50 with your customers?

This is a very complicated question, but we strongly believe the trend is there. A lot of the polysilicon capacity has been ramping up in the last two to three months, and the volume will increase month-over-month dramatically. Next year, there will be sufficient polysilicon capacity to support total demands. Currently, the polysilicon price is flat, and we see potential for the price to be in a downward trend starting from December, but we are not sure about the exact timing. From our perspective, we try to have more signed orders for next year, particularly with our strategic customers, some of whom may have intentions to have a price adjustment mechanism. We think we can approach negotiations case-by-case with different customers.

So can you give us an overall sense then? As the price of polysilicon comes down by X number of cents, on an overall basis, how much of that you would pass on to the customers and how much would you keep to improve your own gross margin?

It is not a very simple case. Some customers have fixed prices, and some have variable prices. Some are indexed to the market price, while some are not. Each case is different.

Hello management. I would like to know what percentage you expect your fourth quarter shipment will be shipped to China, because I can see that in the third quarter it is around 40-something percent, maybe close to 50%. So what do you expect in the fourth quarter?

China will take a very large market in the fourth quarter. By the end of the year, a lot of utility-scale developers will have strong pressures and intentions to start and connect the grid. We estimate Q4 will see the Chinese market account for about 50% to 55%.

Okay. So do you think that the domestic increasing public control could be a challenge or have you already well prepared for these kinds of domestic SOE developers for their project demands?

There are some challenges because of COVID situations and I think the challenge is logistic perspective, but we are seeing some improvement in some regions. So we think there is sufficient time by the end of this year to deliver the modules as scheduled.

Okay, thank you. The next question is about N-Type TOPCon product. In the third quarter, where did you ship those products? Where was the major market for this product? Was it in Europe, the U.S., or mainly in the Chinese market?

The majority is in Europe, and we also have shipments in China, Latin America, and Asia Pacific that have been significant.

So basically, maybe most parts are still in China, and then basically everywhere you have some product distribution for global users.

No, it is not product demos. We are promoting the products starting from last year, and there have been significant shipments to different markets. The European market is very large, followed by China, Latin America, and Australia, etc.

My final question is regarding the upstream supply of materials other than polysilicon. Do you think that these material supplies could be a bottleneck going forward in 2023 for your internal wafer production?

So what kind of bottlenecks of materials you are talking about?

What specific material bottlenecks are you referring to?

Okay. Thank you. This has been discussed for a long time. It is a little bit tight for the particular material, but it can still support over—we believe 500 megawatts. There will be over 90,000 tons of capacity expansions next year. From a technological perspective, we can use both domestic produced materials, other than recorded materials. It is more about the new hybrid, let’s say, from an inflationary cost perspective rather than the volume perspective.

Okay. Thank you. I will pass on.

We have no further questions. There are no more questions.

Okay. Thank you, everyone. So we will now end the call. Thank you. Good night.

This concludes today’s call. Thank you all for your participation. You may now disconnect.