晶科能源 (JKS) 2016 Q2 法說會逐字稿

Thank you for standing by, and welcome to the JinkoSolar second-quarter 2016 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday August 25, 2016.

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

Thank you, operator. Thank you, everyone, for joining us today for JinkoSolar's second-quarter 2016 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 newswire services. We have also provided a supplemental presentation for today's earnings call, which can also be found on the IR website.

On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Cao Haiyun, Chief Financial Officer; and Mr. Gener Miao, VP Global Sales and Marketing, and Sebastian Liu, IR Director. Mr. Chen will discuss JinkoSolar's business operations and the Company's highlights, followed by Mr. Gener Miao, who will talk about the sales and marketing. And then Mr. Cao will go through the financials. They will all be available to answer your questions during the Q&A session that follows.

Please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks is included in JinkoSolar's public filings with the Securities and Exchange Commission. JinkoSolar does not assume any obligation to update any forward-looking statements, except as required under applicable law.

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 announce another strong quarter. Module shipments reached a record high of 1,716 megawatts, exceeding the high end of our guidance of the quarter.

Total revenue reached $896.1 million, an increase of 86.1% over the same period of last year. Gross margin was 20.4%, compared with 21.3% in the first quarter of 2016 and 20.7% in the same period of last year.

We shipped 46% of our modules to China, 43% to North America, 5% to Asia Pacific region, 4% to Europe, and 2% to emerging markets during the quarter. Due to seasonality, a large portion of our shipments were to the US and China, where we expect shipment to balance out during the second half of the year.

ASP remains flat at $0.55 compared with the first quarter.

Looking at the second half of the year, we do see some uncertainty in terms of both demand and ASPs, caused by the [too uncertain] feed-in tariff cut in China, additional global capacity coming online and some panic sales from small suppliers. We remain cautiously optimistic, however, and are confident that we will be able to maintain our gross margin at a decent level.

In China, we are actively participating in the project of Top Runner Program and the PV Poverty Alleviation Program to counter the effects of the declining traditional utility-scale market. We were the first PV company to receive the China Quality Certification Center's level-one energy efficiency certification for both mono and multi products for the Top Runner Program.

In the US, we have already secured a large number of orders for the second half, a majority of which will be supplied by our oversea production facility, which will significantly reduce the impact of declining ASP.

As I mentioned earlier, the portion of shipment to other markets will increase during the second half, particularly to Latin America, India and Japan, which will balance out our geographic mix.

In general, while we are facing challenges, we have already built a strong book of orders for the second half of 2016. And based on our current availability, we even expect to see demand pick up in some of the market in Q4, China in particular.

Electricity output from our domestic projects improved substantially to 327 GWh, an increase of 55.8% sequentially, while generating RMB285 million (sic - see press release "RMB288.5 million") in revenue. This solid increase is a result of increased sunlight hours from seasonality, reduced curtailment in China's western regions, as well as a number of other project ramping up to full capacity.

We remain on track to hit our connection guidance by the yearend. Management believes that our downstream business has enormous potential in the long run, and we continue to work on spinning this business off to maximize shareholders' value and deleverage our balance sheet from this asset-heavy business.

In terms of manufacturing capacity, we update guidance for the year in capacity to 4.5, 3.7 and 6.5 gigawatts for wafers, cells and modules respectively, compared with the original guidance of 3.5, 3.5 and 6.5 gigawatts for wafers, cells and modules. The increased part is mainly wafers for the usage of our PERC products.

On the technology front, we remain focused on cutting cost while delivering the best technology and products. We continue to expand our PERC production lines and help make solid progress in developing our black-silicon technology. We are also working to combine these two technologies to further increase the efficiency and the reliability of our products. Our new series of double-glass smart modules and diamond saw black silicon -- black-sheet modules are also about to begin mass production.

As cost leader in this industry, our team is working very hard to optimize the cost structure and confident that we still have plenty of room to further cut the blended cost towards the end of the year.

When others see challenges, we see opportunities. We take a big-picture perspective on planning out our strategy to navigate through the headwinds and industry shifts. I'm confident in the long-term prospects of the solar industry globally and I believe JinkoSolar will continue to grow substantially and increase value for our shareholders.

Before turning the call over to Gener, I'll quickly go over the guidance for the third quarter and the full year 2016. In the third quarter, the Company estimates the total module shipments to be in the range of 1.5 to 1.7 gigawatts, which include 1.4 to 1.65 gigawatts modules to the third party.

Full-year 2016 guidance stays the same. The Company expect total solar module shipment to be in the range of 6 to 6.5 gigawatts, which includes 5.4 to 5.7 gigawatts shipment to third party. The Company expects to connect solar power project with the new capacity of 600 to 800 megawatts in 2016.

With that, I will turn the call over to Gener.

Thank you, Mr. Chen. As Mr. Chen mentioned, we shipped a total of 1,716 megawatt of solar modules during the quarter. Those strong shipment results reached another history high for us. While we will face a challenging environment during the second half of the year, we remain cautiously optimistic about the market, especially in a number of markets that are already showing signs of regaining growth momentum in the fourth quarter.

First, let's look at the geographic distribution of our shipments during the quarter. We shipped 1,512 megawatt of solar modules to third parties, including 46% to China, 43% to North America, 5% to Asia Pacific region, 4% to Europe, and 2% to emerging markets. Due to seasonality, a larger portion of our shipments were to the US and China, and like Mr. Chen just mentioned, the geographic mix should balance out during the second half of the year when China slows down and Japan, India and Latin America pick up.

China remained our largest market during the quarter. While demand in the third quarter is expecting to soften due to the FiT cut at the end of June, we are confident about our position in the market and its future opportunities. Based on our current visibility, we expect the demand will recover during the fourth quarter.

We are actively involved in Top Runner program, which set high standard for efficiency and reliability of PV products, helping Tier-1 suppliers to create a technology barrier in market. We are also very active in participating Poverty Alleviation Project, which will be a 20-plus gigawatt market for the next 5 years.

Outside China, the US continues to be one of our most important markets, where near-term headwinds have dampened the market sentiment, even causing some customers to wait and see. It does not change the fundamental demand from the US market and the long-term favorable support policies. We expect that the US market will remain relatively flat in 2017 and pick up again in 2018.

We have viewed strong position in the utility-scale market in US and are working with more distributors and deploying more resources in residential and commercial market, which is growing rapidly and steadily. We have also secured a number of large orders in US for the second half of the year, the majority of which will be supplied by our oversea production facility, which will significantly reduce downwards ASP pressure and help maintain our gross margin in the US.

The European market has kept status quo despite the UK, one of the biggest markets, facing uncertainty after Brexit vote. This is mainly the cross-currency depreciation, which affected the economics of some projects. But the market now is recovering and we are still evaluating new opportunities there.

Turning to Asia Pacific region, although we've seen regulatory changes, Japan remains attractive, where we continue to strengthen our relationship with local partners to enlarge our market share there. The Indian government has recently implemented a series of policies designed to support the solar industry from both the central and the state government levels.

The market is growing very fast and showing great potential. While markets are still towards the bottom end of our range, the market environment is getting better and increasingly stable and could actively hedge against the slowdown of some of the other markets. The first half of the year is typically slow for Japan and India as this marks the end of their fiscal year, but demand is expected to pick up in the second half.

Scheduled shipments to the emerging markets will be concentrated towards the end of 2016 and into 2017. We recently helped our utility and ICP customers complete these in Mexico, Argentina and Chile for projects, with the next round of their PV program scheduled to begin construction afterwards. Those orders, plus current backlogs with strengthen our leading position in Latin American markets.

ASPs during the quarter came in at $0.55, flat when compared to the last quarter. ASPs are expected to decline by low teens in second half, mainly due to several reasons, such as slowing Chinese demand following the June 30 FiT cut, additional global production capacity coming online, a large number of tariff-grade products being shipped to US market and some panic sales from smaller suppliers.

Although the decline in ASPs is quicker than we expected, as Mr. Chen just discussed, we are well prepared and have actively taken actions to reduce the impact. And we don't see ASPs decreasing much further and expect that they will improve in Q4.

Moving to marketing and branding, we participated in a number of events, exhibitions and conferences during this quarter. In May, we attended the SNEC in China, and in June we attended the Renewable Energy Asia 2016, Thailand; Africa Energy Forum in London; and the Intersolar in Munich.

During Intersolar Munich, JinkoSolar exhibited the all-black Eagle MX smart solution for the first time. JinkoSolar's MX smart solution is one of the most advanced solutions for rooftop installation. With its built-in intelligence core optimizer, MX smart solution ensures a simpler installation and a greater power output.

Jinko organized a series of anniversary celebration customer events to drive corporate and brand marketing. Jinko created merchandizing kits for distributors in US, and kicked off a series of outside roadshow and online webinars in Australia, Europe, South America and Africa. Through those events, JinkoSolar further strengthened its leading position in brand value and recognition worldwide.

Now I would like to turn the call over to Charlie, who will go over our financial results of the second quarter of year 2016.

Thank you, Gener. I'd like to welcome you to our financial results for the second quarter 2016. Total solar module shipments were 1.7 gigawatts, up 7% sequentially and up 88% year over year. The shipments exceeded the high end of our second-quarter guidance.

We connected 123 megawatts solar projects in this quarter. By the end of Q2, we had 1,130 megawatts projects in operation.

Total revenue was $896 million, up 9% sequentially and up 86% year over year. Revenue generated from solar power projects was $43 million, up 56% sequentially and up 62% year over year.

Gross margin was 20.4%, compared to 21.3% in Q1 and 20.7% in Q2 2015. This sequential decrease was due to the increase of tariff cuts related to module shipments to the US market from China.

ASP was $0.55 per watt, the same to the ASP in Q1. We continued to cut our non-silicon cost to $0.29 per watt, from $0.30 per watt in Q1. The blended cost, excluding the US tariff cost, was $0.41 per watt, flat compared to the costs in Q1.

Power operating expenses resented 12.9% of total revenues, compared to 7.8% in Q1 and 13.3% in Q2 2015. We had an impairment of $50 million for the replaced equipment during the process for the improvements on a domestic production level. Excluding non-cash expenses, the operating expense was 10% of total revenue in Q2 2015. Operating margin was 7.5%, compared to 10.5% in Q1 and 7.4% in Q2 2015.

Net interest expense was $18 million, down 4% sequentially and up 53% year over year.

EBITDA was $180 million, compared to $125 million in Q1 and $66 million in Q2 2015. EBITDA related to solar-powered projects was $36 million, compared to $[50] million in Q1 and $22 million in Q3 2015.

Net income was $42 million. This translates into basic and diluted earnings per ADS of $1.36 and $1.28 respectively.

Non-GAAP net income was $64 million. This translates into non-GAAP basic and diluted earnings per ADS of $2.04 and $1.92 respectively.

Now let's more to the balance sheet. By the end of second quarter, cash, cash equivalents and restricted cash were $557 million, compared to $523 million at the end of Q1. Our accounts receivable was $628 million, compared to $611 million at the end of Q1. Inventories were $466 million, compared to $482 million at the end of Q1.

The total debt were $1.8 billion, compared to $1.6 billion at the end of Q1. The debt related to solar-power projects were $1 billion, compared to $865 million at the end of Q1.

We updated the CapEx plan for our module business in 2015, which is in the range of $200 million to $250 million.

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

(Operator Instructions). We will now take our first question from Patrick Jobin from Credit Suisse. Please go ahead. Your line is open.

Hi. Good evening. Thanks for taking the question. First question, I guess can you talk about the visibility you have into the margins in the second half? I guess I'm trying to reconcile the comment that you've a strong order book, but I guess the comment that pricing is declining in a low-teens percentage. Should we think about gross margin percentage declining, lock step with that, or how do we think about the margin profile in the next two quarters?

Okay, (inaudible). I think we have --

Patrick.

Sorry, Patrick. I think we have strong visibility for the second half year in terms of orders. And in terms of gross margin, Q2, the gross margin was 20%, and of which I think power business is 61% and solar module business is around 18%. For the module business, the ASP is under pressure, but we are taking the further steps to cut the costs. We are seeing a lot of positive factors and targeting to cut our blended costs over 10% in second half year.

The second half year, we expect the tariff costs will be significantly lower because we had completed our capacity expansion in oversea market and we had 1.5 gigawatts cell and module capacity on line, which will help us to adjust to the strong US market. And we plan to ship over 90% shipments to the US market from oversea factories in the second half year, compared to 70% in the first half year.

And the cell price (inaudible) dramatically, and if you look at our capacity, existing capacity, we still need to buy 40% cell from third party. So -- which will help us to drive some of our costs. And the next one is we are working actively with our strategic vendors and we expect to get a more favorable price from our vendors.

And if you look at the RMB, it's still depreciating, so -- which is also help us to cut the costs. And we continue to invest in our R&D and improve the efficiencies.

So for the module business, I would expect the gross margin in the second half year, it's around 13% to 17%. For the power business, the gross margin will be quite stable. It's in a range of 60% to 65% for the third quarter. And for the fourth quarter, because of the seasonality, I expect the gross margin will go down slightly.

Patrick, just one point, in fact this quarter our module business, gross margin just a little above 80%. So in fact, for the second half we expect that the gross margin for our module business just will decrease a little bit.

Okay. That's helpful. Then I guess just in context of what you're seeing on the pricing environment and what we and others in the industry have tabulated as quite a significant capacity expansion that's occurring right now despite some markets where maybe you're not seeing demand in growth into the next year, can you help us understand what you're doing on the capacity front? Why make the decision this quarter to expand capacity further? How much of the expansion is PERC? Is it upgrading existing lines or are these new facilities? I'm just trying to reconcile the oversupply situation, just the cyclical position we're in and the decision to expand capacity right now. Thanks

By the end of second quarter, our total capacity reached to 3.5 gigawatts for wafer and 3.5 gigawatts for cell and 6.5 gigawatts for the solar modules. And you're right, I think we have made strategic decision to invest 1 gigawatt mono wafer capacity and 1 gigawatt PERC equipment. And the production ramp will ramp up to full capacity by the end of the year.

So the rationale is we anticipated the demand for the high-efficiency mono modules in the market and we invested years for the mono technology. And thanks to our technology, we believe we can provide the leading high-efficiency mono modules in the market.

The investment on mono does not mean we are going to shift our focus to multi from mono. And we believe that both technologies have great potential in the future to increase the efficiency and cut the cost. And the investments will help us to solidify our leading position and provide more options to meet our customer needs.

Thank you.

And for the total capacity expansion, we continue to adopt disciplined approach. And the total CapEx this year, 2016, for module business is in the range of $200 million to $250 million.

Got it. Thank you.

Thanks.

Thank you. We will now take our next question from Vishal Shah from Deutsche Bank. Please go ahead.

Yes. Hi. Thanks for taking my question. I wanted to just better understand your mix in the second half across different regions. What percentage of the shipments in, say, for example, Q2 will be to the US market and how will that mix shift in Q4 as China becomes a bigger percent of the mix?

Hi Vishal. This is Gener. I just give you some color from that. So for the second half as a whole, we are expecting around 30% to 35% to China, and a similar number, around 30% to 35% to US, and 12% to -- 15% to 12% to Asia Pacific, and a similar number, 15% to 12% -- 20% to emerging markets. And Europe will be below 10%.

That's great. Thank you. And then what kind of visibility do you have right now with respect to Q4 shipments? What percentage of your current guidance is in the order books, for both Q3 and Q4?

Well, so it's difficult to differentiate Q3 and Q4 because some of the orders are long-term [orders] that come through the whole year or the whole second half. So if we're looking to the whole second half of 2016, we are -- our order book, more than 60% are full. So I think we are pretty happy with the current position we have. And we are seeing more and more opportunities coming, and not only for the second half of 2016, but also for the 2017.

That's great. Thank you. And then just a couple of other follow-up questions. On the US, you mentioned some of the customers are adopting a wait-and-see approach. Where do you think the demand is right now for your products in the US? Is it commercial, industrial segment or utility-scale segment? And how do you think the China market develops in 2017? Is it going to be flat, like you said, in the US or could it actually grow on an annual basis? Thank you.

Thank you. For the US, we are believing that the majority of the demand will still coming from the utility segment, but we are seeing the -- fast-growing market from the -- demand from the commercial and the residential market. So our strategy-wise, we are really working together for the commercial and residential segment, we are working together with a national-wide or regional-wide distributors and the even larger size of the local installers to distribute our business and our products.

So for the China, we are believing that the next year will keep a similar demand compared with 2016. So the total number will still be a high number, even global number one demand. Thank you.

Thank you.

Thank you. We will now take our next question from Philip Shen from Roth Capital Partners. Please go ahead. Your line is open.

Hi. I wanted to touch on the ASP topic for a moment. You mentioned in your prepared remarks that ASPs could improve in Q4. Can you elaborate on this? Typically, ASPs are -- they fall 5% to 8% year on year and they're accelerating, as you mentioned in your prepared remarks, to a low-teens level in Q3. But what specifically do you see in Q4 for the ASP trends and how do you expect the ASPs to trend in 2017 as well?

Thank you, Phil. This is Gener. So for ASPs, if we are looking into the supply and the demand side, actually we are really -- from the demand side we can see that Q3 mainly will be the weak season through 2016. Q4 and Q1 will typically be the peak season for India and Japan market.

And also, after the feed-in tariff cut by the first half in China, and Q3, not many people taking actions for module delivery demand. But for sure, people are trying to close their grid connection before year end, the fiscal year in China. So we will see pretty strong compared with Q3 and we will see pretty strong Q4 demand in China as well. So US will be the similar case, pretty flat.

So combine all this four key markets, we can see that the demand for Q4 will obviously be stronger than Q3. That's why we have the confidence for this Q4 ASP.

Right. And in general, what do you see in 2017? We've heard reports that ASP, booking -- ASPs and volumes that have been booked for the back half of 2017 in terms of long-term contracts are actually quite low. So do you see -- well, thoughts on 2017. Thanks.

Well, 2017, we are still cautiously optimistic. [If we try] to compare with 2016, we can see obvious increase in demand from India. And also Japan will still be strong. So we do not see any decrease in demand. Meanwhile, we can see some increase in demand. So from the total demand side, we are still optimistic because the China market, China government still got their ambitious targets to beat for 2017.

And for the ASP side, we can see the stable ASP in 2017 compared with second half this year because we have -- if we consider the increasing efficiency of the solar products, we will see a slightly decrease. But to compare with the lower end of the second half of 2016, we are still confident that the ASP in 2017 will be -- keep us in rationale numbers.

Okay. Great. One more from me here. In terms of your downstream business, you mentioned in your release that you're still working on plans to potentially spin that business off. Can you update us on where that stands and what some of the next steps might be and if there's anything in the near term that we could expect there?

Philip, this is Charlie. We continue to move the spin-off process forward and target to complete the process by the end of this year. And Chinese capital market is the first options, and the Chinese regulators are annualizing the detailed policies for the overseas asset company coming home. And we are optimistic because China encouraged the merger acquisition for the [real] economies, and renewable energy is one of the key area to develop low carbon (inaudible) economies.

And so far, I cannot discuss the plan in details. And we will keep investors posted if we made some significant milestone.

Great. Thank you. I'll jump back in the queue.

Thank you. Thank you, Phil.

Thank you. (Operator Instructions). As there are no further questions in the queue I will turn the program back to Mr. Lui for any additional or closing remarks. Thank you.

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 a good evening, and thank you and goodbye.

Thank you. That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.