晶科能源 (JKS) 2020 Q2 法說會逐字稿

Hello, ladies and gentlemen, and thank you for standing by for JinkoSolar Holdings Co., Limited's Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Ms. Ripple Zhang, JinkoSolar Investor Relations Manager. Please proceed, Ripple.

Thank you, operator. Thank you, everyone, for joining us today for JinkoSolar's Second Quarter 2020 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website at www.jinkosolar.com as well as our 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. Charlie Cao, Chief Financial Officer; and Mr. Gener Miao, Chief Marketing Officer. Mr. Chen will discuss JinkoSolar's business operations and company highlights, followed by Mr. Miao, who will talk about the sales and marketing and then Mr. Cao, who 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 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 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 the applicable law.

It's 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)

[Interpreted] Thank you, Ripple. Good morning and good evening to everyone, and thank you for joining us today.

(foreign language)

[Interpreted] During the second quarter, our total solar module shipments reached 4,469 megawatts. Total revenues were USD 1.2 billion, and gross margin was 17.9%. Demand in the overseas market was negatively impacted due to the COVID-19 pandemic. Nevertheless, our high-quality products, well-developed global marketing network and premium customer service stood out among the competition and helped maintain the growth momentum in shipment volume. Most of our orders were executed on time, and we were able to increase our market share.

(foreign language)

[Interpreted] At the start of the second quarter, weak demand from the overseas market led to a drop in module prices. Many upstream manufacturing companies control inventory in order to reduce risks, leading to a decline in raw material prices. As a result, stiff competition in the solar supply chain made it tough for companies with limited product, competitiveness and cost control capabilities to remain competitive. These smaller companies have had to successfully reduce their capacity utilization or withdraw from the market completely.

Costs in the solar supply chain increased in the latter part of the second quarter, in part due to the rush in installations in China, driving up demand and the overseas market showing positive signs of improvement from the peak of the health outbreak.

The recent increase in costs were also influenced by the supply shortage of polysilicon, which further squeezed profit margins for nonintegrated solar module manufacturers, whereas the production capacity and infrastructure of integrated manufacturers demonstrated strong resilience to risks and price fluctuations. The epidemic has accelerated the survival of fittest and forced further improvements throughout the industry supply chain, substantially increasing the leverage of integrated module manufacturers. The combined shipment volumes of the top 5 solar module manufacturers are expected to account for 65% to 70% of the industry's total shipments this year.

(foreign language)

[Interpreted] We expect the market share of the top 5 module manufacturers to increase next year. When the global market share is dominated by a handful of top solar firms, excellence in technology will stand out even more in this land scope. In the future, profit margins resulting from imbalance between supply and demand are going to be less. Barriers brought by advanced technology and product differentiation will become more significant.

Recently, our large-area N-type solar cells reached a conversion efficiency of 24.79% and set a new world record for the industry. We believe in the next 2 or 3 years, advanced cell technology will make the greatest contribution to the competitiveness of end products. We are optimistic about the direction of our N-type cell technology. While we currently have the leading edge in the market in terms of cell technology, we will continue to invest heavily in our R&D to ensure the matching competence for silicon wafers and modules.

In 2020, the popularity of large size and bifacial modules exceed our expectations and demonstrated that further reduction in levelized cost of energy remains the core distinction among clean energies. Together with several leading PV companies, we were working to establish a new standard for 182-millimeter wafers in order to reduce the industry's upstream and downstream coordination problems caused by size, diversification and the increase in costs and promote the efficient and standardized development of the industry.

We were currently increasing our R&D resources into technological research related to high-power output, 182-millimeter module, with the aim of promoting these module as our main product for next year.

(foreign language)

[Interpreted] Since the second quarter, the global epidemic has experienced gradual recovery in between epidemic wave causing restrictions to come back into play in certain markets. As a result, global demand for PV installations has gone through extreme lows and then a rapid recovery, which have then influenced the annual installation capacity in many regions.

The coronavirus pandemic has affected demand to a certain extent. However, the decline in prices has also revived demand. As the epidemic situation continues to ease, we believe demand will eventually accelerate. The shortage of supply in China market has driven up prices along the supply chain. At the moment, prices have stabilized, and we expect strong market demand to continue until the end of 2020.

Due to the recent economic environment and the pandemic situation, the growth of the PV industry has slowed down, but the rate of the progress in the industry has actually beaten expectations. We remain firmly confident about the future of the solar as a new energy source.

In the short term, 2020 is the last year for subsidies in China market. Thanks to adequate preliminary preparations and the increased participation of more powerful, state-owned and central enterprises, the pace and the completion progress of bidding projects in 2020 are expected to be better than in 2019. The overall recovery in the overseas markets remains supportive with some regions experiencing surprising growth. In the mid- and long-term, looking back to the last 2 phases of China's 5-year plans, the actual completion rate of PV projects have significantly exceed expectations. With the withdraw of market subsidies, industry drivers have undergone fundamental changes. China's PV installation capacity has entered into a period of steady growth momentum, which increases the probability of accelerated growth over the next 5 years.

Solar energy has become one of the most cost-efficient power source around the world, and we expect new technology in energy storage to usher in a new era of rapid development for the sector and new growth to be the PV energy storage industry.

In short, PV has already been extremely competitive in terms of technology improvements and cost reduction capabilities as well as potentials resulted from accelerated transformation in the energy sector and diversified application scenarios in the downstream market. Gener will address more on markets later.

(foreign language)

[Interpreted] At the end of the second quarter, our in-house production capacities for monosilicon wafers, cells and high-efficiency solar modules has reached 20 gigawatts, 11 gigawatts and 25 gigawatts, respectively, with 5 gigawatts of module capacity ramped up in the third quarter. Our in-house production capacities for monosilicon wafers, cells and high-efficiency solar modules are expected to be reached 20 gigawatts, 11 gigawatts and 30 gigawatts, respectively, by the end of 2020.

In order to benefit from the high-growth in the broader market space and total shipments for next year, we are now considering further increases in production capacity for each segment and will increase the proportion of integrated level accordingly. The PV industry is facing rapid changes, and that's why we have to maintain a certain level of flexibility in our production capacity. This will give our business the advantage to respond to any change in a timely manner, while sustaining the reliable operations and remaining fully focused on the evolving market demand.

(foreign language)

[Interpreted] This week, we announced our plan to list our principal operating subsidiary, Jiangxi Jinko, on the Shanghai's Stock Exchange Sci-Tech Innovation Board, or the STAR market. We believe the listing of JinkoSolar of the New York Stock Exchange and Jiangxi Jinko on the STAR market will raise our profile with investors, both in China and globally and provide us with additional opportunities to grow in the future.

(foreign language)

[Interpreted] Before turning over to Gener, I would like to quickly go over our guidance for the third quarter of 2020. We expect total solar module shipments to be in the range of 5 gigawatt to 5.3 gigawatt for the third quarter of 2020. Total revenues for the third quarter is expected to be in the range of USD 1.22 billion to USD 1.3 billion. Gross margin for the third quarter is expected to be in the range of 17% to 19%. We reiterate our guidance for the full year 2020 shipments to be in the range of 18 to 20 gigawatts.

Thank you, Mr. Chen. During the second quarter, total shipments of solar modules reached 4,469 megawatts, covering 91 countries worldwide. Asia Pacific, North America, China and Europe contributed the largest portions of the total shipments and are expected to continue to contribute substantial warranty on total shipment for the third and fourth quarters.

In terms of the market demand, a rush in installations in the domestic market drove significant growth in China at the end of second quarter. As more and more countries return to normalcy and health crisis continues to improve overseas, we have seen a notable recovery in global sales.

Strong market demand in the third quarter have driven prices up sharply throughout the supply chain, foreseeing some installation demand to be delayed into 2021. At the present, supply and demand have restabilized, which will keep sales forwarding until the fourth quarter. We expect the total global installations to be close to 120 gigawatts in 2020.

Overseas demand in 2021 is likely to go with attractive -- active transactions in Asia Pacific, Middle East, North America and Europe. There are also a large number of installation projects planned in China in 2021.

Given that the original target of 15% of nonfossil energy consumption in 2020 has already been exceeded, the Chinese government is currently drafting its 14th 5-year plan to amend the original target to 20% of nonfossil energy consumption by 2030. In the next 5 years, average annual installations in Chinese market will most likely reach 60 gigawatts.

After U.S. economy started to recover in May, demand from the residential market has gradually recovered from the lows of the epidemic and approved small rooftop solar PV installation have returned back to January's pre-pandemic level. The U.S. imported approximately 15 gigawatt of modules in the first 7 months of the year, and the average monthly import volume was over 2 gigawatts. After falling to their lowest record in June, monthly imports rebounded to 2.2 gigawatt level in July.

Recently, the U.S. Democrat, U.S. President candidate, Joe Biden, proposed a new substantial, sustainable infrastructure and clean energy plan, which aims to achieve carbon-free power generation by 2035, and set clear objectives for the entire economy to be climate-neutral with net 0 GHG emissions by 2050.

In general, Europe has gradually returned to normal. Demand has been relatively stable in several major PV markets, including Spain, Germany, Netherlands, Poland, Portugal and Italy. Actual installed capacity in the European market this year is expected to be significantly higher than our previous expectation. Recently, the second round of the solar auctions in Portugal attracted worldwide attention and set a new world record at a price of USD 0.01316 per kilowatt hour.

Germany has amended the Renewable Energy Act to extend bidding for 18.8 gigawatt of PV power generation projects by 2028, which compromise of 5.3 gigawatt of rooftop installation and 13.5 gigawatt of large-scale ground power stations.

Ireland held its first large-scale solar auctions for renewable energy, and solar dominated with the largest share of 796 megawatt.

Commencing in 2021, the EU's 27 member states are planning to adopt 2030 Climate and Energy Framework that will require renewable energy to account for at least 32% of primary energy consumption by 2030. This framework will certainly stabilize the long-term development of clean energy in Europe.

India has been one of the most severely affected countries in the world, and the coronavirus pandemic continues to intensify with new infections climbing over 90,000 cases each day. As restrictions continue to ease nationwide, local transmission of the coronavirus is expected to continue in India for some time. Furthermore, India's worsened economic ties and trade barriers with China will further affect many projects currently under development in India as well as some previously commissioned PPA projects. In particular, the Border Adjustment Tax in the India has lowered our expectations for PV installation in India market this year.

Coronavirus cases are dropping sharply in Middle East, and the new daily cases in major countries have remained below 2,000. The health pandemic countries to take its toll in Latin America as Brazil emerged as a top global coronavirus hot spot, while Chile and Mexico are both seeing some improvement.

On a brighter note, Brazil has removed import tariff for 101 specific items, including solar modules, trackers and inverters, thus reducing taxes from 12% to 0 since August 1. This is expected to help the distribution market to recover from the impact of COVID-19.

In short, although periodic outbreaks of the recurrent pandemic do trigger some concerns, we see economic activity in most regions of the world improving significantly despite the fact that policies and economic slowdown in certain countries due to COVID-19 will act as a drag on solar installations.

The increasing competence of the global solar supply chain and the hybrid advantage of clean energy have won growing support from governments and installers. In the mid- to long-term, we expect reductions in solar costs will continuously beat expectations. And as great parity is welcomed everywhere, the impact from policy cycle will greatly diminish.

With continued cost reductions and incremental growth coming from the expanding energy storage business, we are facing exciting new opportunity, and our potential PV market size is expected to grow substantially. Recently, we were ranked as a top solar brand in debt finance project and named one of the most bankable PV manufacturers in the world by Bloomberg New Energy Finance. 100% of BNEF survey respondents consider the company as highly bankable. This outstanding brand recognition connects us to more customers in the broad PV market space.

We will continue to dedicate resources to strengthen the quality control of our high-efficiency products to improve customer service excellence and to work more closely with our clients for customized product solutions according to their project requirements.

This year, we have been able to accelerate the promotion of applications that enable further reduction of LCOE. We have also joined up with several leading PV companies to establish a new standard for 182-millimeter wafers and launched the P-Type Tiger Pro and N-Type Tiger Pro modules with maximum power output of 580-watt p and 610 watt p, respectively.

So far, we have secured over 1 gigawatt of orders for high-efficiency modules from the Tiger Pro series, and the first batch is scheduled for delivery in August -- of October this year. Next year, large-sized wafer products are expected to account for over 70% of our total shipment, while significant growth in demand is expected for higher power output by efficient products.

Finally, we are currently conducting market research and accelerating technical reserves associated with new products to better understand how we can serve the needs of our customers and facilitate the provision of more differentiated products and services for our global clients.

With that, I will turn it over to Charlie.

Thank you, Gener. We reported strong operational and financial results for the quarter, with total shipments and gross margin in line with our guidance and total revenue exceeding our guidance.

Financial indicators, such as total revenues, gross margin and net income, have all increased dramatically compared with the same period last year. The company's increased in-house integration level have contributed to this year-over-year growth.

Let's go into more details for the quarter now. Total revenue was USD 1.2 billion, up 22% year-over-year. Gross margin improved to 17.9% compared to 16.5% last year. EBITDA was USD 119 million compared to USD 66 million in the same period last year.

Non-GAAP net income was USD 53 million, significantly increased year-over-year. This translates into non-GAAP diluted earnings per ADS of $1.2. Total operating expenses accounted for 12.8% of total revenue, an increase from 12.6% sequentially and flat with the same period last year. The sequential increase was primarily due to an increase in shipping costs associated with a significant increase in solar module shipments during the second quarter 2020 and an increase in disposal loss on fixed assets.

Moving to the balance sheet. At the end of second quarter, our balance of cash and cash equivalents were USD 970 million compared to USD 670 million by the end of Q1. Accounts receivable turnover days were 71 days compared to 76 days in the second quarter last year. Inventory turnovers were 90 days compared to 140 days in the second quarter last year.

Total debt was USD 2.3 billion compared to USD 1.8 billion by the end of Q1, in which USD 128 million was related to international solar projects. Net debt was USD 1.37 billion compared to USD 1.14 billion by the end of Q1 2020.

On Monday this week, we announced our strategic plan to let our principal operating subsidiary, Jiangxi Jinko, on the Shanghai Stock Exchange after certain intergroup restructuring. If the listing is successful, we expect to have greater access to cheap resources or capital, which will support us in capturing a greater share of market growth and value creation. We are committed to maintain our New York Stock Exchange listing for JinkoSolar.

The pre-IPO financing, which is expected to be completed by the end of next month, will be used for the advanced capacity expansion and the need of working capital.

This concludes our prepared remarks. We are now happy to take your questions. Operator, please proceed.

(Operator Instructions)

So operator, is there any questions from analysts?

Yes, our first question is from Philip from ROTH Capital Partners.

In terms of -- I would like to talk about the Q4 outlook. I think the implied shipment guide is for 6 gigawatts, which would be up 30% year-over-year. How do you expect your margins to trend in Q4?

I think back on the Q1 call, you guys have talked about being 75% booked for the full year of 2020. With pricing through the entire supply chain going higher, including poly and glass, how are you able to kind of -- can you talk about your margin outlook for Q4 as well as how are you able to maintain the 17% to 19% for Q3?

Yes, Philip, the outlook in Q4, we expect the gross margin comparing to the third quarter is roughly slightly going down, given the situation, the production costs, particularly the material cost is increasing due to the shortage of certain materials. But at the same time, the market price in China, we are expecting to be on the upward side compared to, particularly, in the second quarter and third quarter. But given the situation, we are expecting the gross margin have -- we have some pressure, and it's going to be slightly lower compared to the third quarter.

Okay. I think you guys have fixed pricings for your contracts. Have you been able to raise the pricing on customers which had fixed pricing, for example, in either Q3 or for Q4 shipments?

We are expecting -- in the second quarter, we're expecting China will be very strong. So we have sufficient and open capacity at the time back to second quarter to catch up the opportunities if market price increase. And in general, if we sign the contract, we will stick to the original contract terms.

Got it. Okay. Great. And then can you talk about -- I think one of your peers talk -- gave some very specific outlook and even guidance for 2021. Can you share what your thoughts are for 2021? So specifically, I think you increased your module capacity to 30 gigawatts. Is that a good number to use for shipments for next year? And how do you expect your margins to trend as we get through each quarter in '21?

2021, overall, the market situation we're expecting pretty good year. And we announced our plan to get access to the China capital market, and we are expecting to close RMB 3.1 billion financing by end of the month. And we have the plan to invest, particularly the cell capacity -- the monowafer capacity.

And if you look at the situation now, the Tier 1 companies, they are dominating the market shares, and they were expecting more -- I think compared to this year, we are expecting our growth rate will be relatively higher next year. So certainly, we are reaching capacity on the module. I think it's kind of renewable, maybe some base case.

Yes. We are -- we are still working on our 2021 plan yet -- budget yet. We have not finalized it yet. So we are still working on it. But I think somewhere around 30 gigawatt will definitely will be our target to follow.

Great. Okay. That's helpful. And coming back to your $458 million pre-IPO raise, can you talk through kind of how you got to the valuation at which then equity comes in? And also what the use of proceeds will be? I am imagining a big chunk of that is going to be for capacity expansion in '21. So I know you just mentioned, Gener, that you guys are still evaluating, but any additional color on that would be fantastic.

Okay. So for the USD 3.1 billion -- sorry, RMB 3.1 billion, it's including third-party reputable investors like the investor amounts or reputable commercial banks and investment fund focused on energy sector. So back to your first question, how we come out -- come to the valuation is based on the negotiation with third-party investors.

And for the need -- for the funding, it's -- the majority part will be for the advanced capacity expansion. And if you look at our capacity, we have very low capacity in solar cells. That will be our key focus as well as we plan to increase our monowafer capacity and to solidify our competitiveness.

Great. Okay. One last housekeeping question. Can you share what the depreciation and CapEx was for Q2? And then your expectations for Q3 and Q4?

I need to get back to you with the number maybe after the call. I think roughly, depreciation should be each quarter -- let me get back to you after the call. I need to check the numbers. But CapEx this year is still roughly USD 3.5 billion this year.

(Operator Instructions) Our next question is from Brian from Goldman Sachs.

Do you -- just maybe a quick housekeeping follow-up from Phil's questions. Do you have the cash flow from operations and free cash flow results for the quarter?

No. We have the EBITDA number, right? We announced the EBITDA number as well as the -- Phil's question of depreciation, I have the number now. It's roughly USD 40 million. And the operating cash flow is negative because this year -- this quarter, we invested. We anticipate next quarter, we -- our shipments will continue to increase.

And in terms of detailed numbers, I will get back to you after the call.

Okay. Fair enough. I'll follow-up. And then on the balance sheet, I noticed that the debt number was up about $500 million from Q1 to Q2. Can you talk to what that was related to? And then any kind of bigger picture thoughts around delevering?

From the deleverage perspective, we are in the process of close to pre-IPO financing, RMB 3.1 billion, which will decrease our deleverage as a whole. And in terms of second quarter versus the first quarter, the debt -- the total debt increased a little bit. It's in connection with the capacity expansion as well as the working capital for the inventories, accounts receivables.

Okay. Fair enough. And then, I guess, related to the debt and next steps in the STAR listing process, you mentioned some intercompany restructuring. Could you elaborate on what that means? How long it takes? And then does it have to do with some of the intercompany loans? And can you just kind of give us a bit more detail around what has to happen from here on and how long that will take?

Yes. It's a very short term -- timing in terms of internal reorganization because we need to put 100% assets or manufacturing assets under the China entities. And it's -- for us, it's very easy because it's -- we only need to reorganize certain, if not all entities, particularly the sales entity under the China entities control.

And in terms of scope, I just want to emphasize, it's 100% manufacturing assets, including wafers, cells, module, everything. And -- but we still have some -- 2 or 3 international solar downstream projects, which we plan to sell down to -- in the future. So international solar downstream assets are not in the scope of the entities we plan to launch the IPO in China.

Okay. Appreciate that color. And then maybe just last one for me. I know, Charlie, you said that gross margins are -- they're being guided flat basically in 3Q, and you're saying down slightly in 4Q. Can you help calibrate that a little bit, just given there's so much volatility in the supply chain and specifically our polysilicon cost?

One of your peers talked about gross margins being down kind of 500 basis points in the back half of the year versus the first half of the year and being in the mid-teens. Is that how we should think about sort of that slight downtick for you? Are you going to be back into the kind of the mid-teens gross margin level in 4Q?

Yes. I think back to the second quarter, originally, we have relatively pessimistic outlook for the second half year because the global coronavirus situation. But the situation is -- and I think most of the independents are not expecting the power is so big for renewable energy and -- as well as the price is upwards, reached to the bottom in the second quarter and up dramatically in the third quarter and fourth quarter.

And -- but on the other side, certain materials, including polysilicon, glasses are in the shortage supply and wage puts some pressure on the cost -- internal production cost. So we -- that is why we expect this fourth quarter, the gross margin will be in the downward trend comparing to the third quarter and the second quarter.

All right. Fair enough. But would you say mid-teens is too pessimistic of you? Or is that about the right range?

Well, you mean in the fourth quarter, right?

Yes, fourth quarter, specifically?

I think it's slightly down comparing to the third quarter. 15% is -- I don't expect that number in the fourth quarter.

Our next question is from Paul Johnson from GRG.

Can you hear me?

Yes, please.

So there's been a lot of talk about China's next 5-year plan. And there's been some speculation that the target could go up to 50 gigawatts a year. But then on the flip side of that, clearly, incentives in next year, so that any country where we've seen incentives in, you've seen a big decline in demand. So can you talk about what your view is on what you see with respect to demand in China next year? And then I have a follow-up.

Sure. I think for China's 14th 5-year plan, currently the market intel suggesting the total demand side is substantially increasing. And as the draft has not been released yet, there's no public information on it. But according to the rumors, we are reading -- or we are seeing in the market right now, I think if you convert the total installation number into an annual installation number, I think the number is indicating over 60 gigawatts and it may be at the range around like 60% to 70%, even higher.

Yes. On top of that, I am not sure you know or not. And our -- the President Xi had a speech at the United Nations. And China is committed to reach the peak of the carbon emission by end of 2030 and as well as -- and we will try to achieve the carbon -- zero carbon emissions by 2060, so -- which is showing China's commitment to renewable energy. And so as well as the next 5 years' plan, I think it's under -- just like Gener said, it's under discussions, but we think the possibilities -- the high possibility is that China will raise upwards the targets.

Okay. That's very helpful. And then there's been a lot of focus on relisting and subsidiary listing of U.S. ADR stocks in China on the Shanghai Stock Exchange. Based on our understanding, a lot of U.S. investors are expecting listings on the Shanghai Stock Exchange and then that profit to be used to buy U.S. ADR stock. So based on our understanding, is it -- we believe it's illegal in China to list on the Shanghai Stock Exchange and then use those proceeds outside of China, i.e., outside of Shanghai. Do you guys know if that's true or not? And do you agree with that?

I think it's -- the actual process, typically in China, let's say, you issue this year 10%, and typically you have the use of the targets. Typically, it's used for some CapEx as well as working capital. But in China, for the public companies, there is some requirement, let's say, 10% net income each year, the public companies are required to distribute as dividend to investors. From that perspective -- I need to check with the lawyer. But from that perspective, the 10% net income distribution as dividend, I think from my perspective, I need to check. But I think from a dividend perspective, it's okay, and the China entities are able to distribute the dividend to out of China and ultimately the dividend to the U.S. shareholders. But I need to check.

(Operator Instructions) There are currently no more questions. Management, do you have any follow-up remarks? If that is no, then this is the end of today's call. And thanks, everyone, for joining this call, and you may disconnect now. Goodbye.