晶科能源 (JKS) 2017 Q2 法說會逐字稿

Good day, and welcome to the Q2 2017 JinkoSolar Earnings Conference Call.

Today's conference is being recorded.

(Operator Instructions)

At this time, I would like to turn the conference over to Sebastian Liu.

Please go ahead.

Thank you, operator.

Thank you, everyone, for joining us today for JinkoSolar Second Quarter 2017 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 Newswire's services.

We have also provided a supplemental presentation for today's earnings call, which can also be found on IR's website.

On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Cao Haiyun, Chief Financial Officer; Gener Miao, VP Global Sales; and Mr. Sebastian Liu, IR Director.

Mr. Chen will discuss JinkoSolar's business operations and the company's highlights, followed by Gener Miao who will talk about the sales and marketing and then Mr. Cao who will go through the financial.

Then we'll 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 provision of the U.S. Private Security 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 filing with the Security and Exchange Commission.

JinkoSolar does not assume any obligation to update any forward-looking statements except as required under applicable law.

Now, it is 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.

(foreign language)

Thank you, Sebastian.

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

(foreign language)

Second quarter module shipment once again hit a record high, increasing 39.5% sequentially to 2,884 megawatts.

Total revenue hit USD 1.17 billion, an increase of 37.2% from the first quarter.

Gross margin dropped slightly to 10.5% from 11.2% in the first quarter of 2017.

(foreign language)

We are pleased with our overall performance, but a little bit disappointed about the gross margins.

While ASP declined during the quarter, prices along our supply chain remained relatively high, resulting in the decreasing of blended cost lower than the decreasing of ASPs.

With the delivery pressure, we have also to allocate more manufacturing to our OEM partners as expected, which also averaged down our margins.

We're currently reviewing some of our market strategies and plan to further cut down the use of OEM in order to improve our profitability going forward.

Our efforts will also be focused on strengthening inventory management and controlling operating expenses.

I believe that those adjustments, in conjunction with our mono wafer and the PERC cell capacity ramping up, will result in margin improvement during the second half of the year.

(foreign language)

Demand in China was very strong during the quarter, boosted by the rush orders before the June 30 Feed-in-Tariff cut.

This momentum is carried on into the third quarter as well besides the Top Runner project and the PV Poverty Alleviation projects.

DG project will also generate stable demand during the second half of 2017.

This year, China will hit 14 gigawatts plus in installation with long-term demand being supported by upwards revision of 5-year targets set by the NEA, which Gener will talk about later.

(foreign language)

Turning to the U.S., the Section 201 petition continued to create market uncertainties.

While this created rush of demand, we don't benefit much from this because we target long-term plant in the U.S. with the big portion of our order stocks to meet our long-term contract with lock-in prices.

We will continue to monitor the situation and adjust our strategy accordingly.

Overall, we believe that the U.S. solar sector's long-term growth momentum will not change, and we will continue to strengthen our leading position in the market there.

(foreign language)

Demand in emerging markets continued to grow, accounting for a larger portion of our shipment during the quarter.

Despite the initiation of the anti-dumping investigation and some geopolitical risks in India, we believe that the Indian government's 100 gigawatts target by 2022 is solid and will continue to create strong demand going forward.

Mexico, Argentina and Brazil in Latin America are gearing up while Egypt and Jordan in the Middle East have the potential to become gigawatt-level markets next year.

Jinko's leading brands and products have helped us differentiate our sales and demonstrate to our customer that we are not only a high-quality product provider, but invests in developing and supporting long-term relationship with them.

We expect demand in emerging market to continue to grow in 2018.

(foreign language)

We already have strong visibility in our order book through the rest of the year and have already begun to take orders for next year.

We expect ASP to remain stable during the second half of the year.

(foreign language)

On technology front, we are still ramping up our mono wafer and PERC cell capacity.

Our diamond wire-cutting multi-wafers are now in mass production, combined with our black-silicon cell technology.

We expect to see demand balance and more rational for multi and mono products going forward, especially after the release of a new criteria for Chinese Top Runner projects.

The key of this competition is still efficiency and cost.

Meanwhile, our tech team has also made good progress in developing half cell technology and bifacial N-Type cells technology with solid progress being made in our new technology development.

We will continue to maintain flexible and dynamic production capacity in order to meet demand from the rapidly changing market.

(foreign language)

Turning to manufacturing capacity, our internal wafer, cell and module capacity reached 6 gigawatts, 4.5 gigawatts and 7.5 gigawatts accordingly by the end of second quarter and we expect internal capacity with 7.5 gigawatts, 4.5 gigawatts and 8 gigawatts accordingly by the end of the year, of which approximately 3.5 gigawatts will be mono wafer and approximately 2.5 gigawatts will be PERC cell.

We remain cautious about expanding our manufacturing capacity and, we mentioned, our flexibility.

(foreign language)

Before turning the call over to Gener, I will quickly go over the guidance.

Based on the current estimate, total solar module shipments were in the range of 2.1 to 2.3 gigawatts for the second quarter -- for the third quarter and 8.5 to 9 gigawatts for the full year 2017.

(foreign language)

Thank you, Sebastian.

With that I will turn it over to Gener.

Thank you, Mr. Chen.

During the quarter, we shipped a record high of 2,884 megawatt of solar modules.

Demand remained quite strong even after the FIT cut in China.

As Mr. Chen just mentioned, we are adjusting our business strategy towards focusing more on profitability.

We plan to reduce OEM volume and a stringent inventory management, which may cause shipment growth to slow down during the second half of the year.

We shipped to approximately 77 countries during this quarter: 51% went to China, 19% to emerging markets, 11% to Asia Pacific, 10% to North America and 9% to Europe.

Market demand for our new technology products continued to be robust with wider acceptance.

China retained its position as our largest market due to a surge in rush orders before the June 30 FIT cut.

Demand after the June 30 cutoff remained strong, which was demonstrated by the 10-gigawatt installation during [the last].

Orders from Top Runner projects and the DG project keeps coming in, and we expect to see ASPs stabilize and more customers step up the sidelines and place orders during the fourth quarter.

China's long-term demand is also supported by the upward revision of 5-year target set by the NEA.

The new 86.5-gigawatt utility-scale installation target set at the provisional level doesn't include Poverty Alleviation Project and the DG project.

We expected utility projects, PV Poverty Alleviation Projects and the DG project to create a 30-gigawatt plus market annually in China for the next 4 years.

Module demand in the U.S. is expected to increase during the second half of 2017 as utility-scale developers stock up on inventory ahead of the Section 201 decision.

While we are prepared for the worst, we believe that any potential remedy recommendation could well inline as the commission appears to have taken note of the impact potential tariff could have on the downstream sector and the solar industry as a whole in the U.S.

Although we don't expect that the U.S. market will grow significantly in 2018 with some pipelines made early release in the second half of 2017, the U.S. remains an important strategic market for us in long term.

Rush orders in the U.S. have also created a shortage in some overseas market and have pushed the prices upwards as in Europe.

In Europe region, the demand turned out to be stronger-than-expected due to the rush orders from Turkey in Q2.

It is expected that EU demand continued to be inspiring in Germany, Netherlands, France, especially after the new bids in Spain, which requires a new business model of a great parity market.

In Asia Pacific region, shipments into large key accounts have grown significantly.

For Australia market, 2017 has been a transformational year for its utility solar PV development with the financial close of key projects with over 1-gigawatt solar pipeline.

Demand in Japan is weaker than last quarter due to the seasonality following the end of their fiscal year.

We, however, expect the future demand in Japan to be stable and remain one of the top markets.

India launched an antidumping investigation against the imported solar cells and panels in July, which so far has limited impacts to market demand.

The primarily growth driver in the market is the 100-gigawatt installation target by 2020 set by the Indian government, which should help maintain the strong growth momentum.

We also expect to see a more hospital business environment after China and the India reached an agreement to ease the tension.

Demand in emerging markets continues to grow.

In Mexico, we started to deliver our high-quality products for round 1 projects totaling over 1 gigawatt.

As the end of June, we have reached a total shipment at 1.8 gigawatts in LATAM region, and again, more than 40% of market share as the market leader.

We expect emerging markets to be an explosion of demand in 2018 in Egypt, Jordan in Middle East and Mexico, Argentina, Brazil in Latin America.

ASPs during the quarter came in at USD 0.377, a slight decrease from $0.395 in the last quarter.

We expect the module prices to remain stable in the second half of 2017.

In terms of our geographic mix, we expect a more balanced shipment portfolio during the second half.

The percentage of shipment to China may drop to 35% to 40% with the percentage gap fueled by the U.S. and the emerging markets.

We continue to promote JinkoSolar's brand by attending various marketing and industry conferences.

In May, we were invited to co-chair the B20 ECRE Taskforce in Berlin.

As the task force co-chair and the only Chinese enterprise invited to speak at the summit, we led the drafting of the climate change policy recommendations that we personally handed to German Chancellor, Angela Merkel, who is this year's G20 summit chairwoman.

All in all, during Q2, we attended 13 trade shows and participated in 14 -- 40 conferences.

We also hosted 20 customer events, 15 customer trainings, 9 roadshows and 24 co-marketing activities with key partners across the globe.

All those activities further strengthened our leading position as one of the strongest and most recognized solar brands 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 2017.

Thank you, Gener.

I'd like to walk you through our Q2 results.

Total solar module shipments were 2.9 gigawatts, up 40% sequentially and up 68% year-over-year.

Total revenue was $1.2 billion, up 37% sequentially and up 40% year-over-year.

Gross margin was 10.5% compared to 11.2% in Q1 and 18.1% in Q2 2016.

We continue to cut our blended cost to $0.34 per watt from $0.35 in the first quarter.

The operating expenses represented 9.5% of total revenue compared to 10.3% in Q1 and 12.7% in Q2 2016.

EBITDA from continued operation was $37 million compared to $37 million in Q1 and $99 million in Q2 2016.

Net income was $7 million.

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

Non-GAAP net income was $9 million.

This translates into non-GAAP basic and diluted earnings per ADS of $0.28.

Now let's move to the balance sheet.

By the end of second quarter, cash, cash equivalents and restricted cash were $280 million compared to $249 million at the end of Q1.

Inventories were $768 million compared to $780 million at the end of Q1.

The total debt was $1.1 billion compared to $886 million at end of Q1, and net debt was $786 million compared to $637 million at the end of Q1.

The company's working capital was $57 million compared to $117 million at end of Q1.

The reducing in working capital is mainly due to the CapEx.

At this moment, we're happy to take your questions.

Operator?

(Operator Instructions) Our first question comes from the line of Philip Shen of Roth Capital Partners.

This is Justin Clare, I'm on for Phil today.

So first, I wanted to talk about your guidance.

We're calculating implied Q4 guidance of about 1,350 to 1,850 megawatts.

It suggests volume could be down 27% quarter-over-quarter.

Just wondering if you could talk about what you expect to see from the U.S. and the China markets in Q4 and how that is impacting your Q4 outlook.

Yes, this is Gener.

Regarding the shipment targets, we are -- we are targeting for sure, the high end of the previous guidance, which is 9 gigawatts annually.

Meanwhile, if the market demand is strong, we shall give you more color by the next quarter earnings.

Okay.

And then if we could shift to ASPs, can you share what your ASPs were by region for Q2?

And then if you could talk about what the outlook is for ASPs by region in Q3, that would be helpful.

So for Q2, the ASPs -- let me illustrate some key markets.

So for China, the market price -- sorry.

Yes, for China, the market price is around 37 -- USD 0.36 to USD 0.37; and for Japan, the price is at the high 30s, so let's say, at USD 0.38 to USD 0.40.

U.S. market is on average low 40s, so let's say, USD 0.40 to USD 0.42; and the Indian market is relatively lower, it's in mid 30 range, let's say, USD 0.33 to USD 0.35; and Europe is kind of high 30 and similar to Japan market, it's, let's say, USD 0.38 to USD 0.40.

And we are expecting a kind of stable ASPs between Q2 and Q3.

Okay, that's helpful.

And then finally, can you share how much you paid in tariffs in Q2?

And then is the cost of the tariff included in your blended cost that you provide?

This is Charlie.

I think you are talking about that tariff paid for the U.S. shipments.

I think for the second quarter, the tariff should be very small and we did include the tariff cost at the cost of goods sold.

And the background is -- for the U.S. shipments, we are -- we have allocated China capacity to the U.S. market, that is why we don't pay any -- I think that's very small the tariff for the U.S. shipments.

Our next question comes from Maheep Mandloi of Crédit Suisse.

Could you just talk more about the strategic review you spoke about in the prepared remarks?

What steps do you plan to take to improve the business?

And how should we look at your gross margins and OpEx -- operating expense in the second half because of that?

We are shifting the strategy to the profitability.

And if you look at our shipments in the second quarter, it's around 2.8 gigawatts.

And we have annual capacity for the module only 7 gigawatts.

So that means we need to OEM module around 30%, which created the lower gross margin in the second quarter.

And we committed to focus the balance of shipment, profitability and gross margin in the second half year.

And we have cut dramatically the OEM capacities in the second half year and below, I think, below 10% for the OEM capacity.

That is why from the cost perspective, for the multi-wafer we are implementing the diamond wire technology under which we'll improve the cutting cost for the wafer.

And for the mono PERC, which is in supply shortage and we are ramping up very quickly and we are able to ship around 20% mono PERC shipments -- 20% to 25% in the second half year.

And regarding the operating expenses, that is the area we are working on.

And if you like some kind of indications for the gross margin, I would like to say it's going to be stable in the third quarter and to improve in the fourth quarter.

And for the operating expenses, we are looking for the range of around, I think, 9.5% to 9.8%.

That's helpful.

And just on the downstream business, could you talk about how would you exit that business, like would you be selling that business to someone?

And what happens to the existing projects?

And does the exit impact your gross margins and OpEx again?

Sure, sure.

I think we have decided to continue to focus on the solar module business and solidify our leading position in the solar module place globally.

And for the existing downstream international projects, we have I think sizeable late-stage projects, which was around 580 megawatts.

And for the existing projects, we'll continue to develop and construct and connect to grids.

The [COD] timing, depending on different projects, will form in Q4 2018 to the first half year 2019.

And after the connection, we'll, at this stage, we are open to the monetization models.

But after connection of the projects, we are open to monetize the projects.

And we have decided starting from third quarter, we will not develop any new international projects.

That's helpful.

And Gener, given your focus on your module manufacturing business, could you just talk about your capacity expansion plans beyond 2017?

Some of the competitors in China have said that they're accelerating capacity additions.

And do you plan to add more capacity?

And as a follow-up, I'll just -- could you just talk about CapEx in the second half?

In the second half '17 or next year?

This year.

Next year, right?

In Q3 and Q4 of this year, yes.

Okay.

By the end of the year, we'll have 7.5 gigawatts wafer, 4.5 gigawatts cell and 8 gigawatts in solar modules and including mono wafer capacity I think, 3.5 gigawatts and PERC capacity at 2.5 gigawatts.

And we are doing a planning for 2018.

The capacity expansion is under discussion.

But we -- depending on how we look at the 2018, we will continue to adopt the disciplined capacity approach, which means we'll continue to maintain lower level of wafer and cell capacity and relatively higher module capacities.

If you are talking about CapEx for 2018, I think, in general, I will expect the 2018 CapEx should be lower than 2017.

Our next question comes from the line of Scott Chui of Citigroup.

My first question is regarding the downstream projects that you just mentioned.

Can I know the geographical breakdown of those international projects?

And also in terms of the CapEx in the second quarter, how much is attributable to downstream and how much is from midstream?

This is my first question.

Sure.

And for the geographical mix for the downstream projects, we have around 508 megawatts in the projects.

And I think we have 3 projects in Mexico, which is around, I think, 250 megawatts.

And one project in Abu Dhabi, we hold 20% equity, so it's around 240 megawatts, something like that.

And we have another, one project in Argentina.

And regarding the Q2 CapEx, the total amount is roughly $160 million.

And because the international projects we are going to start constructions in later 2018 and early of 2019, so the CapEx for the downstream projects in Q3 is very small.

Okay.

And my second question is about OEM.

You just mentioned that you reduced OEM in Q3, but given that we know that the Chinese shipment in July and August is -- was actually quite robust, and so I would like to know how much OEM have you used for July and August alone.

Yes, this is Gener speaking.

So in general, if you're looking at Q2 total shipments minus our internal capacity, that should give you a range between, let's say, 25% to 30% of total capacity if you see the OEM -- I mean, mainly from the module end.

And as for the Q3, we have significantly reduced such amount.

If you look into the guidance we provided -- shipment guidance, provided to the Q3 and minus our internal module capacity, which should be around 7 gigawatts annually, that should be the OEM we are trying to use right now.

Okay, okay.

And for my last question, it's about the cost reduction and I know that currently we stand at $0.34 in Q2.

To what extent do we see the cost reduction could be for Q3 and Q4?

Do we target at like maybe like 30% or 31% by the end of this year?

For the cost reductions, given the high polysilicon price in the third quarter and we are expecting from the blended cost perspective, we are targeting to achieve $0.31 to $0.32 by the end of the year.

For the in-house manufacturing costs for both multi and mono PERC, we are targeting in-house production cost below $0.30.

Okay, okay.

That's helpful.

Sorry, I have one more question, it's about the R&D tax reduction that you mentioned in the announcement.

Can I know how much is the tax reduction?

It's roughly, I think, USD 5 million.

And for the R&D reduction, just to some clarify, it's kind of for the PRC companies each year for the high-technology companies, we are subject to 50% additional tax reduction spread, it will be approved for the next year.

So we got approval for the -- last year, the R&D, 50% reduction and recorded in the second quarter.

Okay.

So it's like a reversal of previous tax cessation?

It's not a reversal.

It's kind of, to us, the tax benefits and we are able to enjoy last year, but it's subject to approval this year by tax authority, and it's typically happening in the second quarter because that's the tax [finding better lines] for Chinese companies.

Our next question comes from the line of Gordon Johnson of Axiom Capital.

With respect to the gross margin, just focusing on that a little bit, it seems like the gross margin this quarter was a little below expected.

With polysilicon and wafer prices doing what they're doing, up in both significantly today on PVinsights and [margin] is appearing flattish, can you give us some guidance with respect to kind of how we should expect your gross margin to trend?

And can you tell us what the ASP was in the second quarter as well as what you expect the ASP to be in the third and fourth quarter?

Then I have a follow-up.

Gordon, I think I just answered your question in terms of gross margin, and we are looking to improve in the second half year.

And you're right, now the polysilicon price and even I think the wafer price increased a little bit and particular for the poly increased 20%, 25% in third quarter.

From our perspective, we are counting the OEMs volume, which means we are counting the blended costs for the second half year so which will offset again some kind of negative impact by the poly -- high poly price.

And regarding the poly price, we expect to continue to be strong till the end of September and may come down a little bit in the fourth quarter.

So we -- and in addition, we are ramping up PERC, mono PERC capacity.

So that is why I'm saying the gross margin to be stable in the third quarter and to improve in the fourth quarter.

That's our expectation.

This is Sebastian.

For the ASP, I think Gener just said in his speech that our ASP during the second quarter is USD 0.377.

Okay, I'm sorry, you said the ASP was $0.375?

Is that correct?

USD 0.377 for Q2 and I'm expecting the number will be very stable from Q2 even until the year-end.

Okay, that's helpful.

And then, I guess, lastly, as we spoke to in China, they have limited visibility into the fourth quarter with respect to installations and kind of how things are going to trend.

It seems like you guys are saying you have more visibility.

Number one, is that correct?

And number two, why do you think maybe some of your peers are saying they have less visibility into Q4 in China?

Firstly, my comments regarding China demand for Q4.

Actually, the China market is -- the total installation number is very large in 2017 and that the demand in the second half is much stronger than people expected compared with what's happening -- what has happened in 2016.

So that's why the poly price is stable, even goes up sometimes recently.

And together with this visibility of the installation because according to our market intelligence, the installation, there should be some -- more clarities now even, let's say, in the recent 2 or 3 weeks' time compared with what our peers has -- what our peers announced in their earnings, I think, almost one month ago because the China policy has more clarity and people get -- people have hold their pipelines for long enough.

So it will be very limited time left for the year to finish the installations before year-end.

So in general, my comments for China market demand for Q4, the visibility are much better in general.

And for Jinko, specifically, because we are trying to, let's say, maximize our profitabilities by reducing our OEM volumes, that means our total availability of the capacity will be less than previous plans and the visibility of the total order book are very high level.

That's why we are seeing the ASPs and also these order books are very, let's say, visible.

Actually, just one last one, if I could.

I thought last quarter you guys said you expected some gross margin improvement with respect to PERC helping -- your PERC technology helping gross margin and you also said that you expected ASP improvement, I believe, last quarter.

So are we just seeing a delay in that?

Or it's somewhat volatile when those benefits coming in?

Yes, let me answer your question regarding ASPs.

So if you look into the PERC products alone, definitely you will see the ASPs are better in Q2, even in Q3 compared with what we have in Q1.

But the total ASP or weighted average ASPs not only depends on the PERC itself, it's also have other products jump in, so that will impact the total ASP.

I will leave the gross margins to Charlie.

Yes, I think the high material supply cost is exceeding our expectations unlike the poly, the cell due to the strong -- I think most people don't anticipate such strong shipments in China and put material cost higher than our expectations.

So that is another area, which has an impact on the gross margin.

Gordon, let me explain in more detail because when we announced the Q1 results, in fact, we already have visibility of our Q2 shipments and also the ASPs.

So -- but our costs is better with our expectation of Q2.

But like Charlie just said, the value chain -- price in our supply chain is kind of above our expectations, especially the price of polysilicon and sales.

So in fact, the problem lies in the cost, not lies in the volatility of shipments or the ASPs.

(Operator Instructions) Our next question comes from the line of John Segrich of Luminus.

I just wanted to understand one thing about the OEM business.

Is the OEM business that you're doing actually gross margin positive?

Or was it possibly even gross margin negative during the quarter and that's why you feel better about the margin going forward?

The OEM gross margin is positive, but it's very low.

I think I don't have the exact number, but it's roughly 5%.

Yes, it depends.

Some of them are really low.

But on average, it's way below our average gross margin.

Sorry, this is Gener.

I want to add more colors on your question regarding OEM.

I think everyone's asking about it.

So in the -- let's say, in the bad time of the market, OEM is definitely a positive to the company shipment numbers and also the gross margins.

But at the peak time, especially during that Q2 rush hour, especially in China, everyone is in short of supply.

The market is in short of supply so we are looking for the support from the OEM players.

You have to share the margins and take with them.

So that's, I think, part of the reason why the margins are competitively low.

Thank you.

As there are no further questions in the queue, that will conclude today's question-and-answer session.

And now I would like to turn the call back to Sebastian Liu for any additional closing remarks.

At this moment, 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, and good evening.

Thank you, and goodbye.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.