JinkoSolar Holding Co., Ltd. Q2 FY2023 Earnings Call

Hello, ladies and gentlemen, and thank you for standing by for JinkoSolar Holdings Co. Ltd. Second Quarter 2023 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Sella Wang, JinkoSolar's Investor Relations.

Thank you, operator. Thank you, everyone, for joining us today for JinkoSolar's second quarter 2023 earnings conference call. The company's results were released early today and are available on the company's IR website 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. Xiande, Chairman of the Board of Directors and the Chief Executive Officer of JinkoSolar Holding Co. Ltd.; Mr. Gener Miao, Chief Marketing Officer of JinkoSolar Co. Ltd.; 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 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. We 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 the applicable law. It's 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 report solid growth as we overcame volatility in slight price fluctuations and market challenges. Thanks to our excellent market network, high-quality products, and our highly effective supply chain management. Module shipments in the second quarter were approximately 17.8 gigawatts, up 36.2% sequentially. Shipments of the competitive N type module were approximately 10.4 gigawatts, up 74.1% sequentially. We are happy and proud to be the first module manufacturer to reach the milestone of shipping 10 gigawatts of N type modules in a single quarter. Besides, our shipments to the U.S. market increased from the first quarter due to lower demurrage charges. Our efforts in supply chain management technology advancements and process improvements also enhanced our profitability. Net income was $180.1 million in the second quarter, up 65.6% sequentially. Adjusted net income was $196.7 million, up 70.5% sequentially. Diluted earnings per ordinary share were USD 0.77, up 48.5% sequentially. Due to the substantial release of polysilicon production volumes and excessive inventory, polysilicon prices declined sharply in the second quarter which also caused some volatility in module prices. As most customers are sensitive to price, they were cautious and slowed down their orders, which, to some extent, affected our module demand. As the lower supply chain prices stabilized in the third quarter, domestic customers started to place orders and major projects were initiated and construction started in China. The lower prices also led to a surge in demand from some overseas markets. We expect production and sales in the PV market to rebound in the second half. More and more players are deploying TOPCon production capacity and tight supply of TOPCon is certain to become the next-gen technology in the industry. However, some of the new entrants experienced product delays and slower-than-expected production and efficiency ramp-up due to insufficient technical know-how and differences in technology and processes, keeping competitive N type production in short supply. As of the end of the second quarter, the mass-produced efficiency of our 182 N type TOPCon capacity had reached 25.5%. This N type power is approximately 580-watt peak, which is about 25 to 30 watts more than P type modules of the same variant. The integrated cost of N type modules remains competitive compared to P type modules. We are confident we will continue to lead in efficiency and cost through technology integration and process optimization. At the end of May, we announced the construction of a major production base of 56 gigawatts integrated wafer cell module capacity in Shanxi, which will become the largest N type-integrated production facility in the industry. Our Shanxi integrated base is another strategic expansion of the production model campaigned by JinkoSolar in the PV industry that will fully demonstrate our advantages in highly efficient technology and products, lower investment costs, and greater operational efficiency as well as intelligent and smart manufacturing capabilities. Meanwhile, we proactively responded to shifts in the global PV landscape by expanding our overseas industrial chain. The 1 gigawatt capacity expansion for N type modules in the U.S. is expected to start production in September this year. So far, we have established an industry-leading overseas industrial chain network with integrated production capabilities from wafer sales to modules with feasibility and excellent product competitiveness. As we continue to invest in N type capacity expansion overseas in the second half, we will reach an integrated capacity of over 12 gigawatts overseas by the end of 2023, with N type accounting for over 75%. We will continuously strengthen and expand our global industrial chain to provide premium and high-quality products and services to our global clients. As one of the largest and most innovative solar module manufacturers in the world, we have always carried out social responsibility and have taken continuous improvement of our ESG management. As a key matter for our sustainable development, in the second quarter, we set up a goal and a roadmap to net-zero emissions based on methods and requirements advised by the science-based targets initiative, actively promoting our global carbon emissions reduction and addressing climate change with concrete actions. With outstanding performance in social responsibility fulfillment, we led the mainstream PV industry in the S&P Global Corporate Sustainability Assessment. We improved our feasibility system and independent third-party audit mechanism to enhance supply chain reliability. Meanwhile, we enhanced our cooperation with leading institutions and professionals in global renewable energy development and joined the International Renewable Energy Agency, sharing best practices and experiences. We are dedicated to making a positive contribution to the sustainable advancement of renewable energy globally. In summary, we are confident in the development of the PV industry. We will continue to enhance our integrated operations and management. We are positive about the long-term prospects of the PV plus energy storage model and will continue to grow our competitiveness by actively developing our energy storage business. Before turning over to Gener, I would like to go over our guidance for the third quarter and the full year of 2023. By the end of 2023, we expect to mass produce the N type cell efficiency to reach 25.8%. We are optimistic that demand will grow as industrial chain prices stabilize and we anticipate our full-year module shipments to be in the range of 70 to 75 gigawatts, with N type modules accounting for approximately 60% of the total module shipments. As demand for N type products continues to increase in the global market, we will continue to invest in N type capacity that is competitive in both technology and costs. We expect our annual production capacity for mono wafers, solar cells, and solar modules to reach 85, 90, and 110 gigawatts, respectively, by the end of 2023, with N type capacity accounting for over 75% of the total capacity. We expect module shipments to be in the range of 19 to 21 gigawatts for the third quarter of 2023.

Thank you, Ms. Li. Total shipments in the second quarter were around 18.6 gigawatts, over 95% of which were module shipments. We are glad that total module shipments in the first half of 2023 exceeded 30 gigawatts, making us the number one in the PV industry for the first half of module shipments. In terms of product mix, N type fiber neo accounted for 58% of the module shipments in the second quarter, a steady increase from nearly 50% in the previous quarter, thanks to its high power output, quality, and reliability. In terms of geographic mix, China and Europe remained the largest regions in the second quarter, accounting for over 50% combined. The proportions of other markets remained relatively stable. Most importantly, we are glad and proud to see both the efficiency of customer clearance and the size of our shipments to the U.S. market improved sequentially, benefiting from our dedicated efforts. As we continue to make effective progress, we expect our shipments to the U.S. market to gradually increase in the second half. For orders and prices, visibility of our order book has reached about 80% for the whole year of 2023, improving compared to the first quarter, with overseas orders comprising the majority. Declines in raw material prices drove module prices lower. Recent prices for our new contracts have fluctuated within a reasonable range, in line with market trends. Tiger Neo retained a competitive premium over P type. With the gradual release of our untapped capacity, we expect the Tiger Neo to accelerate its penetration into China, Europe, and emerging markets in the second half. The proportion of Tiger Neo shipment for the full year 2023 is expected to reach around 60% of our total module shipments and its product strength will continue to lead the industry. Recently, we were awarded the Top Brand PV Europe Cell 2023 by EUPD research. This recognition by our downstream partners not only proves that JinkoSolar is one of the preferred European brands for installers to work with but also reflects our strong reputation and commitment to our customers as a leading supplier and N type TOPCon technology leader. In addition, we are recognized as the 2023 Overall Highest Achiever for the first consecutive year in renewable energy testing centers PV module index report, reaffirming the quality, manufacturability, and reliability of our products. In summary, we are happy to navigate through volatility in supply chain prices and end demand in the second quarter, leveraging our advantage in terms of global marketing network, industrial chain layout, and product competitiveness. Meanwhile, we continued to improve our mechanism to cope with risks and enhance our customer relations and marketing network. As supply chain prices stabilized recently, we are optimistic about the return of demand in the global market for the second half and in the medium and long term, as the economics of solar power become increasingly prominent, the PV market will move forward at a healthy and sustainable growth pace. We expect China, the U.S., Europe, and other developed markets to grow steadily, while emerging markets continue to expand. We are confident we will provide more economic value to our customers with excellent products and services and continue to grow our market share. With that, I will turn the call over to Pan.

Thank you, Gener. We are pleased to report strong financial results in the second quarter, with total revenues, gross profit, income from operations, and net income all reaching historical new highs. Recently, our majority-owned principal operating subsidiary, JinkoSolar Co. Ltd., announced its intention to issue ordinary shares for no more than RMB 9.7 billion to fund the construction of our N type-integrated production facility in Shanxi. This expansion of advanced integrated production capacity will help us continuously improve our cost structure and increase our equity capital, which will also help us improve our capital structure. As we keep enhancing our global industrial chain, marketing network, and product competitiveness, we hope to achieve healthy and sustainable profitability. Let me go into more details now. Total revenue was over $4.2 billion, up 32% sequentially and up 63% year-over-year. Gross margin was 15.6% compared to 14.7% in the second quarter last year. We continue to make good progress in clearing customs in the U.S. market, significantly reducing demurrage charges compared with the first quarter this year. Total operating expenses accounted for 11% of total revenues compared with 12% in the first quarter this year and 16% in the second quarter last year, improving sequentially and year-over-year. Income from operations was RMB 212 million compared with income from operations of RMB 176 million in the first quarter this year and a loss from operations of RMB 43 million in the second quarter last year, improving sequentially and year-over-year. Operating margin was about 5%, flat compared with the first quarter this year and an operating loss margin of 1.5% in the second quarter last year, also improving year-over-year. Net income attributed to JinkoSolar Holdings ordinary shareholders was about $180 million, up 66% sequentially and compared to a net loss attributed to the JinkoSolar Holdings ordinary shareholders of about $93 million, improving year-over-year. Excluding the impact from a change in fair value of notes, a change in fair value of long-term investments, and share-based compensation expenses, adjusted net income attributable to ordinary shareholders was about $197 million, up about 71% sequentially and up 2.9 times year-over-year. Diluted earnings per share were $0.77 in the second quarter, up about 49% sequentially compared to a diluted loss per share of $0.47 in the second quarter last year, improving year-over-year. Moving to the balance sheet. At the end of the second quarter, our cash and cash equivalents were about $2.35 billion, up from $1.48 billion at the end of the first quarter this year, improving sequentially. Accounts receivable turnover days were 79 days compared with 95 days in the first quarter. Inventory turnover days decreased to 17 days in the second quarter from 100 days in the first quarter. Total debt was $4.7 billion at the end of the second quarter compared to $4.4 billion at the end of the first quarter. Net debt was $2.4 billion compared to $2.9 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.

The first question today comes from Brian Lee with Goldman Sachs.

This is Grace on behalf of Brian. I guess my first question is around ASP trajectory. Obviously, we've seen a significant decline in the second quarter, though we have stabilized in recent weeks. At the same time, we're hearing some oversupply in certain areas of the market. So I just wonder if you can talk about the ASP and maybe the margin trajectory moving through the rest of the year and into 2024?

This is Charlie speaking. First, I want to discuss that this year is a significant solar market, and many markets are performing very strongly, including China, the United States, and European markets. We delivered a very strong performance for the first half of the year. In terms of revenue shipments, with the next generation and TOPCon technology, we are leading the industry and have captured about 50% market share. Currently, 50% of our portfolio is from N type products. We believe we will continue the momentum throughout the year. Since N type products offer cutting-edge technology and strong performance for end customers, we see the market continuing to accept N type and anticipate it will dominate. We will maintain a relatively stable supply throughout the next year. Regarding ASP, for the first half of the year, pricing has remained relatively stable, and starting from June, we saw some price adjustments due to polysilicon supply oversupply situations affecting solar module prices. From a mid-term perspective, we believe this presents a strong opportunity for downstream demand to accelerate across various markets. ASP trends are generally in line with the industry. The second half of the year does show a downward trend, but it has stabilized. We believe that thanks to strong installations in China, particularly in Q4, ASP may potentially trend upward. As for profit margins, we are confident in our sales orders for this year, with over 80% already booked, and we are actively planning for next year.

Charlie, that's very helpful. Could you provide your updated CapEx number for 2023? Also, you mentioned the 12 gigawatts for overseas capacity next year. Can you elaborate on the CapEx number and your plans for funding it? You mentioned that the capital raised in China cannot be used in the U.S., so how are you planning to handle that?

Yes, the CapEx for this year is roughly RMB 15 billion. In the first half of the year, we have generated around RMB 5.5 billion in operating cash flows. This year, we estimate over RMB 10 billion in operating cash flows. Additionally, we completed convertible loans in the second quarter, so we have sufficient cash to support the CapEx. Regarding next year, the overseas capacity is projected to be completed by year-end, and we do not foresee any additional cash needs for the 12 gigawatts of integrated capacity covered.

Next question comes from Philip Shen with ROTH MKM.

This is Matt on behalf of Phil. Looking at the U.S. market, there is an expectation in the industry that modules made with Chinese polysilicon not from Xinjiang could be allowed into the U.S., but we haven't really seen that yet. Can you explain what might be causing the delays, and when do you expect non-Xinjiang China polysilicon modules made in Southeast Asia to be cleared by CBP?

For Jinko, we focus on 100% polysilicon sourced outside of Xinjiang to serve the U.S. market. We have been experiencing smooth progress and expect to speed up clearance processes starting from the third quarter. Regarding polysilicon from China, we are unsure but it is possible that it may be delayed due to regulatory matters. However, we have established long-term contracts with Tier 1 polysilicon producers outside of China and are confident we can maintain a steady supply and lead in terms of market share.

Do you think it's possible for non-Xinjiang polysilicon to eventually enter the U.S. market? I'm just curious about your view on that.

I'm not in a position to project on that matter. But from a legal perspective, if you can show traceability, it might be possible; however, implementation from the relevant regulators remains uncertain.

The next question comes from Rajiv Chaudhri with Sunsara Capital.

First of all, congratulations on a superb quarter and for the very strong guidance. One question that hasn't been asked yet concerns the inventory reserves that you took in the quarter. Normally, your inventories tend to increase every quarter because you're growing the business, rising by $200 million to $250 million each quarter. This time, your inventory sequentially decreased by about $200 million. My first question is, is it reasonable to think that the inventory reserve you took was actually around $400 million, which would make sense given the sharp decline in polysilicon prices? Given that at any point in time, you might have quite a bit of polysilicon in your working process, can you clarify if the inventory reserve was in the ballpark of $350 million to $400 million? And that without this reserve, your gross margin would effectively be in the mid-20s for the second quarter?

Hello, Rajiv, this is Pan. Yes, we made some inventory reserves in the second quarter, which indeed impacted our gross margin. As for the exact figures, we don't think this temporary treatment of inventory will be long-term.

Understood. It's obviously a one-time event. My question is, was it in the ballpark of $400 million, suggesting that without the reserve, your true earnings would have been significantly higher?

You mean $400 million is one number. We provided roughly RMB 500 million in inventory provisions. However, we performed well and anticipated the decline starting from June. So we managed inventory tightly, resulting in lower total inventory quarter-over-quarter. Still, we have some orders targeting the residential markets, which tend to remain steady even as adjustments occur in supply chains. Consequently, at the end of the second quarter, we recorded additional one-time inventory provisions, which we believe are not recurring items in the future.

So is it fair to say that without this inventory reserve, the gross margin could have been in the mid-20s, 24% or 25%?

Without that, I think it's in the ballpark of 20%.

Do you expect it to be higher in the third quarter because the rate at which the price of modules is decreasing is slower than that of polysilicon?

We expect to see continued strong earnings because of the N type modules, which have strong earnings-generating power, along with our increased shipments in the U.S. market. So the combination of these factors leads us to expect solid results going forward.

Also, my next question is about the storage business. Did the storage business contribute any revenues in the second quarter? What should we expect for the full year?

Yes, the storage business is expected to become a very important unit for us in the long term—3 to 5 years down the line. However, this year is more of an investment year. We are investing in teams, sales channels, R&D, as well as small capacities. The revenue contributions for this year will not be significant, and we might incur some losses in this business segment. Moving forward into next year, we anticipate it to become a significant high-growth area for Jinko.

So will you hit a few hundred million dollars this year, or not really?

Not this year. I think we won't disclose the specific numbers, but this year is primarily an investment segment, leading to limited revenues. We aim to build our team and operations by the end of the fourth quarter and anticipate a good position going into next year to penetrate the storage market.

Going back to the cost of polysilicon: is it fair to think that the average cost of polysilicon in the second quarter was roughly $0.03 lower than what it was in the first quarter?

I don’t have specific numbers, but in Q1, the polysilicon market experienced a significant rebound and slight month-over-month declines started in June. Therefore, the impact on our Q2 financials was indeed there, considering our inventory turnover.

Is it fair to say that at this point in the third quarter, your average total cost per watt is under $0.15?

We don't disclose specific numbers as it's a competitive advantage, but there has been significant improvement in our cost structure. We expect continued improvements in supply chain management and overall costs moving forward.

First Solar has pointed out that they have many long-term contracts extending up to 2, 3, or 4 years, with prices in the high 20s. Do you think that such pricing at that duration is sustainable based on current market dynamics?

Yes, the U.S. market is indeed generating substantial sustainable growth. The past couple of years saw disruptions, causing tight supplies. Local producers have signed many long-term contracts based on these supply constraints. However, we have overcome such disruptions and are in a good position for growth as polysilicon prices stabilize.

Will you be able to leverage the IRA regarding the production starting with the 1 gigawatt N type product in the U.S.?

Regarding the IRA, we believe it's transparent in its policies and it favors local production in the U.S., but we don’t rely solely on the IRA for our competitiveness. We believe the size of our local production combined with global supply chains positioned us well in the market.

So you expect to benefit from it but aren't counting on it strictly?

Correct. We adopt a conservative accounting approach, providing our competitive edge in the market moving forward.

The next question comes from Alan Lau with Jefferies.

Congratulations on the great results. I would like to clarify the overall impairment reported in Q2. Is it accurate that overall impairment was around RMB 1.3 billion? In the U.S. reporting, around RMB 500 million is recorded in cost of revenue, with the remaining under impairments of long-life assets? Is this understanding correct?

Yes, you are right. It reflects presentation differences across various accounting standards. In the U.S., inventory provisions typically fall within the cost of goods sold, whereas PRC standards may include them under asset impairments.

So if we add back the RMB 500 million of inventory impairment, the gross margin in Q2 was indeed improving compared to Q1?

Correct. You are right.

Regarding the impairment of long-lived assets, these are one-off events, correct? They represent irregular circumstances?

Yes. It is indeed a one-off adjustment to enhance the competitiveness of our assets on the balance sheet.

What is the situation of port charges for the U.S. in Q2? Can you share expectations for Q3 with accelerated product clearance?

In the first quarter, we faced RMB 400 million in port charges for the U.S. operations, while in the second quarter, we were able to reduce that to RMB 200 million. Through Q3, as our modules have cleared customs more efficiently, we expect port charges to be significantly lower.

Understood. What is your expectation for U.S. shipments for the first and second quarters?

U.S. shipments represent about 5% to 10% of total shipments.

With your raised guidance to 70-75 gigawatts, 5-10% would contribute roughly 4 to 7 gigawatts. Is it reasonable to expect similar growth next year?

Yes, that projection aligns with our expectations; we foresee 10% of our total shipments moving toward the U.S. market, potentially yielding over 10 gigawatts depending on supply circumstances.

What is your expectation for U.S. installations next year?

It depends on demand, but we expect robust market demand. It's contingent on ensuring supply is streamlined and compliant with U.S. regulations. We see potential volumes ranging from 30 gigawatts to potentially 50 gigawatts, depending on the supply side.

For polysilicon supply, have you secured supply for the 12 gigawatts? How does that affect your projections?

Yes, we have locked in a majority of the supply needed; our capacity is aimed to support the projected 12 gigawatts, which should allow us to achieve targeted production without issues.

Finally, will expansion in Asia affect your U.S. market share?

Yes, it could amount to around 7% to 9% dilution, but Jinko will still maintain a strong presence in the U.S. market, which accounts for a significant portion of our business, around 58% market holding.

This concludes our question-and-answer session and our conference for today. Thank you for participating. You may now disconnect.