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JinkoSolar: Ignore The Market And Buy The Stock

  • JinkoSolar results and guidance are per our expectations and well above Wall Street expectations.
  • YieldCo market concerns and ITC concerns should not impact the stock.
  • At forecast $5.50 EPS, the stock is now trading at a bear market multiple of less than 4 and is a screaming buy.

JinkoSolar (NYSE:JKS) announced Q2 2015 earnings today. Module shipments came in at 913.4 MW, above the mid-point of 850 to 900MW guidance range.

While coming within guidance range might be disappointing to investors accustomed to the company outperforming its guidance, it should be noted that the relative softness came primarily from shipments to its internal projects. The company shipped only 90.4 MW to internal projects compared to guidance of 100 to 150MW.

It should be noted that the company came in slightly below expectations on this same metric in Q1. While project delays are very common in this business, certain amount of vigil on this metric is prudent after a two quarter miss. At the same time, it should be noted that the project assets are being built to hold and have no significant impact on the company's near-term earning metrics. Any concern here would be not about current quarter EPS but about long-term value delivery.

The company's revenues, at US$516.2 million, came in well above the high end of analyst estimates. The 16.4% growth from the first quarter of 2015 is spectacular for a seasonally soft second quarter. Of the peer group, only Trina Solar (NYSE:TSL) is showing similar strong performance.

Revenues generated from solar power projects came in at $28.7 million, a strong increase of 74.2% from the first quarter of 2015. JinkoSolar continues to build on its already strong foundation in this space and connected another 108 MW of solar projects to the grid during the quarter, bringing its total connected project capacity to 725 MW. The company is on track to connect another 400 MW to 600 MW for the year. The corresponding power output from these projects is growing very rapidly (image below from JinkoSolar earnings call presentation) and will start becoming increasingly important to JinkoSolar's shareholders. These revenues accrue at a very high gross margin and we expect them to be a driver for earnings until the company sells these assets or spins them off into a YieldCo.

(click to enlarge)

Just about the only red flag in the P&L had to do with the significantly increased opex. While the opex did rise far faster than revenues, we believe this is mainly due to the dramatically increased shipments to the U.S. We believe the new Malaysia fab also was part of the drag, but management did not break out the related expenses. The company mentioned an increase in R&D, but once again it is not clear how big that component was. All in all, we do not see the increase in this line item as a cause for much concern and expect growth, adjusted for revenues, to trend down in Q3.

Gross margin at 20.7% was more favorable than the company guided and non-GAAP net income was $33.4 million. Non-GAAP diluted earnings per ADS came in at $1.04, well above the consensus of $0.84.

Investors should note that the street consensus for the year is currently at $3.26 compared to our prior estimate of $5.50. With the seasonally soft first half delivering $1.92, we expect the street to revise EPS estimated upwards in a significant way.

JinkoSolar's balance sheet continues to be ugly because of the project business, but we do not see that dynamic changing until the company spins off the project business into a YieldCo or some other project holding entity. As such, given the nature of the project business, we do not see any elements of the balance sheet that are a cause for concern other than the common Chinese company practice of relying excessively on short-term debt.

Just about the only item that could raise eyebrows in the balance sheet is the increase in inventory level but that can be easily explained away with the shipment guidance.

Looking into Q3, the company gave a module shipments guidance of 1000 MW to 1100 MW, which includes 100 MW to 150 MW for its downstream projects. For the full year 2015, the company increased its module shipment by about 700MW (!!) to a range of 4.0 GW and 4.5 GW including 600 MW to 800 MW for its own downstream projects. This guidance is even stronger than the one we predicted last quarter.

On the somewhat negative side, JinkoSolar now appears to have fallen decisively behind Trina Solar in terms of cost reductions. JinkoSolar's in-house cost of $0.42 is now a full $0.03 behind that of Trina Solar. On a blended cost basis JinkoSolar remains ahead of Trina by $0.02 ($0.46 compared to $0.48) but we attribute less importance to this metric than the in-house cost. Trina's gain, we believe, is due to its stronger research and development efforts. We look forward to seeing what steps the management will take to narrow the gap or regain the cost leadership.

In terms of pricing, the company's ASPs have fallen by a penny keeping in line with general solar market trends but downdraft was offset by module cost reductions thus resulting in healthy gross margins. Module prices are expected to stay relatively flat for the second half of the year which we consider to be a great news for the gross margins for all industry players including JinkoSolar.

On the manufacturing front, as expected, JinkoSolar became the first of the Chinese majors to get to U.S. tariff free solar modules with its Malaysian fab ramping up this quarter. We expect U.S. tariff free capacity, affording margins in the 25% to 30% range, to be one of the factors that separates winners from losers in the module manufacturing business and the company, along with Trina Solar, are on the winning side.

Setting aside the exceptionally strong results and guidance, one key investor concern is likely to be about JinkoSolar's YieldCo.

While JinkoSolar does not have a YieldCo, it has been building assets on its balance sheet for a long time and has one of the best project pipelines in China. While JinkoSolar was originally considering a U.S. IPO, we do not believe there is any appetite in the U.S. market for China project YieldCo and find it unlikely that JinkoSolar will a float a YieldCo in the U.S. It is an open question if the company will float an IPO for the YieldCo, if any, in China or a different country.

Regardless of the answer to that question, we believe JinkoSolar has a very unique value proposition with its assets that makes it stand alone when it comes to project assets.

Unlike its U.S. based peers like SunEdison (NYSE:SUNE), JinkoSolar's project come with very high IRRs. Barring adverse government action, these assets will be easy to finance and hold on the balance sheet. The balance sheet may look ugly but JinkoSolar also has shown that it knows how to make deals and raise capital. When it comes to JinkoSolar, we believe it is unlikely that a lack of YieldCo will cause a liquidity crunch situation. For the above reasons, we believe JinkoSolar's risk factors with YieldCo offering are a lot more reasonable and are unlikely to materially impact this company.

Even if there should be cash crunch of sorts, the company is set for substantial tailwinds in the back half of the year due to increasing high margin power revenues, increasing shipments, reducing costs coupled with favorable currency trends from Yuan and Ringgit. Due to these factors, we expect 2015 EPS to be north of our prior forecast of $5.50. However, we are leaving our EPS estimates unchanged given that our view is already a staggering 68% above the current Wall Street consensus.

With current stock price at under $19, JinkoSolar is now trading at less than 4x our forecast 2015 earnings. Note that our EPS numbers exclude any benefit, other than power revenues, from the project side including a YieldCo.

ITC expiration is not a risk to JinkoSolar unlike U.S.-centric solar companies like SolarCity (NASDAQ:SCTY), SunRun (NASDAQ:RUN), and Vivint Solar (VLSR). As such, even if the ITC expiration causes an unlikely worldwide demand shortfall, we expect companies such as JinkoSolar, TrinaSolar, and FirstSolar (NASDAQ:FSLR) to gain at the expense of their higher cost peers.

Given the extremely strong results, solid asset base, and bright future, it is sheer madness that the stock got driven by almost 15% since earnings.

It is hard to find a better bargain than JinkoSolar in the market today. A savvy investor can exploit Mr. Market's madness.

Our Sentiment: Strong Buy

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