晶科能源 (JKS) 2017 Q3 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, operator.

Thank you, everyone, for joining us today for JinkoSolar's Third 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 services.

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

On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer; Mr. Cao Haiyun, Chief Financial Officer; Mr. Gener Miao, VP Global Sales; and then 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 will go through the financials.

We 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 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 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.

(foreign language)

Thank you, Sebastian.

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

(foreign language)

Larger shipments [exceeded] at the high end of our guidance during the quarter, coming in at 2,374 megawatts where total revenue hit USD 964.8 million, a decrease of 19% sequentially and an increase of 20.4% from the third quarter of 2016.

Gross margin [rebounded] to 12% from 10.5% of last quarter as a result of cost-cutting measures and reducing the usage of the OEM manufacturers.

(foreign language)

Although facing the challenge of rising material costs, our gross margin rate and net income from the operation both increased in Q3.

However, net profit decreased sequentially mainly because of the depreciation of the U.S. dollar and related exchange losses.

Looking towards Q4, we see net profit have room to improve.

(foreign language)

Demand in China remained strong during the quarter.

The post (inaudible) circuits market in China has been firmly supported by the DG market, which is expected to create over 20 gigawatts of demand this year with strong growth momentum carrying into Q4.

Turning to the U.S. After evaluating the different remedy recommendations from the ITC, we are still awaiting for the final decision on the 201 petition.

Regardless of what the final result is, we strongly believe in the U.S. solar market's long-term growth trajectory and we'll work out the best solution accordingly.

Demand in European market showed signs of an upturn as the effects of electricity parity sinks in for more countries and regions.

Look at between low PPA prices end markets will remain stable this year have created some challenges in Indian market, but this market is still growing fast and is gradually replacing Japan to become the third-largest solar market.

Demand in new emerging market continued to grow.

The Australian, Jordanian, Egyptian, Mexican and Brazilian market are all thriving.

Demand in Saudi Arabia, the U.A.E, Argentina and other new markets also picking up quickly.

The sustainable, long-term development of emerging market has greatly improved as solar system costs rapidly drops and regulator have more experience in promoting green energy and organizing electricity auctions.

We will continue to strengthen our leading position in the various markets by expanding our service teams and enhancing our brand image.

(foreign language)

Looking into 2018 market, we're still optimistic that global demand will be strong.

The Chinese market, which account for almost 50% of the global demand this year, is transitioning from a utility-dominated market to a DG-driven market.

The recent introduction of policy steps there favor DG projects and to make sure this transition is smooth and could create more market opportunities.

The global industry will face challenges in 2018 as it always does with the various tariffs, supply-demand imbalance, capital expenses and expenditure.

But the future of solar industry have never been brighter with great parity improving, the rapid development of storage technology and the emergence of the era of energy Internet and smart energy.

For 2018, we already have good visibility into the first half with approximately 1/2 of our order book already filled.

(foreign language)

On the technology front, we're on track with optimization of our mono wafer costs and upgrade in diamond wire cutting into multi-wafer production line, which are expected to be fully completed next quarter.

We will also increase our black silicon sale capacity accordingly for more diamond cuts multi-wafer output.

Our tech team continued to make solid progress in developing half-cell and bifacial N-Type cells technologies.

Our half-cell technologies are leading the industry, especially in terms of combination to other high-efficiency technologies and performers such as power output and reliability.

We also made progress in developing new technologies such as Hydride Oxide Thin Film or HOT, which makes 23.5% cell efficiency in lab.

And we plan to develop mass production lines based on it at the next phase.

Overall, we will continue to allocate resources towards innovating new and high-efficiency solar technologies and strengthen our leading position in the market.

(foreign language)

Our internal wafer sale and market capacity reached 7 gigawatts, 4.5 gigawatts and 8 gigawatts, respectively, at end of third quarter.

We expect to reach 7.5, 5 and 8 gigawatts, respectively, by end of the year, of which approximately 3.5 gigawatts will be mono wafer and approximately 2.5 gigawatts will be PERC sales.

Looking into 2018, we plan to further increase mono wafer capacity as the market develops and we also evaluate options to increase our market capacity and the PERC sale capacity depending on how the market evolves.

We remain cautious about expanding our manufacturing capacity and I 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 market shipment will be in the range of 2.3 to 2.5 gigawatts for the fourth quarter.

And we increased our full year guidance to 9.6 to 9.8 gigawatts accordingly.

(foreign language)

Thank you, Sebastian.

With that, I will turn it over to Gener.

Thank you, Mr. Chen.

I'm happy to report another great quarter of sales results in which we shipped a total of 2,374 megawatt of solar modules, which exceeded at the high end of our guidance.

As Mr. Chen just discussed, we remain optimistic about the global demand in 2018 with already approximately 50% order visibility for the first half of next year.

2018 will still be competitive, but I'm confident that we are well prepared for it.

First, let's look at our geographic distribution of our module shipments in this quarter.

China is still our biggest market share with approximately 1/3 of the total shipments.

The new emerging markets came as a second and the next one is North America.

The Asia Pacific, European and India market followed.

China remained our largest market during the quarter where ASPs kept stable following the June 30 cutoff.

Although it's hard to claim that Chinese market will be even stronger in 2018, which depends largely on a number of factors and policies, we expect, overall, our Chinese demand in 2018 to remain solid as the market shifts from utility-scale projects to DG projects and the poverty alleviation projects.

The government is determined to make this transfer smooth and healthy.

For example, the issuance of distributed generation market trading pilot policy, if landed, could largely result the lack of the power consumption of DG and issues of transmission charges to the grid, the two biggest problems in DG market.

We have been optimizing our sales teams and manufacturing capacities to meet the increasing strong demand from Chinese DG projects while maintaining the flexibilities to adjust in the future.

Outside China.

The U.S. ITC issued [3] remedy recommendations for U.S. solar industry on October 31.

We have taken an active role in meetings organized by industry associations and feedback industry recommendations to the regulatory decision-making entities while at the same time have prepared for possible outcomes from Section 201.

Demand in U.S. next year, especially in the first half, make contract to some extent as some demand was released earlier -- in this year.

But we expect that the U.S. market will recover quickly and continue to develop sustainably, generating an average of more than 10 gigawatt annual demand very soon.

In Europe where parity is generating a lot of opportunity for us not only in sales, but in other regions with good solar radiation levels and high electricity rates.

We expect that demand will go back to back upwards channel over the next 2 to 3 years.

Turning to Asia Pacific region.

Australia is generating a lot of growth as more utility-scale projects are expected to become online over the next 5 years.

At the same time, demand from Vietnam, Malaysia, Indonesia and other regions is also increasing.

Demand and ASPs in Japan remained relatively stable during the quarter with 5 to 7 gigawatt total demand expected for the next year.

India has gradually become the third-largest PV market in the world.

Because of the gap between the market price and the effected price of PPA, lots of IPP are choosing to wait and see resulting in potential delays in some demand there.

We expect India to become one of the main growth drivers for the global PV industry over the next 2 to 3 years as solar system cost continues to go down.

Growth momentum in emerging markets continues to increase significantly.

Jordan, Egypt, Mexico and Brazil are expected to become gigawatt-level market.

Demand in Saudi Arabia, U.A.E, Argentina and other regions is also picking up quickly.

With the support of international financial institutions, more and more developing countries in Africa will also become further future growth drivers, such as Ethiopia and Nigeria.

We are really proud and happy to see solar energy become more and more affordable and begin to change people's lives.

ASPs during this quarter were stable compared with last quarter.

We expect that module prices maintain stable in last quarter of 2017 while ASPs in the first quarter of 2018 may decrease slightly depending more on the price trend from China market as well as the cost of raw materials.

In Q3, we continued to promote JinkoSolar's brand by attending various high-profile summits, industry conferences and customer engagement activities.

In September, we were invited to speak at the 9th BRICS Summit hosted in Xiamen, China.

At the summit, representing the global renewable energy sector, we provided the insight on how the BRICS nations can fulfill their Paris Climate Agreement commitments through further cooperation in trade and in renewable energy development.

Events like these are not just to promote our brand, but also allow us to shape the global conversation on sustainable development.

All in all, in Q3, we attended 9 trade shows and participated in 27 conferences.

We also hosted 8 customer events, 37 customer trainings and 41 co-marketing activities with key partners across the globe.

These activities further strengthened our leading position as one of the world's strongest and most recognized solar brand.

With that, I will turn it over to Charlie.

Thank you, Gener.

I'd like to welcome you to Q3 financial results.

Total solar module shipments were 2.4 gigawatt, down 18% sequentially and up 48% year-over-year.

Total revenue was $965 million, down 19% sequentially and up 20% year-over-year.

Gross margin was 12% compared to 10.5% in the second quarter and 19.2% in Q3 2016.

We continued to cut our blended cost to $0.335 per watt compared to $0.34 in the second quarter.

The operating expenses represented 10.6% of total revenue compared to 9.5% in the second quarter and 11.1% in the third quarter 2016.

EBITDA was $36 million compared to $37 million in Q2 and $90 million in Q3 2016.

Net income was $1.7 million.

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

Non-GAAP net income was $3.9 million.

This translates into non-GAAP basic and diluted earnings of $0.12 per ADS.

Now let's move to our balance sheet.

By the end of Q3, cash, cash equivalent and restricted cash were $371 million compared to $280 million at the end of second quarter.

Inventories were $788 million compared to $768 million at the end of Q2.

The total debt was $1.2 billion compared to $1.1 billion at the end of Q2.

The net debt was $824 million compared to $786 million at the end of Q2.

The company's working capital was $78 million compared to $37 million at the end of Q2.

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

Operator?

(Operator Instructions) We will now take our first question from Maheep Mandola (sic) [Maheep Mandloi] from Crédit Suisse.

It's Maheep Mandloi from Crédit Suisse.

Given we're already 2/3 into Q4 right now, can you talk about how Q4 gross margin is shaping up given your visibility in ASPs and costs globally?

And then I'll follow-up.

Maheep, we expect the gross margin to be stable.

As talked by Gener, the ASP impacting the Q4 is quite stable.

From the cost perspective, the polysilicon price is putting some pressures.

However, we continue to cut our OEM volume as well as the improvements of in-house [on certain] costs.

And we're also benefiting from slightly down for the solar cell price.

So we expect the blended module cost in Q4 is stable compared to Q3.

And could you just talk about 2018, your expectations for how either ASP or cost should shape up in 2018?

And just as a follow-up, on capacity expansions for next year, when do you think you would have a better visibility and announce more capacity expansion for next year?

Sure.

Sure.

I'll take the capacity and I think the cost target question and Gener is going to answer shipment.

For the capacity expansion, the evaluation is still in the process.

The capacity expansion is depending on the market demand as well as the potential results of Section 201.

And in principle, we are going to continue to invest on the higher-frequency capacities.

At the same time, we are going to maintain some flexibility.

And for the cost target, we think we are going to [allot] in Q4 next year, but we are expecting significant cost reduction in 2018.

From the multi-wafer side, we are converting the diamond wire cutting technology 100% in first quarter, which will help to improve our multi-wafer cost.

For the mono wafer, we are ramping up very quickly and our target is to be the mono wafer cost leaders in the first half year 2018.

So I'll turn back to Gener for the shipment.

Yes.

So back to the market, we can see the 2018 market demand continues to be strong.

And we have given the current visibility of 2018 orders, so we are pretty confident that 2018 will be another great year for the whole solar industry.

However, from the ASP side, given the current key market policy uncertainties such as China feed-in tariff policy, together with U.S. 201 and also the India antidumping, there are still some headwinds that are bringing up some uncertainties.

But we believe -- well, it should be -- bring more clarities in the next, let's say, 1 to 2 months, which will further strengthen the confidence for the 2018 demand.

And very -- one up with market we have [up with] is booming of the emerging market.

As I mentioned previously, that lots of new PV market become gigawatt market in 2018, which are great news for the whole industry.

We will now take our next question Philip Shen from Roth Capital Partners.

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

So first off, in Q3, the margins improved sequentially to 12%.

I was just wondering if you could give us a bit more detail on what drove the margin expansion and tell us what the mix of OEM shipments were in the quarter as well as the mix of mono PERC shipments?

In terms of shipment mix by product, the mono PERC is roughly 18% of total shipments of 2.4 gigawatt.

And for the improvement on gross margin, it's contributed by 2 parts.

I think, one, is the -- because of the OEM volume in the third quarter and the OEM is roughly 20% in third quarter, which is, in Q2, I think, 40%.

That's why we continue to improve our in-house on certain costs for both multi-wafer -- and multi module and the mono module, which also make some contributions.

Okay, got it.

And then just to get a better sense for it, can you share what the gross margins are -- or were for OEM shipments versus mono PERC shipments versus your multi shipments in Q3?

I think OEM, the gross margin is lower than 4%.

And for the mono PERC gross margin, and you can calculate from this perspective, in general, the mono PERC price is 10% to 15% higher than the multi and the cost is higher than for the mono PERC is relatively higher, around 5%.

So you can do the calculation.

Okay, that's helpful.

And then, finally, for me, I wanted to ask about the China market.

You've highlighted the strength of China in Q3 including the rapid growth of the DG segment.

Can you share what your overall expectation is for China demand in 2018 and then how big you think the DG segment could be?

Yes, this is Gener.

For China market, we believe it will continue to be the #1 market not only for Jinko but also for the whole solar industry.

And this year, people believe China market will or, let's say, will exceed the 50 gigawatt, which is historical high numbers.

And for the 2018, at least from our side, we still believe it will be a 40-plus gigawatt market, let's say, around 45 gigawatt.

And the potential for DG project are very high given the great returns we have seen from the market, also as well as the government's support for the DG's -- the quota allocation or noncapped allocation, et cetera.

So we believe that market will become very big.

So you can imagine from Q3, if I remember it correctly, the quarterly installation for DG is almost 7 to 8 gigawatts per quarter.

So if we take that as a peak time, let's say, potentially it could be like 30 gigawatt-plus only for DG, together with government's support of the poverty alleviation project, which will easily add up another 10-plus gigawatt.

And also there are some Top Runner Programs, et cetera, so adding everything up together, you will see a 40-gigawatt-plus number will be very easy to reach.

Gener points that 40 to 45 gigawatts is kind of a minimum or a conservative number because X factor definitely is the DG project.

We will now take our next question from John Segrich from Luminus.

I just wanted to confirm a couple of things that you said.

You said that ASP was flat sequentially, so does that mean 37.7 is this the right compare that we should be using?

Yes, that's very close.

The change is less than 1% so...

Okay.

Would it be below that or above it, just so we're clear?

Well, I think it's just...

Almost the same.

Yes, it's I think the same.

Okay.

And then I'm wondering, every quarter in the past, you guys have given specific breakouts of megawatts by geography.

This quarter, you've given just general comments.

Do you think you could walk through those with little more specificity for us for modeling purposes?

I think from our point of view, we would like to help you, but given the current geography mix and the market competition, we prefer to disclose more conservative informations.

But in general, we can comment that China takes approximately 1/3 and followed by other markets such as emerging markets also approximately, let's say, 25%-ish range and followed by North America and Asia Pacific, both at 20% market.

The rest will be the Europe.

Great.

Okay, that's very helpful.

And then just last one.

You had a big jump in related party revenue sales.

Can you explain what they are and why that happened during the quarter?

The related party sales transactions is composed of 2 parts.

One is the Abu Dhabi projects, the project's total size is 1.2 gigawatts and we hold 20% equity.

So from the accounting perspective, we need to record this module shipment as related parties because we hope to [represent] equity.

And another part is, I think, roughly 100-megawatt shipments to Jinko Power.

Jinko Power has been spring off from JinkoSolar back to last year, but because of the same controlling shareholders, from the accounting perspective it seem as related party, but the transaction price is based on the market price.

Okay.

And so for the EBITDA of these sales then, is there some adjustment that comes through the income statement as well, backing out your 20% ownership?

You're right.

We account 100% shipment revenue and gross margin.

But from the net income perspective, we will adjust 20% from that to be excluded.

So from the net income perspective, we just record the 80%.

It's the same methodology, as [Canadian Solar] [accord].

Yes.

No, exactly.

And can you just remind us how much you invested in the Abu Dhabi?

Total investment roughly, I think, USD 50 million.

USD 50 million, okay.

And you intend to sell them the 1.2 gigawatts, right?

Yes.

Yes, you're right.

You're right.

(Operator Instructions) We want now take our next question from Brad Meikle from Coker & Palmer Institutional.

Brad Meikle.

Can we just talk about free cash flow?

Just thinking about free cash flow, do you -- I think the firm's burned cash 11 out of the last 12 years as a public company and it's going to burn a couple of hundred million this year and next year and maybe free cash flow positive in 2019.

Can you talk a little bit about what your plan is for sustained free cash flows?

I think the stock's traded at a low multiple because of the market perception that you really are never going to be free cash flow positive.

So can you speak to what the plan is there?

I think this year, the free cash flow differential should be negative because we are investing in the mono wafer PERC capacities and the next year depending on our capacity expansion plans.

So we did have a plan, we want to reach free cash flow positive, but it's going to be depending on the market demand, and our capacity expansion plans and a couple of things.

Yes, Brad.

This is Sebastian.

So next year, we -- still it's too early to make -- say that our free cash flow will be negative, I think.

So definitely, like Charlie said, we are trying our best to make positive free cash flow.

But so far, especially at current time, we don't have a specific plan to the cash flow plan.

Yes, I said it from the perspective of having a positive view on the industry, and I mean, this year, the demand has come in 15 gigawatts above where anyone thought it was going to be probably and strong demand from China and pricing's higher in the second half, and there's still not a lot of free cash flows despite some positive developments.

So I guess, the question, I think, investors are asking is polysilicon prices have rebounded from $13 to $17 or $19 or so.

And at what point does the more balanced supply-demand environment translate to profitability and pricing power on a longer-term basis?

I mean, do you think that the excessive margin in wafers being seen currently will translate downstream at all?

Or what's your view?

I think you're right in this year because of the strong demand and the supply shortage for the polysilicon and not only polysilicon, some in our suppliers they are enjoying higher [indiscernible] gross margins and we believe it's not sustainable.

And looking to next year, I think the profitability and then even you are talking about cash flows will shift to the wafer sale and module makers.

Okay.

I guess, last question is can you talk a little bit more about what you're seeing in emerging markets?

Obviously, there's a lot of project announcements.

What do you think will translate into real -- new markets next year?

Yes, this is Gener.

For emerging market, surprisingly, we have seen the Middle East region, let's say, Africa together with Latin America have as well as the Southeast Asia region has a lot of projects coming up online.

And maybe you have seen a lots of announcement from Egypt, U.A.E, Saudi Arabia and Indonesia, especially Australia, and together with the Latin American countries like Mexico and Brazil, Argentina [eventually].

So those markets adding up together, I think it will take more than, let's say, 30%, close to 40% of the demand for the next 2 to 3 years' time.

So we value the emerging market demand will become a very important market for Jinko, together with the industry.

(Operator Instructions) As there are no further questions in the queue, I would like to turn the call back to Sebastian Liu for any closing or additional remarks.

On behalf of the entire JinkoSolar's management team, I want to thank you for joining us today.

If you have any further questions or concerns, please feel free to contact us.

Have a good day and good evening.

Thank you.

Goodbye.

Thank you.

That will conclude today's conference call.

Thank you for your participation.

Ladies and gentlemen, you may now disconnect.