晶科能源 (JKS) 2014 Q1 法說會逐字稿

Thank you for standing by and welcome to the JinkoSolar First Quarter 2014 Earnings Conference Call.

At this time, all participants are in a listen-only mode.

There will be a presentation followed by a question-and-answer session (Operator Instructions).

I must advise you that this conference call is being recorded today, May 27, 2014.

I would now like to hand the conference over to your first speaker today, Sebastian Liu, Investor Relations Director.

Please go ahead, Mr. Liu.

Thank you, operator.

Thank you everyone for joining us today for JinkoSolar's first quarter 2014 earnings conference call.

The Company's results were released earlier today and available on the Company's IR Web-site at www.jinkosolar.com, as well as on the newswire services.

We have also provided a supplemental presentation for today's earnings call which can also be found on the IR Web-site.

On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Arturo Herrero, Chief Strategy Officer; and Mr. Zhang Longgen, Chief Financial Officer.

Mr. Chen will discuss Jinko's business operations and Company's highlights, followed by Mr. Herrero, who will talk about the Company's business strategies, and then Mr. Zhang who will go through the financials and guidance.

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 these 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 laws.

Please be noted that to supplement its consolidated financial results presented in accordance with the United States Generally Accepted Accounting Principles or GAAP, JinkoSolar uses certain non-GAAP financial measures.

The Company believes that the use of non-GAAP information is useful for analysts and the investors to evaluate Jinko's current and future performances based on a more meaningful comparison of the net income and diluted net income per ADS, when compared with its peers and historical results from prior period.

These measures are not intended to represent or substitute numbers as measured under GAAP.

The submission of non-GAAP numbers is voluntary and should be reviewed together with GAAP results.

It is now my pleasure to introduce Mr. Chen Kangping, CEO of JinkoSolar.

Mr. Chen will speak in Mandarin and I will translate his comments into English.

Please go ahead, Mr. Chen.

(Interpreted) Thank you, Sebastian.

Good morning and good evening to everyone and thank you for joining us today.

I'm pleased to report another successful quarter as we record our fourth consecutive quarter of profitability, well within our previously issued guidance.

We continued to expand our manufacturing and downstream businesses by increasing our geographic reach, further cutting costs and keeping high gross margins throughout the quarter.

We are confident in our ability to deliver solid results for the rest of the year as we benefit from high gross margins from our module business and growing profits from our downstream business.

Our revenue streams continue to diversify as we focus on developing our downstream abilities.

Revenue from power generation increased sequentially 62.3% to RMB[48.3] million as we generated a record 50 million kWh of energy during the first quarter.

Despite unusually cold winter in China and the effects of seasonality, we are confident that the project development will quickly rebound next quarter, given that first half of 2014 we expect to connect 140MW solar PV project to the grid and on top of that begin constructing another 200MW to 250MW during the second quarter.

Looking forward, we remain well optimistic about the coming quarters.

We expect module shipments to increase by approximately 30% sequentially during the second quarter and are confident to meet our full year guidance.

Despite the seasonally slow first quarter in China, we believe China will remain largest solar market this year and that installation will reach 12 GW to 14 GW.

We mentioned our market-leading position in China by shipping over 200 MW in China and anticipate a strong recovery for the next quarter and during the second half of the year.

We continue to gain market share in the U.S. and Japan, which now account for approximately 22% and 10% of our total market shipment respectively.

Increased shipments to the U.S. and Japan also result in increased ASPs which offset the slight decrease in [SPC] in China during the first quarter.

We are growing rapidly to have become one of the largest module supplier in new emerging markets such as South Africa, Chile and India.

These new and emerging markets are increasingly forming a larger and more meaningful portion of our total shipments, making our geographical mix more balanced.

Despite our focus on utility-scale projects, we have been exploring opportunities in distributed generation projects in China.

We have created a strong pipeline for more than 400 MWs in DG projects and expect to begin construction on top of them during the second quarter.

Where there are still uncertainties surrounding China's developments of DG projects, such as counterparty risks and rooftop ownership disputes, we expect that the demand of DG will pickup in the near term as government issues further supportive policies and financial institutions get more involved.

Our reputation as an industry technological leader allows us to steadily build our competitive advantage by delivering more innovative product and technologies.

We proudly unveiled our new series of Eagle + modules last week during the 2014 SNEC.

These new modules have been engineered to reliably reach 275 watts of peak power output, a new record for mass-produced and commercially available modules in the market.

We incurred a loss from foreign exchange as a result of the U.S. dollar denominated debt from the new issued convertible bonds and the unexpected depreciation of the RMB against U.S. dollar and euro.

In summary, I'm pleased to say what we have accomplished during the quarter.

We will continue to prudently manage our business going forward as we develop to a one-stop energy solution provider.

As for the guidance for the second quarter of 2014, total solar module shipments are expected to be in the range of 570 MW and 600 MW.

Full year 2014 guidance remains intact.

Total solar module shipments are expected to be in the range of 2.3 GW and 2.5 GW, with total project development scale expected to be above 400MW.

Arturo, our Chief Strategy Officer, will now discuss our major achievements in sales and marketing for the first quarter in further detail as well as our strategy and market outlook for the second quarter in key countries and regions.

Thank you very much, Mr. Chen.

The first quarter of 2014 has been a good start to the year for JinkoSolar considering the traditional effects of seasonality in the PV market.

Despite this, we seek our targets for the quarter and reaffirm our guidance for the entire year.

We are very optimistic about our future opportunities that will arise in the quarters to come.

Despite the effects of seasonality affecting the Chinese market and also the European issues regarding anti-dumping regulations, we managed to ship more than 200 MW to China and over 30 MW in Europe during this quarter.

We had a successful quarter with record shipments to the USA, totaling over 100 MW.

To give you some perspective, our shipments to the United States during the first quarter of 2014 almost exceeded total shipments for the year before, 2013.

Approximately 10% of all 45 MW were shipped to Asia-Pacific during the quarter and mainly to Japanese market.

We expect more in the next coming quarters as we take full advantage of favorable market conditions and a high [feed-in] tariff, even after the tax in Japan.

Demand from new emerging markets, such as South American countries and South Africa, remains strong as we shipped over 70 MW in this quarter and have signed contracts for more than 250 MW for the next coming quarter of this year.

This growth has positioned Jinko as the number one brand in South Africa with over 40% market share, and in Chile in South American country with a better than expected 30% market share.

Japan is the world's second-largest PV market in terms of demand that we expect between 7 to 9 GW, will continue to be an important market for Jinko in the next coming quarters.

In the U.K. in Europe, we have been seeing the surprise of many of the PV communities with the announcement of more than 1.2 GW of installations during the first quarter.

We expect this strong demand in the U.K. to continue in the coming quarters, at least until the reduction of subsidies which will be beginning in April next year.

Thanks to that, we are comfortable with our visibility on future market conditions and predictability for coming quarters.

This year we can provide market guideline on shipments and revenues for the year with much more easy than during the industry downturn.

But challenges still remain with the reduction on subsidies for renewable energies and uncertainties regarding anti-dumping and revamping and countervailing investigations.

Protectionists measures generally impact projects negatively and reduce demand and interest in solar modules.

Aside from the USA, countries such as Australia and India have began to initiate anti-dumping investigations against Chinese products.

Whoever new emerging markets have continued to adopt the initiatives to support solar and demand is expected to boom in the coming years, countries such as Brazil, Jordan, Saudi Arabia, United Arab Emirates and the Philippines are good examples.

Jinko is very present in these markets and we will see the results in the next coming year.

Strong demand together with [approaching vitality], especially from the power demand side, has been triggering demand in new and emerging PV markets such as Chile, Mexico and a number of African countries.

We expect the total global demand this year to be above 48 GW, and next year to be above 55 GW.

Thanks to our well-defined and [executed] geographical diversification strategy, our efficient localization of professional teams, their reliability and cost competitive products and the constant support of our partners, JinkoSolar has succeeded in differentiating our strategy from our peers to advance our position as one of the top manufacturers and leaders of PV modules and fast growing energy solution provider.

The success of our strategy is based on our ability to anticipate changes in the market.

Being flexible and lean, rapidly building a first mover advantage in selected markets, investing resources in new emerging PV industry and leaving countries where demand was shrinking.

During the first quarter, we announced the signing of a number of important contacts.

Among them there's 4 MW supply demand for a project in Israel for Inbar, one of the top leaders in installations.

We also closed a deal to supply high efficiency modules to CSEM Outdoor Lab in United Arab Emirates in Middle East.

We also supplied modules to the Swiss Embassy in Tokyo in Japan.

Our recent contracts include supply agreements of large volumes like 37 MW to EDP for the Lone Valley Solar Park in the USA, another large project for 35 MW for the Arizona Avalon Solar Project, and 100 MW in two important projects in Chile with one of the largest European Chile companies with subsidies in Chile.

JinkoSolar's brand awareness has improved clearly and is supported by over 65 banks and over 300 world recognized customers, who has given testimony of our high quality modules and services.

Altogether, this has contributed to the consolidation of the Jinko brand, stable ASPs and visibility and predictability for the next coming quarters.

In China, JinkoSolar has become the market leader in terms of shipments and market share while our downstream business has become more promising as we grow in both revenues and profits from the power generation.

With the cold winter in China over, we will soon see a pickup in demand as we work to connect approximately 140 MW to the grid during the first half of this year, and will begin construction of another 200 MW to 250 MW on top of that.

In first quarter, total solar product shipments were 581 MW, consisting of 455 MW of solar modules, 92 MW of silicon wafers and 34 MW of solar cells.

This represents almost the same number as in the fourth quarter of 2013 and an increase of 71% from 338 MW in the first quarter of last year, 2013.

During the first quarter, we delivered approximately 40% of total module shipments to China, 20% to North American markets, 17% to South Africa and South America, 8% to Europe and the rest to the rest of regions in the world.

We are now benefiting from the strong partnerships we have built over years with global and local distributors, PV developers and EPC contractors across the globe, and now increasingly active outside Europe especially new and emerging markets.

Regarding marketing, we have increased our global footprint and brand recognition, thanks also to our marketing events worldwide and localized activities in major markets.

We have attended conferences and exhibitions around the world, including the USA, Europe and in particular U.K., Asia-Pacific and new emerging markets.

JinkoSolar is not only an active sponsor but has been invited as a speaker to specialized technical and professional conferences.

Our cooperation both with SolarPV.

TV and Solarplaza has been very successful in communicating our strategy.

Recently Solar PV.

TV jointly hosted a one day conference in Shanghai with Association [IPVA] during its next exhibition in Shanghai that brought together manufacturing, equipment, component supply and storage leaders of the PV industry.

We have attended conferences and tested the market in the Middle East with our meetings in Saudi Arabia, Qatar and Kuwait where we see important goals for the renewable energy in the next couple of years.

We have both been present at the World Future Summit in Abu Dhabi, at (inaudible) in Israel, Solar Expo in Casablanca, PV Expo in Tokyo and [CoBuilding] in London and [Power and Electricity World] in Africa and South Africa market.

During PV Expo in Tokyo we launched our newest smart modules that integrate microinverters and optimizers that are key for residential markets and add value to smart solutions installations.

We have steadily increased ASPs through 2013 and have managed to keep them stable when compared with last quarter, thanks in part to our focus on countries with higher government support and margins such as Japan, the U.S. and South Africa.

ASPs are the reflection of JinkoSolar's better increasing brand recognition, higher-quality better communications and market demand recovery.

Module average selling price increased during the first quarter to US$0.64.

We expect ASP in 2014 to remain stabilized.

Regions such as Europe and the U.S. have higher ASP to the European Commission's agreement for a minimum selling price for Chinese modules at 53 euro cents per watt and the USA due to the barrier set by tariffs.

In emerging markets, we ended with US$0.64 per watt despite the lack of subsidies in most of the markets, while in China we reached US$0.60 per watt, thanks to our strong brand recognition.

In summary, we are in a strong position to maintain growth as a result of several important agreements with a strategic partner for 2014 in a different and more diversified balanced [country range] around the world.

Now, I would like to turn the call over to Zhang, our CFO, who will go through our financial results.

Thank you, Arturo.

Good morning and good evening to everyone on the call.

First, I would like to walk you through our financial results for the first quarter of 2014, followed by second quarter and full-year 2014 guidance.

As Mr. Chen mentioned earlier, total solar products shipments in first quarter of 2014 were 581.2 megawatts.

Total revenues in the first quarter of 2014 were $323.9 million, a decrease of 8% sequentially and an increase of 73.1% year-over-year.

Gross margin was 24% in the first quarter of 2014 compared with 24.7% in the fourth quarter of 2013 and 12.7% in the first quarter of 2013.

The year-over-year increase in gross margins was mainly due to improvements in operating efficiencies and continued cost reductions for the silicon and [auxiliary] materials and improved ASPs.

The Company also enjoyed higher gross margin generated by solar project electricity revenues.

In-house gross margins relating to in-house silicon wafer, solar cell and solar module production was 26.6% in the first quarter of 2014 compared with 24.3% in the fourth quarter of 2013, compared with 13.1% in the first quarter of 2013.

Income from operations in the first quarter was US$32.7 million compared with income from operations in the fourth quarter of 2013 of US$43.3 million and a loss from operations of $2.7 million in the first quarter of 2013.

The operating expenses in the first quarter of 2014 were $45 million, an increase of 0.4% sequentially and an increase of 70.4% year-over-year.

The year-over-year increase in operating expenses was mainly due to the increase in shipping and warranty costs and research and development expenses.

The Company's operating expenses excluding the provision for bad debts and impairment of long-lived assets represented 13.1% of its total revenue in the first quarter of 2014, representing an increase from 12.3% sequentially and a decrease from 14.9% year-over-year.

Operating margin in the first quarter of 2014 was a positive 10.1% compared with positive 12% in the fourth quarter of 2013 and negative 1.4% in the first quarter of last year.

Net interest expense in the first quarter of 2014 was $9.8 million, an increase of 14.2% sequentially and an increase of 10.3% year-over-year.

We recorded an exchange loss of $22.1 million in the first quarter of 2014 primarily due to foreign currency exchange loss of $3.7 million and loss in fair value of forward contracts of $18.4 million.

We recognized a gain of $4.3 million in change in fair value of convertible senior notes and kept call options.

The Company recognized an income tax expense in the first quarter of 2014 of approximately $1.3 million compared with a tax expense of approximately $57,000 in the fourth quarter of 2013 and an income tax expense of approximately $2,000 during the first quarter of last year.

Net income in the first quarter of 2014 was $1.5 million compared with a net income of $27.1 million in the fourth quarter of 2013 and a net loss of $20.7 million in the first quarter of 2013.

This translates into basic earnings per ADS of $0.04 and diluted loss per ADS of $0.20 respectively.

Non-GAAP net income in first quarter of 2014 was $6 million compared with non-GAAP net income of $36.1 million in the fourth quarter of last year and a non-GAAP net loss of $12.1 million in the first quarter of last year.

This translates into non-GAAP basic and diluted earnings per ADS of $0.20 and $0.20 respectively.

We would like to take a quick look at our balance sheet.

As of March 31, 2014, the Company had $271 million in cash and cash equivalents and restricted cash.

As of March 31, 2014, total shipment volumes including the current portion of long term bank borrowings were $265.9 million compared with $326.2 million as of December 31, 2013.

Total long term borrowings were $56.7 million as of March 31, 2014, compared with $59.8 million as of December 31, 2013.

As of March 31, 2014, the Company's working capital [debt] was negative US$63.7 million compared with [negative] of $312.9 million as of December 31, 2013.

For the second quarter of 2014, total solar module shipments are expected to be between 570 megawatts and 600 megawatts.

For the full year 2014, total solar module shipments are expected to be between 2.3 gigawatts and 2.5 gigawatts, with total project development scale expected to be about 400 MW.

At this moment, we are happy to take your questions.

Operator?

(Operator Instructions) Your first question comes from the line of Philip Shen from ROTH Capital.

Your line is open.

Please go ahead.

Can we talk about your capacity, when do you expect to take full ownership of the [Top One] assets and what's your view on acquiring additional distressed assets in 2014?

I think as of the end of Q1, our capacity still is around we give officially 2 GW and under waiver and the [cell] and 2.1 GW I think are the module segments.

In Top One right now, we are running at lease basis and we're still thinking --because tuning up for the machine, today we're still running around like 80%.

So basically we believe we're continuing to look at opportunities I think like [Topoints] opportunities, and by the end of this year hopefully we can reach our capacity on the [waiver] and the cell to 2.5 GW and module around 3 GW to 3.5 GW by the end of this year.

Okay great.

And can you give us an update on your yield co plans, how many megawatts would be like to have in place for the yield co and what do you expect the timing of the yield co to be as well as which markets would you like to actually list in?

Okay.

I think as of March 31, we have 213 MW connected with the grid and we have 100 MW under construction, and as of today as we already announced in the release, and we I think complete acquired -- completed another two projects totaling 39 MW.

As of today, we have 252 MW connected with the grid and we have 100 MW under construction and we have also given guidance on this quarter.

By the end of this quarter, we think we'll have additional 100 MW, at least total this quarter we were around like 139 MW connected with grid in the second quarter and by the end of second quarter we were on a construction around 200 to 250 MW on the construction.

And any comments on the yield co at all, what the timing might be and which markets you would like to list the yield co on?

I think we still are continue looking on that.

As you can see, the whole year guidance in this year we have additional 400 MW and we are working hard because you see really the yield co is capital intensive investment and we are working hard, I think continue to looking at some opportunities I think along with some probably equity funds and to bring equity funds and to see possible and future we can really more capital I think in the downstream project, and hopefully I think if smoothly, I think yes, we hopefully I think are going to list either in U.S. market or Hong Kong market and we have to depend on market capital window possible open and also the timing [can see] and also to maximize the Jinko shareholders value and we believe I think the earliest maybe the December or early the next year and possibly the mid of next year, if we got it to Hong Kong.

Your next question comes from the line of Brandon Heiken from Credit Suisse.

Your line is open.

Please go ahead.

I just wanted to clarify, have you officially acquired the (inaudible) as the -- have the bankruptcy proceedings been finalized (inaudible)?

The question at the Topoint is [incremental], right.

The 500 MW we ran the [sale] and we already signed a lease agreement for six months and we're still waiting for the call in a go-through of the legal processing and we believe I think in Q3 we can completely finish the acquirement and also to reach fully operation by the end of this quarter.

Okay great.

And it looks like the wafer shipments were fairly high in the first quarter over 90 MW, is that just a one-time event or do you expect to ship a little more wafers now, what happened in the first quarter?

Basically the first quarter we shipped more than 90 MW to outside third party and actually also we buy -- because we export to U.S. 100 MW, we have to buy cell from outside from Taiwanese.

So we have to sell to outside and buy the cell back.

So this is purely for the U.S. module shipments.

Okay, and just a follow-up on the question of financing for project development, you've talked about the potential IPO of the project business, you mentioned the possibility of some private equity, are there any more details that you can offer on other financing mechanisms or your outlook there for needs for financing projects this year?

I think basically as everybody knows that, I think it's a good question, Jinko is I think the only one right now, the Chinese, [I think], manufacturing company in the United States right now on the project, and the reason why we are on the project because we got [purely] support from CDB and we have signed agreements and our credit line totaled last year RMB3.3 billion loans, purely to support leverage our downstream project, and today I think with that support, so we have continued to hold the project.

And because the leverage, today all the projects if without leverage the IRR is about 10% to 12% considering the bet and with leverage IRR is higher than even 20%, 18% to 22%.

The reason is because the CDB loans is 15 years and first year without paying the principal and the second year through the 15th year, the principal payment is minimum.

So the majority principal payment back is 11 years to 15 years.

So that's also increased our leverage ability.

So I think all these together, I think we want to looking for some strategic part of the equity fund coming to continue to support us to hold the project and continue with leverage for certainty and for the future we can accelerate all of the extension on the downstream projects than to accelerate our [ASP] ASAP.

Your next question comes from the line of Vishal Shah from Deutsche Bank.

Your line is open.

Please go ahead.

Of the 250 MW that you have connected to the grid, have you been receiving payments on all those projects regularly, what are the delays that you are experiencing on those projects?

I think, Vishal, on the question that you mentioned, the project side (inaudible) this quarter the way we recognize the revenue from the downstream projects total is $7.78 million and the gross profit is around $5 million and most of it now, the feed-in -- if it is the regular deduction is (inaudible) receipt, the only is feed-in tariff and we are working on that because we collect already in the middle of 2013, starting mid of 2013 as I mentioned last time I think in the Deutsche Bank Conference.

We are arguing now the VAT payment and I think as soon as we smoke out that issue, I think very quickly we can collect those money, and I think today our AR in the downstream project side I think is around six months.

So basically hopefully I think to Q3, definitely, I think we can reduce that DSO to 30 days to 45 days.

So you expect the decision on the VAT payments in Q3?

Yes, I think by the end of Q3 we should be clear.

Even there, maybe even going to pay the VAT first to see maybe the policy [clear] that we can repay back apply.

Okay, that's helpful.

And then as you think about the rest of the year and also the policy changes that you are expecting, I think that everyone is expecting change in the DG policy, I mean is your guidance for 400 MW dependent on that change or you can hit your targets even if there is no policy change?

Basically I think that the downstream 400 MW is based on without considering any downstream continuing reading the capital and beside our inside cash flow we can do that, even consider right now the China policy, because we have the pipeline as I mentioned there.

This quarter we will connect another, second quarter where our connection -- connect is finish -- I think connect 139 MW.

So plus that beginning of the year 213 MW, total is around 352 MW will be connected by the mid of this year.

At the end of the mid of the year, we still have 200 to 250 MW under construction.

So we believe that 400 MW to us is the minimum target right now.

The 200 to 250 MW that are under construction, are those approved projects, are those fully approved projects?

Yes.

I mentioned there, all the projects that we are starting to construction, we got all the possible license available, also the [state] grids accessible.

So all these we've already done as we started because all we'll consider here is because we're not going to start the project, we'll hold the project, we don't want starting the project then have problem.

Just one last question, can you talk about your pipeline of approvals that you have in place, so as you think about the next 12 to 18 months, how do you plan to grow this business, do you expect a 600 MW zone run rate in 2015?

Okay.

Basically right now we say because the pipeline always floating and we say we have DG 400 MW and utility-scale is around 700 MW and within that pipeline and some projects may drop, some projects may be adding.

So I think of that 1.1 GW today, if you are asking me everything is ready for this year and I think we maybe still have like 300 to 500 MW available and the rest of them maybe towards the next year.

So we believe I think as this year if we are going to basically right now the guidance 400 MW is I think [no] problem and for the next year we didn't give a guidance.

If we go ahead and let's say add another 500 to 600, even don't think any problem.

The question you raised that, you see -- because right now I think a lot of people, the money right now invested in this segment, I think the license, everything ready project I think right now also is [sellable].

So today, the price also go up.

Already you can buy let's say $0.20 per watt, everything is ready, the license, everything.

Today right now maybe increased to $0.80 to RMB1 per watt.

We will now move on to our next question from the line of [Pranab Sarma] from AN Capital.

Your line is open.

Please go ahead.

First question is on what type of development you are doing on the distribution generation, DG projects now, can you give a little bit of update and do you have any plan to do N-type sales going forward?

I think right now the DG right now, as you know the government I think has given a total target of 14.5 GW for this year and 60% is DG and 40% is the utility scale.

I feel the government if want to reach I think the target, already inside around 10 GW to 12 GW, even higher, we believe 12 GW to 14 GW, and some things were to change, have to change, [either] adjust the percentage.

Second, also for the DG, the government right now is discussing and the new policy may be come out.

For example right now the DG related to third-party, I think the government maybe change, just deal with the state grid without further deal with the third parties.

Then also other issues, for example the install cost.

I think because utility scale you have to finally generate, actually you have to transmission to higher pressure, high transmission, but DG you didn't spend that money on the facility, so you can save like RMB1 per watt.

So all of these I think and then also the local different level subsidies I think that will unify and as the central government to give subsidized.

So all of these I think is a discussion around.

I think if the Chinese government really want to encourage and stimulate the DG, they have to have some policy, continued subsidized on the DG side.

That is fine, I understand, but my question was also to add on, like what is your involvement in the developing under DG [sustenance], have you started building up your own team on that for DG projects and if that is, how many people are there on that team and what type of technology partner and maybe you will need that on the energy storage solution and all those stuff as we start looking into those things?

Okay, we basically already have a team.

We have I think the sub [yield co] and we also have a EPC team.

The team is not only do utility scale but also do the DG.

As you can see, the pipeline of 400 MW is just not collect all the data because we are working on those projects and also a feasibility study, send the people, so then to get the license, all these.

I think our team today is ready.

So in the second quarter where possible also under construction by the mid of the year, we say we have 200 to 250 MW under construction, of which maybe around up to 50 MW is DG.

So we have to see the policy of what's going on.

For the [Philippines], inside the company, we are ready.

Okay, perfect.

And how about going for the high-efficiency module like N-type, are you doing any development on the N-type cells now?

(Inaudible) N-type right now the technology but we [didn't] commercial production right now, and as you can see we have Eagle + and also very high safety in this [SNEC] is around 275.

All these are things [in the wood], we have to take in cost-effective.

We're manufacturing high-efficiency panel, we also should be at the lower cost and to reach the reasonable gross margins or minimum gross margin target.

So we are working on that, continue on the technology side.

And my last question is on your comment on channel inventory, how do you see channel inventory in the systems or in the market now?

This is Arturo Herrero, Chief Strategic Officer.

Regarding inventory we see in the channel, right now is quite low.

We are seeing quite strong demand in many markets not only in China but also in Japan as we mentioned before or in markets like the USA, markets like India also South Africa, and even if European markets has been going down in global but U.K. has been surprising all the community in the PV industry by connecting more than 1.2 GW in the first quarter.

So there is not so much inventory in the channel.

On the contrary right now for top tiers like Jinko, we are facing kind of lack of enough production to cover all our demand.

This is why we are expanding our factories.

Your next question comes from the line of [Pierre Macano] from [Broadpry].

Your line is open.

Please go ahead.

Regarding your $22 million foreign exchange related loss, could you explain a little bit your hedging strategies and if any possible improvement of that going forward or is this a very volatile type of situation that is very difficult to control?

I think for this part, yes, we have a large loss on the foreign exchange, and as you know that our functioning currency is renminbi so it is around [single] 4.7 million come from, we just issued a new CD in January.

So because of the renminbi devaluation so quickly, so I think that's what happened.

We leased I think [CD] 150 million and plus the equity offering.

Equity offering, [of course], I think the majority of the CD.

Then also on the long-term contract, the hedging, with our policy in the history is we go ahead -- project the future for months, the sales revenue in U.S. dollars, how much, and we are taking certain percentage of our sales [less] than 20%, we buy the hedging contract.

In history, we are making money on the betting on the renminbi continue to appreciation and but February in Q1 this year, the Chinese government and also the central bank and the unexpectedly [were down] devaluation of renminbi and we believe right now the foreign currency, the rate and renminbi versus the U.S. dollar is more stable for this year.

So we think this year maybe I think one-time big loss and the future we also need to base it on the forward contract recalculation I think re-book each quarter, but hopefully I think we can make some profit.

Your next question comes from the line of Colin Rusch from Northland Capital Markets.

Please go ahead.

Just a quick follow up on that last question.

Can you give us a sense of what level you're at in terms of the RMB target with your future contractor right now?

I think I cannot tell you exactly.

I think basically how much -- what's the price but basically (inaudible) U.S. dollar we are running like right now I think by the end of next year we forward a contract around like US$500 million and the euro is around 100 million euro.

So basically that account our revenue, I think less than 10% basically.

So we think it's very conservative.

But if like renminbi currency, let's say appreciation for a long time and suddenly 15%, 20% drop becomes appreciation, so that's where the tender run, I think unexpectedly downward cost of [forward] contract, revaluation of fair market value then would cause a big loss.

Okay, great.

And then can you talk about your capital allocation decision-making process, as you look at the opportunities in front of you on both the project side as well as the manufacturing side, how are you differentiating between those opportunities and deciding where to put your capital?

Basically I think for the manufacturing segment, it will continue on the key business.

As you can see, Jinko today we are in the best position lower cost and as the market continues consolidation, we will become I think the key player there.

So that's why you can see in the Q1, we continue CapEx around 17 million.

Those money including partial is aligned with Topoint equipment.

Then we also will continue looking for -- second quarter maybe spending more CapEx on the manufacturing side but we will continue looking for Topoint opportunities there.

So we think that will give us like Topoint -- we didn't spend CapEx too much because you're assuming the liability, and the Topoint is 500 MW from wafer sale and if the deal closed, we just pay RMB600 million and also basically we're assuming the liability, net liability, but we also have accounts receivables within 100 million and inventory 100 million.

So the net pay is around 400 million.

So this is good opportunity for us.

We are continuing looking for that opportunities, pay the market value equipment investments, CapEx around the 30% and continue to expand our capacity on the wafer sale module, but be very cautiously because this industry we still believe is in the consolidation.

We will continue to see some company player where we exited in this industry.

So that's all opportunities to continue to get the market niche by niche but our condition is we have to keep our gross margin above 20%, if without any dramatic change on the silicon price.

That's one area.

The second area is the downstream project and we believe right now we have forecast [today] China projects.

Yes, those China projects at the beginning, especially two years ago is not too much investor interesting because one is connection issue, one is [connectability] issue, but today more and more clear, a lot of the investors are jumping through this industry right now and Jinko is in the right position.

We have right now 252 MW connected with the grid, we have a strong EPC team, we have good structure, downstream yield co structure and a lot of equity fund including some governments, the [sovereign] equity funds also confident with us.

So we think in that area today we believe I think that we already [injected] around US$150 million assets into the yield co.

In the future we may be increase to, by the end of this year, we may be increase to US$200 million.

That's our total CapEx investment in the downstream I think in yield co.

I think allow if possible we can [risk more] part of equity funds, I think (inaudible) to achieve that target I think by the end of this year, we're [connect] to 600 MW maybe even accelerate it you see, then on [tier two] spinoff, I think it's enough for us to put that capital into it.

Right, and can you just give us a little bit of color on gross margins and as you see them trending into 2Q and potentially into 3Q?

I think if you look our Q1, our ASP is 60% and our cost is around $0.47 and of which the silicon cost, our average cost is around US$20.4 per kilogram and is around $0.10 and our marketing cost is $0.47 of which -- $0.37 and of which I think the wafer is $0.09 and the cell is $0.10 and module is $0.18.

So we think then the in-house gross margin that means use our own wafer and cell to manufacturing module is around 26%.

I think this is the best quarter for this year.

Of course this is -- should be (inaudible) to attribute to the renminbi I think appreciation.

And our average -- actual gross margin is around 24%, the reason because we are shipping 100 MW to the U.S. market and we have to buy cell from outside, we have to sell wafer to outside and buy cell from Taiwanese.

So that increases our cost.

So that means we're not 100% integrated.

So that's why our actual gross margin is around 24%.

From (inaudible), I think we have not given the guidance to the gross margin but we believe I think in 2Q right now the ASP should be status quo and we will continue cutting on the cost side.

So we believe the gross margin should become -- have the ability to stable in the second quarter.

Your next question comes from the line of Brian Lee from Goldman Sachs.

Your line is open.

Please go ahead.

Just a follow up on the approval side for the downstream projects, so we see more and more companies entering into the market for the silicon projects, so have you seen growing difficulties to obtain permissions to build the new projects right now is the first question?

I think it's a good question.

I think it's not difficult to get permission, if a lot of people jump into the projects, so the scarcity of the projects and also too much people right now apply for really I think increase the possible on the cost side, and luckily and fortunately at Jinko we already have the pipeline around a 1.1 GW.

Of course we still are working hard because we have professional teams and also have strong EPC team and we also face such kind of challenge but it's not big challenge for us.

Okay, and next question is about your Q2 shipment to (inaudible) breakdown, could you give some color about the shipment by country or region?

I think in Q1 as you'll see there, I think Arturo just mentioned that, Q1 we shipped to China is 44%, Asia-Pacific is 10% and the Europe around 7% and the emerging markets 17% and North America is around 20%.

I think the Q2 the guidance we still think that China is around 40%, Asia-Pacific is 15% and Europe is 15% and the emerging markets 10% and America and North America is 20%.

Okay, and last question, just want to clarify that your target, the total project to be connected to the grid by end of this year is likely to reach 400 MW right?

We say we were additional add 400 MW this year.

By the end of this year, we should be connected to more than 600 MW on the grid on the downstream project.

Is that clear?

Yes.

It appears there are no further questions at this time.

I'll now hand the call back over to Mr. Sebastian Liu for any additional or closing remarks.

Okay, so on behalf of the entire JinkoSolar's management team, I want to thank you for your interest and the participation on this call.

If you have further questions or concerns, please feel free to contact us and have a good day and good evening.

Thank you and good bye.

That does conclude our conference for today.

Thank you for participating.

You may all disconnect.