JinkoSolar Holding Co., Ltd. Q1 FY2023 Earnings Call

Thank you, operator. Thank you everyone for joining us today for JinkoSolar's first quarter 2023 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, if required under the applicable law. It is now my pleasure to introduce Mr. Li Xiande, Chairman and CEO of JinkoSolar Holdings. Mr. Li will speak in Mandarin, and I will translate his comments into English. Please go ahead, Mr. Li.

We are pleased to deliver year-over-year improvements in module shipments, total revenues, and gross margin. With polysilicon prices being volatile in the first quarter, we adjusted our supply chain strategy to effectively control our costs. Meanwhile, the ratio of N-Type product shipments approached nearly 50% of our total shipments due to their high efficiency and our strong global marketing network, which partly contributed to the improvement of our profitability. Gross margin was 17.3%, compared to 15.1% in the first quarter of last year. Our profitability in the first quarter remained under pressure from margin costs in the U.S. market. We have proactively taken measures to address this, and we have seen the efficiency of customer clearance and the size of our module shipments to the U.S. market gradually improve recently. As we continue to make effective progress, we expect our shipments to the U.S. market to gradually increase in the coming quarters. Recently, our majority-owned principal operating subsidiaries have successfully issued convertible bonds in the principal amount of RMB10 billion to strongly support the expansion of our highly efficient capacity. Growth in PV demand in the first quarter remains strong despite uncertain factors. The Chinese market saw a mix of prices of PV projects and delays in PV projects from 2022. The new installations of PV reached 33.7 GWac, an increase of 154.8% year-over-year. As a result, the cumulative installations of PV have surpassed that of hydropower for the first time, making PV the second-largest power source in China. In addition, the export of solar cells and modules from China to overseas markets remains strong in the first quarter. Total overseas shipments of modules and cells reached US$13.1 billion in the first quarter, an increase of 50% year-over-year. Since the second quarter, as pricing gains between different segments along the supply chain have stabilized, with the prices of polysilicon starting to decrease moderately, the current module prices have become attractive for the economies of PV projects. We believe that polysilicon price declines will stimulate large market demand as more production volumes are gradually released during the year. The top manufacturers are expected to increase their market shares thanks to stronger supply chain management, market footprint, and competitiveness of their R&D and products. We are optimistic about global market demand and the opportunities brought by new technologies in 2023. We will continue to invest in R&D and advanced N-Type capacity to enhance our N-Type leadership in terms of mass production capabilities, product performance, and cost while exploring the PV plus areas to proactively respond to competition. The second phase of 11 GW TOPCon cell capacity in Jianshan has reached full production, and the average mass-produced efficiency of 182mm N-Type TOPCon cells reached 25.3%. We have also further improved our N-Type ecology chain, constantly enhancing our competitive advantages in N-Type wafers, cells, and modules, with improved supply chain management for key and auxiliary materials, iteration of core technologies, and process improvement. As our technology, product performance, and cost are continually improving, we expect to maintain our leading position in the industry. Recently, we were ranked in the highest AAA category in the Q1 edition of PB tags, module bankability report, a recommendation by the industry recognizing our advantages from outstanding manufacturing finance and technology. By the end of the first quarter, the accumulated N-Type module shipments extended to 16 GW, providing support for hundreds of projects globally in the past year. In January this year, we launched the Second-Generation Tiger Neo panel family. The model efficiency of the upgraded Tiger Neo family of 445 Wp for 54 cells, 615 Wp for 72 cells, and 635 Wp for 78 cells reached up to 22.27%, 23.23%, and 22.72% respectively. Meanwhile, we increased investments in the energy storage business, furthering its development, and continuously provided our clients with highly efficient, reliable, and safe solutions at competitive costs related to clean energy transformation. In conclusion, future compensation will be based on comprehensive strength, and we are confident in our ability to further increase our competitiveness and profitability in the global market with our continuously improved global industrial chain and our N-Type technology and products. Before turning it over to Gener, I would like to go over our guidance for the second quarter and the full year of 2023. By the end of this year, we expect to mass produce N-Type cell efficiencies to reach 25.8%, and high-efficient N-Type cell capacity to account for over 70% of our total solar cell capacity. We are confident we will achieve our module targets at the beginning of the year of approximately 60% of total module shipments being N-Type. We expect the module shipments to be in a range of 16 GW to 18 GW for the second quarter of 2023.

Thank you. Total shipments in the first quarter reached about 14.5 GW, which was up 9% year-over-year. From a regional perspective, China and Europe accounted for over 60% of their total shipments. Shipments to the Chinese market increased more than 40% on a year-over-year basis, while the European market grew over 50% year-over-year. In addition, emerging markets like Latin America, and the Middle East and North Africa also made a remarkable contribution. Recently, the industry has seen prices gradually return to a normal level, and domestic utility-scale PV projects have started to accelerate their invitations. The current module price is acceptable to clients, supporting them in achieving their predetermined installation targets with stable order pace. We expect that the decrease in industrial supply chain prices will drive the growth of utility-scale PV demand, especially in the Chinese market. The European PV market has grasped potential, and the decline in industrial prices is expected to further drive demand for distributed and utility-scale power stations. The U.S. market has shown robust demand but some utility-scale power station projects may face delays until 2023 due to price factors and supply constraints, with an expected 40 GW of PV installed capacity in the U.S. by 2023. Over the past year, we have continued to improve our risk management capabilities and supply chain visibility system, maintaining close communication and coordination with customers, suppliers, and other parties to jointly promote the efficiency of customer clearance in the U.S. Based on our experience in supply chain construction and marketing network layout, we are committed to meeting our customers' needs by delivering outstanding products and services. Regarding the product pipeline, we achieved a shipment volume of nearly 60 GW in the first quarter, maintaining a competitive premium. China, Europe, and emerging markets have become the main contributors to shipments. At the same time, we observed that Tiger Neo is accelerating its penetration in markets like Asia. Recently, we were awarded the title of number one market brand portfolio for 2022 by Taiwan. Tiger Neo not only has advantages such as high conversion efficiency and high power output but also leads the industry in terms of degradation rates, temperature coefficient, and weak light performance, meeting customer demand for households. With the release of N-Type capacity and continuous improvement of Tiger Neo product performance, Tiger Neo's penetration rates and premium are expected to continue to lead the market. In terms of business distribution, the market accounted for more than 40% in the first quarter. Considering the standard demand for existing scale power stations this year, we expect the proportion of distribution to be around 14% for the whole year. In 2023, our total visibility exceeded 60% with the majority being overseas orders. As raw material costs decrease, we expect the module market price to experience a slight decline. Our pricing will fluctuate within a reasonable range in line with market trends. We will continue to focus on customer clearance approaches to provide high-quality products and services to our customers. At the same time, we will adjust our marketing strategy flexibly according to market conditions. With that, I will turn the call over to Pan.

Thank you, Gener. We're pleased to report a year-over-year increase of about 73% in our shipments for the first quarter, driven by strong demand from global markets. In response to the polysilicon price decline, we adjusted our procurement strategy and achieved significant year-over-year growth in key financial metrics including revenue, gross profit, and operating margin. Let me go into more details now. Total revenue was $3.4 billion, an increase of 58% year-over-year. Gross margin was 17.3%, compared to 14% in the fourth quarter and 15.1% in the first quarter of last year. The sequential and year-over-year increase was mainly due to the decrease in the cost of polysilicon and the increase in shipments of N-Type modules, which have a premium compared to the P-Type modules. Total operating expenses were $412 million, down 21% sequentially and up 25% year-over-year. The sequential decrease was mainly due to a decrease in shipping costs for solar modules and a reduction in impairment loss on property, plant, and equipment. The year-over-year increase was attributed to an increasing loss on disposal of PPE and an increase in demurrage charges. Total pricing expenses accounted for about 12% of total revenues, compared with 14% in the fourth quarter and 15% in the first quarter last year, improving year-over-year. Operating margin was over 5% compared with 2% in the fourth quarter, excluding the impact of changes in fair value of notes, changes in fair value of long-term investments, and our share-based compensation expenses. Adjusted net income attributable to JinkoSolar Holding Company Limited's ordinary shareholders was over $121 million, more than double sequentially and 1.5 times year-over-year. Moving to the balance sheet, at the end of the first quarter, our cash and cash equivalents were about $1.5 billion, down from $1.6 billion at the end of the fourth quarter and compared with $2.7 billion at the end of the first quarter last year. Total debt was about $4.4 billion at the end of the first quarter, compared to $4 billion at the end of the fourth quarter last year. Net debt was about $2.9 billion compared to $2.3 billion at the end of the fourth quarter last year, and our total debt profile has improved. This concludes our prepared remarks. We're now happy to take your questions. Operator, please proceed.

Yes, thank you. The first question comes from Brian Lee with Goldman Sachs & Company.

Hi, everyone. Thanks for taking my question. I guess the first question I have was just around the ASP environment. I know you guys have seen some good margin expansion here quarter-on-quarter, which sounds like most of that was driven by the decline in polysilicon cost. So, what's the status of that? How much more leverage do you have to lower polysilicon costs relative to what you're shipping out and your employee base today? And then can you kind of give us a sense of what you expect module ASP trends to look like in Q2, and maybe the back half of the year? We are hearing there's sort of double-digit declines in certain markets for solar panels, so wondering where your pricing strategy is trending for the next few quarters. Thanks.

First of all, regarding the pricing trends. For the market price, some have remained stable in Q1 and Q2, mainly in the first half. I don't see, there are too many differing opinions across the industry about the first half module price. However, for the second half, we have seen some differing opinions based on different expectations. In our opinion, module prices may trend down gradually. We do not expect significant drops over the second half, but rather a steady decline quarter-over-quarter. Based on that expectation, that's how we foresee the market price moving for the rest of the year. I hope that answers your question.

Maybe just I know you made some comments around the U.S. and the market. Can you give us related thoughts around shipping into the country? How are you navigating the UFLPA, and also any thoughts around manufacturing or expanding your manufacturing base domestically within the U.S.?

For the U.S. market side, I think we are closely working with our suppliers to ensure we can provide the documentation needed for the UFLPA. We have successfully done that based on a significant amount of shipments in the last quarters, and we expect that with more experience, we can ship or attain more approvals. Based on our current actions, we are planning to resume shipments in the U.S. market gradually, hoping to return to a relatively stable situation in the next two to three quarters.

Last question for me, I don't know if I might have missed it and maybe you didn't provide it, but can we get what the CapEx was in the quarter, what the free cash flow was in the quarter? And then any thoughts on the financing needs and strategy for the rest of the year to cover the CapEx here? Thank you.

Hey, Brian, this is Charlie. We have completed the issuance of convertible bonds in the Chinese capital markets recently. Second, regarding CapEx, it's in the range of $1.5 billion to $2 billion in R&D focusing on solidifying our leading position in the supply chain, including wafer, cell, and module capacities. We're expecting performance to improve. If you look at Q1 performance, it’s quite good, and we will continue to expect the expansion of gross margins and profitability. Operational cash flows last year were around RMB0.4 billion and are continuing to improve. The financing is already in place and sufficient to meet our needs for the CapEx.

The next question comes from Philip Shen with ROTH MKM.

Everyone, thanks for taking my questions. First one as a follow-up to Brian on the UFLPA question. How many GW have been released thus far in the U.S.? And how many GE have you obtained total?

I think we have significantly improved since Q4 last year in our modules regarding UFLPA compliance. We have achieved a significant amount of module shipments. As for the details, I don't think we have very exact figures, but the most important thing is that looking forward, we believe the mechanism is already in place, and we have very strong visibility capabilities. We expect that quarter by quarter, our segments will gradually improve and hopefully by the third quarter, our shipments to the U.S. will return to normal.

Great. Thanks. So, of the more than 60% of the order book visibility, can you talk about how much of that you expect to go to the U.S.?

This year, the total volume we are planning to send to the U.S. will be around 5% of our total shipments for the whole year. As Charlie mentioned, we are gradually resuming our shipment plans and revenue recognition, but due to logistics considerations and timing, the revenue side won't be too significant. That's why we estimate around maybe 5% to 25%.

So, 5% to 10% of the shipments?

Yes.

Good, thank you. Then our work suggests that the non-China modules can access the U.S. market are roughly 5 GW annually. Does that sound right? And then is it the case that you can smoothly import modules that contain non-China polysilicon now, so there's no issue there at all?

That's a good question. Currently, we are planning to manage our resources for polysilicon strategically. If we rely solely on a single source of polysilicon, it might significantly constrain our supply capabilities for the U.S. market. Personally, I still believe this might pose challenges for U.S. customers as well. Therefore, that's what we are trying to navigate.

Okay, got it. Then shifting back to margins for a bit or two margins for a bit. Can you give us a sense of how you expect margins to trend in Q2 and Q3? Especially given the ASP comments that you had earlier? Do you expect margin expansion in Q2 and Q3, or perhaps the margins to compress a little bit with some risk to backup pricing? Thanks.

I believe margins will gradually improve as we advance. That's what we believe. Because our new technology, the Tiger Neo, is highly appreciated by the end market and creates added value for customers. Based on the additional value-sharing business models, we are certainly confident about improving our gross margins over time.

One last question related to U.S. expansion. I think Brian asked about it. I just want to check in to see if you can give a little more color on the timing of that. My guess is you have to wait for the domestic content rules to come out. What do you see for U.S. module pricing trends? Do you think it will improve between now and 2025?

Sorry, I think we missed the last question. I will briefly mention it, and then we can pick it up next quarter. Regarding U.S. expansion, we have confidence and the time to do it, but we are waiting for further clarification on the policy and/or approval, which we are closely monitoring. Hopefully, we can obtain some clarity in the coming weeks or months. Thank you. Let's take the next question.

The next question comes from Alan Lau with Jefferies.

Thanks a lot for taking my question. And congratulations on the really great results and the margin expansion. My first question is, I would like to know how much did the additional charges related to the detention in the U.S. impact margins? And if there are going to be zero going forward, then how much would that contribute to margin expansion?

In the first quarter, we had roughly RMB300 million to RMB400 million in demurrage and additional storage costs due to U.S. shipment situations. This roughly translates to a 1.5% to 2% gross margin impact. We're expecting this impact to decrease to about 25% of Q1 levels, which will translate to at least a 1% gross margin expansion.

So, another question is, I would like to know how much are the prices for polysilicon purchased from Wacker? Is it going down at the same pace as polysilicon prices in China, or is it going down a bit slower?

It's very confidential, but it's simply a market phenomenon. The poly out of China primarily serves the U.S. markets, and there's already a short supply situation for poly outside of China. The prices tend to be sticky and different situations exist as polysilicon supply in China is more abundant. So, it's kind of a varying pricing situation depending on supply and demand.

Understood. So, is it possible that if U.S. customs accepted some of the wrong way polysilicon, your shipments to the U.S. would experience even higher margins because you would revert to the cheaper polysilicon?

It really depends on market principles – supply and demand. If we secure additional approval for non-China polysilicon, it would ease our situation. However, how far it goes will depend largely on the balance of supply versus demand. We will see.

Thank you, that’s clear. My last question is in relation to Southeast Asia or capacity expansion potential. So, what is the latest plan in terms of the Southeast Asia capacity expansion?

Currently, we have a 7 GW integrated capacity and plan to expand it possibly to 11 GW to 12 GW by the end of this year.

That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.