晶科能源 (JKS) 2015 Q3 法說會逐字稿

Thank you for standing by and welcome to the Quarter 3 JinkoSolar 2015 Earnings Conference Call.

(Operator Instructions)

I must advise you that this conference is being recorded today, Thursday, November 19.

I would now like to hand the conference over to your host today, Mr. Sebastian Liu. Please go ahead, sir.

Thank you, operator. Thank you, everyone, for joining us today for JinkoSolar's third quarter 2015 earnings conference call. The company's results were released earlier today and available on the company's IR website at www.jinkosolar.com as well as on the newswire services. We have also provided supplemental presentation for today's earnings call, which can also be found on the IR website.

On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Arturo Herrero, Chief Strategy Officer; and Mr. Cao Haiyun, Chief Financial Officer. Mr. Chen will discuss JinkoSolar's business operations and company's highlights, followed by Mr. Herrero, who will talk about the company's business strategies. And then Mr. Cao 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 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 Jinko's public filings with Securities and Exchange Commission. JinkoSolar does not assume any obligation to update any forward-looking statements, except as required under applicable law.

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 investors to evaluate JinkoSolar's current and future performances based on a more meaningful comparison of net income and diluted net income per ADS when compared to peers and historical results from prior periods. 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 excited to report another strong quarter as our business gained considerable growth momentum. Total revenue during the third quarter reached US$637.6 million, representing an increase of 58.2% over the same period in 2014 and 26.6% sequentially. Module shipment to the third party reached a record high of a solid 1,064 megawatts, which was again exceeded the high end of our third-party shipment guidance. With demand for our high-quality solar product increasing, we are increasing our full year 2015 third-party module shipment guidance for the second time this year from the current 3.4 to 3.7 gigawatts to 3.8 to 4 gigawatts.

Earlier this year, we strategically planned for a surge in global demand during the second half of the year by preemptively increasing inventory levels. This strategic decision was made based on our assessment of what demand would be in key solar markets as well as the visibility our customers and partners are sharing with us. This strategy is now paying off, and it not only provides us with flexibility to balance the shipment between third-party customers and Jinko Power but also give us good visibility on next year's orders.

During the third quarter, electricity output reached 234 GWh, up 15.1% sequentially. Electricity revenues generated RMB 206 million. One-hundred-twenty-one megawatts of projects were connected to the grid during the quarter, which bring our total capacity of connected projects to 846 megawatts. This leaves us right on track to meet our 600 to 800 megawatt target for the year. Higher-margin downstream business increasingly generates a larger share of our revenues and profits as it develops in size and scale.

The rapid growth of our downstream business is supported by diversified financial channels. Jinko Power recently signed a RMB10 billion strategic credit agreement with Industrial and Commercial Bank of China, the largest commercial bank in China. This new line of credit will be used to provide us with working capital as well as bridge and credit loans for future project developments. This huge vote of confidence in our future is in addition to existing close relationships we have with several policy and commercial banks, such as China Development Bank, Export-Import Bank of China, Ping An Bank and the Minsheng Bank. We are closely managing each relationship to ensure that we allocate the capital in the most efficient manner and generate a long-term return for our shareholders.

Strong demand and government support has created many new opportunities globally. In China, the possibility that the government's 13th five-year plan [with] stated 115 gigawatts total solar installation target may increase annual solar demand to 20 gigawatts or more. In the U.S., we continue to expand our market share and are now among top three module suppliers there. Aside from rush orders due to ITC uncertainties, demand from rooftop projects in the U.S. is growing rapidly and is expected to grow larger than the utility-scale market as more regions reach grid parity on (inaudible) side.

Shipment to the Asia Pacific regions were 145% sequentially on the back of strong orders from Japan and Thailand. Demand in India also increased as a result of government's ambitious 2022 installation target and increasing demand for power. While our shipment to Europe remained steady but soft, our deep relationship with European EPCs has opened doors to new projects in emerging markets, such as Chile, South Africa, and in Mexico, where shipments surged 211% sequentially.

On the technology front, we steadily increased capacity of Passivated Emitter and Rear Cell or PERC production line as well as expanded our new double-glass module production lines. In the U.S., we work with optimizer companies to provide customers with products with higher yield and better performance. On the cost side, we maintained our industry-leading position by further cutting non-silicon costs.

To conclude, this quarter's performance, along with what we expect, will be strong fourth quarter. We remain very confident in our ability to deliver a strong year-end and further grow our business. With a large and geographically [diverse] customer base, industry-leading technology, long-lasting relationship with financial institutions, and new growth drivers, we are building the foundation for sustainable growth in years to come and delivering long-term return to our shareholders.

As for the guidance for the fourth quarter of 2015, the company estimates total solar module shipment to be in the range of 1.4 gigawatts to 1.7 gigawatts, which includes 1.2 gigawatts to 1.4 gigawatts module shipment to third parties. For the full year 2015, the company updated its guidance of total module shipments to 4.2 gigawatts to 4.5 gigawatts, which includes 3.8 gigawatts to 4 gigawatts module shipments to third party. The company expects that grid-connect solar projects with total capacity of 600 megawatts to 800 megawatts in 2015.

Arturo Herrero, our Chief Strategy Officer, will now discuss our major achievements in sales and marketing for the third quarter in further detail as well as our strategy and market outlook for the fourth quarter 2015 in key countries and regions.

Thank you, Mr. Chen. We are glad to report another strong quarter of good results. What's more important is that we have good visibility for the next coming quarters, which give us confidence that the coming quarter and year ahead will be strong in terms of JinkoSolar sales. All of our production capacity has been booked for 2015, but also for 2016, we have already big portion of our production capacity committed into firm contracts.

We are seeing currently that despite the decrease of demand in European countries, many other important countries are increasing significantly their PV demand. USA and China are leading the world demand, especially USA due to the ITC uncertainties after the end of next year. And China continues with a strong commitment from government with a feed-in tariff program. There are new tenders for renewable energies and solar, in particular, such as 200 megawatts in Egypt or 200 megawatts in Peru, in Latin America, or the recently 1 gigawatt tender in Brazil, or even the coming one in Mexico expected this month of November after the energy reform has been implemented. India also has confirmed an impressive target of 100 gigawatts for 2020. But even if it only reaches 75 gigawatts, it will be impressive.

During the third quarter, we further diversified our geographical distribution. In China, we sold over 30% of our megawatts. Over 20% went for North American countries, USA and Canada, and also another 20% in emerging markets. Finally, 18% was for the region of Asia Pacific.

We once again increased sales and market share in the USA, one of the strongest markets with growing demand in the world. We also increased our position in sales in countries such as Chile, South Africa, and Mexico; and in Asia Pacific, such as Thailand, Japan, and Australia. With recent government regulations, India looks to be another market with great opportunity. Finally, with Turkey and The Netherlands, we completed the top 10 countries of our sales in Q3, completing altogether over 1 gigawatt of sales, a record high in our corporate history and a benchmark for what we believe will be promising quarters ahead.

Thanks to a strong demand, we decided to increase our total 2015 third-party modules sales guidance to 3.8 to 4 gigawatts. A worldwide increase in demand, our successful diversification strategy and our local approach in each of these important markets is helping JinkoSolar to increase its brand recognition, our market share, and grow faster than our competitors.

Our sales and marketing strategies continue to pay off as our business keeps expanding in size and geographic reach. We have made sales in over 50 countries in Q3, and we have over 300 existing active customers worldwide in our database. With multiple signed contracts in our pipeline, we expect results to be good for the rest of the year and into 2016.

We benefit from a strong increasing customer portfolio. Shipments and demand for JinkoSolar modules grew faster than previous quarters due to the strong demand from China, USA, and emerging markets, such as Chile, South Africa, Mexico, Thailand, or Australia. In Q3, we shipped 1,134 megawatts, of which, 1,064 megawatts went to the third parties, representing 21% growth from the previous quarter.

Throughout 2015, we keep our leading position in Chinese markets and strengthened it in the U.S., where despite the trade disputes, we are benefiting from the booming demand and uncertainty from the ITC expiration. Over the past few quarters, we have made progress in Mexico where implementation of the energy reform is beginning to show promise for both large-scale projects and distributed generation. We're enthusiastic about the first tender expected to begin November 20.

Sales continue to grow in South Africa with the completion of 90 megawatts for our customer Solar Capital, one of the leaders in the past few rounds of the South African public tenders. In the past quarter, we delivered approximately 35% of our solar module shipments to China, 22% to the USA, around 8% to Chile, 7% to Thailand and South Africa and around 6% to Japan, 5% to Mexico, and finally, 3% to Turkey, and 2% to Netherlands and Australia.

We will continue to capitalize on the global recognition of JinkoSolar's brand and localized sales and marketing services to expand our market share and diversify our customer and geographic portfolio. We are also succeeding not only in keeping the loyalty from our existing partners but continue to increase our customer base. The rapid global expansion of our business has provided excellent exposure.

For full year 2015, we have been launching different PR campaigns, and we plan on further expanding our PR activities as well as actively attending solar and renewable energy exhibitions and conferences. During Q3, we have been sponsoring several events, exhibitions and conference, including the Summer Davos in September, [Energy Year] in Panama, Inter Solar in San Francisco, and PV Japan in Tokyo and in Osaka.

Our Chairman Li had the privilege to be invited to the Sino-British Energy Dialogue held in London during President Xi Jinping was on the state visiting the United Kingdom. We also were invited in Shanghai recently to the Bloomberg New Energy conferences. Next quarter, we already have plan to attend over nine exhibitions and conferences across the globe, including Chile, Bogota, Cairo, Hanoi, and Melbourne.

Turning to ASP. Our average selling price remained stable despite volatile exchange rates. Our ASP in the quarter was US$0.56 per watt on average. It represents only $0.01 lower than the previous quarter. And next quarter, we expect to see ASP stabilize.

Now, I would like to turn the call over to Charlie, our CFO, who will go over our financial results and guidance for the fourth quarter and full year 2015. Thank you very much.

Thank you, Arturo. Good morning and evening to everyone on the call. First, I'd like to walk you through our financial results for the third quarter 2015, followed by guidance for the fourth quarter and the full year 2015. As Mr. Chen mentioned earlier, total solar product shipments in the third quarter 2015 were 1,134.5 megawatts. Total revenues were $637.6 million, an increase of 26.6% sequentially and an increase of 58.2% year-over-year. Gross margin was 21.3% compared to 20.7% in the second quarter 2015 and 20.6% in the third quarter 2014. The sequential increase was mainly due to the continued cost reductions of solar modules and the increase of electricity revenues.

Income from operations was $60.4 million compared to $38.2 million in the second quarter 2015 and $39.1 million in the third quarter 2014. Total operating expenses were $75.6 million, an increase of 12.7% sequentially and an increase of 66.5% year-over-year. The sequential increase in operating expenses was mainly due to the increase in shipping and warranty costs associated with the increase of module shipments and stock-based compensation expenses.

The company's operating expenses excluding stock-based compensation and the change in provision for doubtful accounts represented 12.2% of its total revenues, representing an increase (sic - decrease) from 13.2% sequentially and an increase from 11.5% year-over-year. Operating margin was 9.5% compared to 7.4% in the second quarter 2015 and 9.4% in the third quarter of last year.

Net interest expense was $23 million, an increase of 83.9% sequentially and an increase of 100.2% year-over-year. We recorded an exchange loss of $19.1 million, primarily due to unexpected depreciation of RMB against U.S. dollars in the third quarter.

We recognized a gain of $24.9 million from the change in fair value of convertible senior notes, which was offset by a loss of $7.4 million from the change in fair value of capped call options. We recognized an income tax expense of $5.4 million compared to an income tax benefit of $0.3 million in the second quarter 2015 and an income tax benefit of $25.1 million during the third quarter of 2014.

Net income was $30.7 million compared to $12.3 million in the second quarter 2015 and $45.7 million in the third quarter 2014. This translates into basic and diluted earnings per ADS of $1.48, respectively. Non-GAAP net income was $39.8 million compared to $33.4 million in the second quarter 2015 and $52.5 million in the third quarter 2014. This translates into non-GAAP basic and diluted earnings per ADS of $1.28 and $1.04, respectively.

And now I would like to take a quick look at our balance sheet. As of September 30, 2015, the company had $584.2 million in cash, cash equivalents and restricted cash. As of September 30, 2015, total short-term borrowings, including the current portion of long-term bank borrowings, were $744 million compared to $657.7 million as of June 30, 2015. Total long-term borrowings were $544.6 million as of September 30, 2015 compared to $344 million as of June 30, 2015. As of September 30, 2015, the company's working capital was negative $116.1 million compared to a deficit of $285.4 million as of June 30, 2015.

For the fourth quarter 2015, the company estimates total solar module shipments to be in the range of 1.4 gigawatts to 1.7 gigawatts, which includes 1.2 gigawatts to 1.4 gigawatts module shipments to third parties. Revenues will not be recognized for the modules shipped to its own downstream projects as required by U.S. GAAP. For the full year 2015, the company updates the guidance of total solar module shipments to 4.2 gigawatts to 4.5 gigawatts, which includes 3.8 gigawatts to 4 gigawatts module shipments to third parties. The company expects to grid-connect solar power projects with a total capacity of 600 megawatts to 800 megawatts in 2015.

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

(Operator Instructions) Your first question comes from Philip Shen from Roth Capital Partners.

Hey, guys. Thanks for taking my questions. Apologies if I missed some of the prepared remarks because I was jumping between calls. But in terms of 2016, to what degree -- I know you don't have guidance out there, but can you talk about how you see demand developing in 2016? How much of Q1 is booked right now? And what regions -- what kind of mix could we see in 2016?

Philip, 2016, we believe, it's another very strong year for solar sectors, and total global demand is around 65 gigawatts, up 15% to 20%. At Tier 1 companies, we believe, Jinko is in the best position to catch up more global market share, and we are confident we can deliver higher growth rate. In terms of visibilities for the first quarter, over 80% of capacity was booked Jinko, and for the total 2016, over 50% capacity was booked. The growth, I think, it's driven from the China, United States, and other emerging markets, including South Africa, Chile, Mexico. And maybe Arturo can supplement more.

Yes. Thank you, Charlie. This is Arturo Herrero. Philip, mainly, after these four years of difficulties in the solar industry, we are seeing a very strong coming market. We have a very strong visibility for the next coming quarters, and this is something that we didn't expect one year ago. So we are very, very satisfied about the growth worldwide. The important thing is that Jinko is very diversified in several regions and countries. So we have done very good in stepping strongly in markets like USA that is the leader right now because, as you know, the situation is booming. But also, we have been diversifying in markets like Asia Pacific, like Japan. India is very strong, as you know, because of the big commitments from the government. And then in what we call emerging markets like Chile, Mexico, they have already provided the new regulation for the energy reform. And we are really confident because right now our customers are demanding more than our current capacity. So in 2016, so far, we don't have enough production to cover all our customers

That's great color, Arturo. Thanks. What are you seeing -- if you have that kind of visibility into 2016, how do you see ASPs trending?

Okay. In terms of ASP, we believe, the price for the key solar markets are pretty stable in 2016. We believe that ASP is stable and down very slightly in the range of 2% to 4% year-over-year.

Yes. At the end, Philip, it depends a lot -- this is Arturo again. It depends a lot on the countries where we are diversifying geographically. But still, we are seeing that even in China, that historically the prices were lower, right now, we are seeing that the price is even higher than some Asian countries like India, for example. But USA and Europe, as you know, price is higher. And even in countries like Mexico, Chile, that is still, Chile will be strong. Still, ASP is quite different. So it's helping us to have an average selling price stable for next year.

Okay. Thanks. One more for me. In terms of your Q3 downstream shipments guidance, I think you guys were calling for 150 to 200 megawatts, but I think you actually shipped 70 megawatts. So what was the delta there and what happened? Thanks.

Yes. It's due to the capacity constraints and strong demand from the U.S., emerging markets, and the Asia Pacific region. We've scheduled some shipments for the downstream from the third quarter to fourth quarter, but we don't believe any impact on our total project development scale targets in 2016. And we connected 121 megawatts in the third quarter and reached cumulative 846 megawatts by the end of third quarter in our projects, and we are on track to achieve cumulative 1.1 gigawatts to 1.3 gigawatts in our projects by end of this year.

Okay, Charlie, thank you.

Welcome.

Hi, do we have more questions?

We do. Thank you very much. Your next question comes from the line of Patrick Jobin from Credit Suisse. Please go ahead, sir.

Hi, thanks for taking the questions. My first question, I just want to look at Q4 a little bit in more depth. So I'm just trying to reconcile. It looks like the megawatts you shipped into China declined sequentially from Q2 into Q3. I guess in Q4, -- it looks like you're building up some inventory for Q4. Where do you think mix shift would head towards in Q4? And then how should we think about that in context of ASP and margins for Q4, specifically? And then I have a follow-up.

Okay. Sure, sure. You have a couple of questions. I think for the China shipments in the third quarter, you're right, a little bit lower than the second quarter shipments. It's due to -- we need to balance our shipment to different regions. If you look at the shipment into United States, the emerging market, Asia Pacific region in the third quarter, it's surging. And we controlled the shipments in China in the third quarter, and we scheduled some shipments to the fourth quarter. If you look at -- look to the fourth quarter, I think we expected third-party shipments up 20% again, and it's driven from China and United States. And in terms of the gross margin you're asking, we expect our gross margin in the fourth quarter will improve quarter by quarter. And the ASP, it's kind of we're stable, and we expect it's going to be flat. The third quarter ASP is around $0.56. We believe the fourth quarter is the same.

That's helpful. And then I guess the follow-up question, not related to Q4, but the follow-up question and perhaps a suggestion really, could you break down the debt associated with Jinko Power, so the downstream assets relative to the debt held at the parent level for your manufacturing business?

Sure, sure.

I just wanted to get a better sense of cash flows from the projects.

Okay, okay.

Thanks.

The debt by the end of third quarter is around US$1.6 billion, of which around US$600 million is relevant to Jinko Power. If you look at this year, the total debt increase for Jinko group is directly linked to the downstream.

Okay, thank you very much.

Thank you, Patrick. Thanks.

We have another question from Scott Chui from Daiwa Capital.

This is Scott from Daiwa Capital. My first question is regarding Jinko's exchange loss in Q3. I would like to know how much debt of Jinko is actually foreign currency denominated. And also, do you have a sensitivity analysis on how foreign exchange rate change in Q4 will affect Jinko's P&L? That's my first question. Thank you.

Sure, yes. The RMB unexpectedly depreciated by 4% in the third quarter, and the exchange loss resulted from the U.S. dollar-denominated loss. And by end of third quarter, we had around US$ 500 million denominated loans, including $270 million convertible bonds and $150 million that were issued at the Jinko Power level. In the fourth quarter, we take further steps and actions to hedge some portions of the U.S. denominated loans. And at the same time, if you look at the currency movements, we believe Chinese government has the intention and capabilities to stabilize the RMB currency rate, so we don't expect significant loss in the fourth quarter again.

And on the other hand, I just want to emphasize the RMB depreciation is helpful for the module business because it's export-oriented. We have around over 60% export sales, but the cost side is almost in RMB. So it will help us to reduce the module cost and improve the gross margin in the future.

Scott, this is Sebastian. As you can see that, in fact, the foreign exchange rate, especially the RMB against U.S. dollar, has been stable recently. So we don't expect any big significant loss in Q4. And as Charlie said, we also do some hedge activities.

Okay. Thank you, Sebastian and Charlie. My second question is about the ASP by region. Can you share with us actually the ASP by region for the key markets? Thank you.

Sure, sure. I will -- we believe the price for the key market is quite stable, and China is in the range of $0.53, $0.54. And Japan, $0.55, $0.56, has some kind of currency depreciation. And United States is in the range of $0.63 to $0.65, down very slightly quarter-over-quarter.

Okay, thank you. My --

Just to continue with this, even in emerging markets, we are -- we had US$0.56 per watt. So it's quite stable, taking in consideration that there is no antidumping, there is no taxes for imports in most of these countries where we have been doing the sales.

Okay. Thank you. Can I clarify, the emerging market is $0.56 or $0.66?

That's correct, yes.

Fifty-six?

Yes, $0.56, five-six.

Okay, okay. Thank you. And my last question is about the spinoff plan of Jinko Power. Are there any updates with the spinoff plan at this moment? And can you share with us the latest progress?

Sure, sure. I believe now the U.S. market is not favorable for solar yieldco companies, and we are closely watching out the capital markets conditions. And more importantly, we are actively looking to other options, including Hong Kong capital market and the Chinese capital market. So far, we didn't make any decisions. But the goal for us is very clear, we will complete the spinoff of Jinko Power assets in 2016.

Thank you. And I just want to ask for Jinko Power, when do you expect Jinko Power's capital will be used up so that you need to do more capital raising (multiple speakers) --

Okay. The current funding is sufficient for cumulative 1.4 gigawatts project development. We expect that we will complete the scale, cumulative 1.4 gigawatts in the first half year of 2016. So now we are still evaluating our 2016 plan based on our operational status and the options of financing. So we plan to discuss our 2016 project development scale in the next quarter's earnings release.

All right, thank you. Thanks a lot.

Your next question comes from [Yang Liu] from Goldman Sachs. Please go ahead.

Thank you and congratulations on a strong quarter. I just wonder, want to spend about management's thoughts around 2016's demand. Given U.S. ITC will be expiring, do you think that demand, global demand will go down or flat? And also, about our capacity expansion plan since most of the capacity has been booked, so we'll be building our own capacities or leveraging it on OEM?

Sure. I think we just emphasized 2016 is very strong for the solar sector. And you're right, for the Tier 1 companies, the companies are facing capacity constraints. We believe the global market up -- demand is 15% to 20%. And for Jinko, we are very confident that we can deliver over 30% year-over-year growth in terms of the third-party shipments.

For the capacity expansion, by the end of third quarter, we had 3 gigawatts for wafer, 2.5 gigawatts for cells, and 4 gigawatts for solar modules. And we plan to adopt a disciplined capacity expansion approach in 2016, which means we will continue to expand module capacity to catch up the high growth and the demand in 2016 while being relatively conservative on wafer and the cell side.

And for the wafer, we plan to increase the capacity from 3 gigawatts to 3.3 gigawatts by upgrading existing equipment. For the cell capacity, we plan to increase from 2.5 gigawatts to 3 gigawatts. For module, our plan is to increase from 4 gigawatts to 5.3 gigawatts. All the capacity expansion will be completed in the first quarter 2016.

Thank you very much. And for the module capacity, adding it will be in China mainly or Southeast Asia?

Wafer capacity is in China, and for cell and module capacity, we are considering both China and overseas markets. And we are still evaluating and we plan to disclose in the next quarter earnings release for the detailed capacity allocation between China and overseas markets.

Sure.

But generally speaking, I'd say -- yes. But generally speaking, probably China will be -- most of the capacity expansion will be in China.

I see. Just to confirm, it's 5.3 gigawatts in the first quarter for module, right?

In the first half year 2016, 5.3 gigawatts.

Sure. Thank you. And my next question is about cost-reduction roadmap. Previously, it's guided that every quarter will be reduced by $0.01. What about maybe long term, maybe in 2016? Given the potential lowering in feed-in tariff over the years, is there a company guidance for the cost reduction as well? Thank you.

In terms of cost reduction, we are still on track to reduce our module costs. In the third quarter, the in-house module cost was $0.41, improved to $0.01 quarter-over-quarter, and we are targeting to achieve $0.40 in-house module cost by the end of this year. And next year, in 2016, our target is to cut the non-silicon in-house module cost by 5% to 8% again.

Thank you. And my last question is about downstream, the subsidy catalog. Last quarter, I remember 100 megawatts was on the catalog. Wondering if there's any update. And will the subsidy payment you showed impact our decision for the downstream and next year development? Thank you.

Okay. We are still waiting for the approval of subsidy catalog. And I think the green energy is a key for China in the next five-year plan, and the National Energy Administration has showed strong commitment to resolve the issue as quickly as possible in recent meetings. And I think you understand and you [saw] the draft plan for the next five years for feed-in tariff reductions. We believe it's positive. The new policies will help the government to have the visibility towards the total scale of feed-in tariff in the next five years, and the next step is -- the NDRC is planning to increase the renewable surcharge and accelerate the approval of the next round of subsidy catalog by the end of this year or in the first quarter of 2016.

Just one thing to add. You can see the Chinese government -- this is Sebastian. You can see the Chinese government keeps cutting the interest rates, and that means that the valuation of our downstream project is increasing. We already see this trend from the market, so that's a very good sign for us.

Yes. The continued downstream solar asset cost reduction and the interest cuts helped to lift the solar project returns. We did some sensitivity analysis. If the interest rate is cut by 1%, the IRR leverage for the solar assets in China will increase by 1.6%.

Okay, thank you. And then the leverage, current level of leverage IRR is about which level?

Fifteen percent to 18%.

Yes.

Thank you very much.

Welcome.

Your next question comes from the line of Gordon Johnson from Axiom Capital. Please go ahead.

Thanks for taking my question. I guess my question centers on, you guys -- I guess more of a theoretical question. You guys have invested a lot over the years in building projects, and I'd just like to know year-to-date how much of those projects that you guys have invested in have you sold year-to-date and in aggregate. And then I have a follow-up question.

So you're talking about the downstream, right, the projects construction?

Yes, that is correct.

Gordon, as you know -- yes. This is Sebastian, Gordon. As you know, we never planned to sell these projects. We've got lots of offers from the market, but our plan is to hold them as an independent IPP company. So, so far, we don't sell any of them.

Okay. So with that said, are you guys seeing continued issues with respect to cash collection given, as we all know, that there's been some issues with curtailment as well as FIT payments from the government?

Curtailment is not an issue for JinkoSolar. If you look at the -- I know you see some statistics. China idles 10% solar capacity in the first nine months, but over 90% is in the Jiangsu and Xinjiang province. We shifted our focus from the west region to the east and south China. So exposure to curtailment for Jinko Power is not an issue.

For the feed-in tariff payment, we are confident. And if you look at the government's -- what they are saying is they are trying to resolve the issues as quickly as possible. So we believe that the government will approve the next round of subsidy catalog in the near future.

Okay, that's helpful. And then we're listening to a lot of the reports and calls from solar -- Chinese solar companies that are coming out, and we see a wave of capacity expansions from pretty much everyone, including you guys, to start next year. Clearly, China is cutting the FIT. There's some issues -- or concerns, rather, with respect to installations in Japan, and maybe the ITC cut in the U.S. starts to affect installations at some point next year. Do you guys see any risk that capacity expansions of module, capacity specifically, could push the market back into oversupply in the first half of '16? And then one last question.

This is Arturo Herrero, the CSO. Answering your question, yes, let me first clarify that the ITC uncertainty will not happen until the end of next year, okay, because it's until December that they will be stable. So next year, it's a huge market in the USA. The other thing is Japan. Even if it is slightly down, still the market is strong, and it will keep strong despite the reduction in the feed-in tariff. It's one of the most generous countries in terms of feed-in tariff and subsidies. But beside these two countries, there are many other countries that, before, they were not in our portfolio, in our scope, and now we are seeing that the demand is becoming very important. One example, as we said, is Asia Pacific countries like Thailand, where we have been selling a lot. India is becoming very strong with 100 gigawatt of target by 2020 commitment from the government. Then we have the markets like Mexico that after the implementation of the energy reform is becoming a very strong market.

And then there is markets that are smaller in terms of size, but altogether make a big, huge demand and stable in the next 2017 and 2018. And I'm referring to emerging markets in Middle East. I'm referring to Egypt. We just started -- they have started with 200 megawatts of tender. I'm referring to UAE. I'm referring to Jordan. That is also becoming very strong. And then you need to look at African countries, where they have a big shortage of demand -- of supply of energy. I mean they have demand but they have a big shortage, and blackouts, like, happened recently in South Africa. So they really have a huge need of energy.

So we believe that expansion of JinkoSolar that is very rational. And in fact, we don't have enough production. I was pushing our chairman -- we were -- all of our regions were pushing our board to try to increase production capacity, and we are doing it very rational, very, very careful.

Okay. And then one last question. Clearly, as you guys know, polysilicon prices have been under pressure. However, just this week, polysilicon prices were down 2.1% week-over-week or nearly 65% annualized. Polysilicon prices are in free fall, yet other substrate prices have been resilient. Historically, polysilicon price declines lead other price declines. Can you guys help us understand why polysilicon prices are under such pressure from your standpoint yet you're not seeing that yet or maybe, in your view, at all in other substrate solar prices? Thanks for the questions and congrats on the good quarter.

Sure. I think you're right, the polysilicon price is down slightly while the wafer and cell price improved 2% to 3%. I think it's kind of supply and demand situation. If you look at polysilicon supply, it's a little bit oversupplied. But for the wafer and silicon capacity, it's very tight, so the prices - [which] prices the wafer and the [cell] price improved, but will be stabilized.

Thank you.

Thank you.

Your next question comes from Sheng Zhong^ from Morgan Stanley.

Sorry that I lost connection for a while, so -- if this has been asked. So I just wanted to follow up the polysilicon price. As the polysilicon price actually dropped significantly, but your polysilicon price is stable in this quarter versus last quarter. So what's the reason? And do you think there is any reduction potential in next quarter maybe?

Yes. I think our purchase price is down quarter-over-quarter. And in the third quarter, our average polysilicon price is around $15.5 compared to the second quarter, it's $16. And now the polysilicon price is $15 or even below the $15.

Okay. So we should think there is some polysilicon cost reduction maybe in fourth quarter as well?

Yes. I think so, yes.

Yes. And actually, in September, you've gotten RMB10 billion loan credit from ICBC. So as Mr. Chen already introduced, that will be mainly for the downstream projects. So are there any criteria for the money usage, and if this money can be used on your capacity expansion?

The RMB10 billion is kind of strategic agreement between Jinko Power and ICBC Jiangxi branch, and we are working with ICBC for the projects we are developing. And I think under current arrangement, the credit line cannot be used for capacity expansion.

Hi, Sheng, this is Sebastian. So first, you have to understand that this agreement is between Jinko Power and ICBC. That means that definitely cannot be used for JinkoSolar's capacity expansion. Second, I don't think there are so-called criteria for drawdown of that capital. But now it's an agreement -- it's a strategic agreement, so that means it's a credit line. So it's case by case. Once you have the project, then you apply for that project loans or bridge loans. They can offer us different types of financial product, not only the long-term project loans, but also, like I said, working capitals for Jinko Power and also the bridge loans.

Yes. And the financing environment for Tier 1 module makers, I think is very favorable. If you look at our track record, first half year, we expanded Malaysia factories. And in the second quarter, when the facility is up to full capacities, we closed the project loans for the capacity expansion with Chinese import and export bank. So we have tons of options to finance our capacity expansion in 2016.

Understand. That's very helpful. And last question is about on the -- actually, I want to understand more about our working capital. Because the account receivable -- for, say, maybe account receivable, how much is from the electricity? And if I read across the account receivable and the prepayment, it's all increased. But at the same time, the advances from customer also increased significantly. So I want to understand what's the payment term currently in the industry. So can you please give some color on this?

If we look at the accounts receivable from third party, it was around $540 million by end of third quarter, of which around $96 million is related to the downstream solar power and electricity revenues. Actually, if you look at our turnover, it improved a lot quarter-over-quarter. Our DSO has improved to 95 days, 95 days compared to the second quarter; it's 110 days.

And another question is advance one from customers. You are right, China, because of strong demand, the payment term is very, very favorable. And typically, for China, the arrangements will require 30% to 40% down payment before shipments; and upon shipment, another 30%; and upon receipt by the customer, we get the remaining part. So that is why the advance from customer increased a lot in the third quarter. At the same time, accounts receivable is down and the DSO improved.

Okay --

Sorry, as Charlie said, you can see our DSO improved a lot. I think that's the most important index we should focus, not only the -- just amounts, the total amounts.

Yes, sure. Yes, thanks. That's for me. Thank you.

There are no further questions at this time. Mr. Liu, please continue. Thank you.

Okay. So on behalf of the entire JinkoSolar's management team, I want to thank you for your interest and participation on this call. If you have any further questions or concerns, please feel free to contact us. Have a good day or good evening. Thank you and goodbye.

That does conclude our conference for today. Thank you for your participation. You may now all disconnect.