Emeren Group Ltd (SOL) 2017 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's Fourth Quarter and Full Year 2017 Earnings Conference Call. Please note that we are recording today's conference call.

I will now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead, Mr. Fong.

Thank you, operator. Hello, everyone, and thank you for joining us on ReneSola's conference call to discuss fourth quarter results. We released fourth quarter and full year 2017 results earlier today, and they are available on the company's website as well as from newswire services. You can also follow along with today's call by downloading the short presentation available on the company's website at renesolapower.com.

On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Mr. Weiguo Zhou, Interim Chief Financial Officer; Mr. Doran Hole, Group Vice President of Strategy; Mr. Xiaoliang Liang, Group Vice President of Investment and Financing; [Mrs. Jesse Jiang], Director of Financial Reporting; and Mr. Johnny Pan, Director of Investor Relations. Johnny will read Mr. Li's prepared remarks regarding ReneSola's operating highlights, and Weiguo will then review our fourth quarter and full year 2017 financial results.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are mainly related to the company's continuing operations, and you may not be able to compare such information with the company's past performance or results.

Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statement except as required under applicable law.

Please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

With that, let me now turn the call over to Johnny who will translate Mr. Li's prepared remarks. Johnny?

Thank you, Ralph. So following are Mr. Li's prepared remarks. Thank you, everyone, for joining our call this morning. We appreciate your interest in ReneSola.

So to get started, I will make some important strategic comments about the business, our performance and review operating highlights. Then Weiguo Zhou, our interim CFO, will cover the financial results for the fourth quarter, full year 2017 and then provide 2018 guidance. We will then open to the call -- open the call to Q&A.

2017 was a transformative year for us. We exited the manufacturing business, becoming a true player in the fast-growing project development market. With that, the fundamentals for our project business have improved tremendously. We achieved the profitability and maintained a healthy balance sheet, providing the financial flexibility to drive our growth.

Our operating results of the continuing business in Q4 were largely in line with our expectations. On a year-over-year basis, Q4 revenue grew 60%, and operating income was up over 166% (sic) [136%]. We are very pleased with our overall Q4 results.

Our overall solar power project pipeline remained strong at around 1.1 gigawatts. We continued to execute our downstream strategy and excited to pursue opportunities in small-scale solar projects in diversified regions. In 2017, we successfully connected 270 megawatts of solar rooftop projects in China and continued to expand our global reach.

I will go over our geographic coverage in just a few moments, but I'm very excited that we successfully entered the Hungarian market with a pipeline of 38.4 gigawatts. The project portfolio in Hungary comprises a number of micro-projects, each with the size of 0.5 megawatts. This fits well with our overall downstream strategy to pursue opportunities in small-scale projects.

As we discussed previously, there are several factors why we focus on this niche market. First, small-scale projects are supported by the governments in multiple jurisdictions, including China, Poland, Turkey, Canada, Hungary and so on.

Second, compared to large-scale utility projects, small-scale projects are usually superior with higher PPA price and thus bringing a higher return.

Third, small-scale projects, especially rooftop projects, show more flexibility compared to ground-mounted projects as the electricity generated for those projects can be sold to end users directly in load centers with less transmission loss.

Fourth, our large-scale projects whose value can be created by a significant amount of capital investment, low-cost financing, economics of scale, can be achieved for EPC activities. It is possible to drive significant value in small-scale projects in the earlier development stage. For instance, to secure the project plan close to interconnection points with -- and quality electricity users. It is difficult to create value in EPC activities for small-scale projects due to small project size and fragmented EPC markets. ReneSola, as an experienced global project developer, can leverage its development expertise in this niche market.

ReneSola currently owns and operates 212 megawatts of solar assets. Our assets are geographically diversified giving us attractive risk profile. Of the 212 megawatts of assets, we operate 187.3 megawatts of rooftop projects in China, 15.4 megawatts in Romania and 9.3 megawatts of rooftop projects in the United Kingdom. We now have approximately 28 megawatts of China rooftop projects under construction. We anticipate owning 350 to 400 megawatts of rooftop projects in China by the end of 2018, 150 to 200 megawatts of which are new additions in 2018.

Our current operations are strong, and our pipeline remains large. We have a robust pipeline of future projects across different geographic regions in various stage of development. Our late-stage pipeline features 546.5 megawatts in the U.S., Turkey, Canada, Poland, Hungary and China.

Our early total pipeline features power projects around the world, bringing total capacity to approximately 1.1 gigawatts. In addition, we are actively pursuing opportunities in other markets, including Spain, France, North Korea and India.

Now let me now turn your attention to our downstream efforts in several key geographic regions. First, China. The rooftop markets in China remains a solid and a lucrative opportunity for us. Rooftop solar provides steady cash flow, attractive IRRs and a reduced risk of curtailment of subsidy delays.

On the market side, the Chinese government has distributed several supporting policies to encourage DG projects. On April 13, 2018, National Energy Administration published their policy to formalize the regulation and the management for the DG market and to encourage net metering projects. The policy also allows permitted or licensed gross metering projects to be connected within the permitting period. We think the market expectation is that unconnected growing metering projects would be expired immediately.

On April 17, National Energy Administration published a document to establish an electricity spot trading market. The spot price of electricity in certain provinces is already higher than the solar FIT rate, which is great news for the DG markets. On April 21, the National Development and Reform Commission released the 2018 new installations for DG markets, which grew tremendously. The country connected 7.7 gigawatts of DG projects in Q1, grew 217% on a year-over-year basis. So 2017 full year new installation for China DG projects was 19.4 gigawatts.

We now have over 187 megawatts of rooftop under operation, concentrated in a handful of eastern province with attractive development environments, including Zhejiang, Shanghai and the Jiangsu province. Those are the most developed regions in China. Commercial and industrial electricity users in those areas are usually credit enterprises, whom we consider to be ideal net metering electricity off-takers.

As I mentioned earlier, we anticipate only 350 to 400 megawatts of solar rooftop projects in China by the end of 2018. In the fourth quarter of 2017, we connected 76.8 megawatts of rooftop projects in China, which we intend to hold. In 2017, we connected 270 megawatts of rooftop projects in total.

Going forward, we intend to continue to pursue opportunities in China DG markets under net metering schemes, especially those commercial and industrial rooftops with higher PPA price that's less reliant on subsidies. Our strategy to focus on the China rooftop market is favorable. Our efforts in the markets there have enabled us to become the only U.S.-listed company leveraged to the large and growing China rooftop opportunities.

On the financing front, we have built solid relationships with a number of financing institutions to fund the project. In addition to that, we are now in late-stage discussion with a strategic investor to form a partnership to co-own our China DG holdco. The investor plans to inject CNY 200 million in cash into our China DG holdco in exchange for minority interests over the holdco. We are hoping to finalize the details of our financial partnership very soon, likely in a few days, and we will update the market once we have more to share on that front. Beyond this, we are also actively and continuously engaging other potential strategic investors to fund our IPP business in the attractive China DG market.

The U.S. continues to be a large and important market for us. We have over 188 megawatts of late-stage projects, of which approximately 45 megawatts is community solar in multiple states, including Minnesota, Massachusetts and in Europe. Additionally, we are also pursuing small utility-scale projects in Utah, Oregon, New York, Texas and California.

In Canada, we have 18.8 megawatts of late-stage projects, which are under construction in the current quarter. These projects are eligible for a fixed-rate price higher than CAD 0.28 and FIT4 with a price higher than CAD 0.18.

In Poland, we're awarded 55 megawatts of projects from the government auctions last year, each with a size of 1 megawatt. 14 megawatts of this project are under construction, and we expect them to be connected to the grid in Q2.

In Turkey, we currently hold 50% of economics for approximately 120 megawatts of project pipeline, of which 10.4 megawatts is under construction with better security. As discussed previously, we connect a total of 12.6 megawatts of ground-mounted projects in the third quarter of 2017, 8 megawatts of which was sold and the revenue recognized in the fourth quarter. So sale of remaining 4.6 megawatts will be recognized in the first half of 2018. We will sell the remaining interest in the Turkish pipeline and exit the Turkish market.

In France, we formed a strategic partnership with Green City Energy to jointly develop 4 solar parks in the south of France with a total installed capacity of 69 megawatts, generating approximately 105 million kilowatt-hours of solar power per year. In addition, we were awarded 16 projects in a recent tender with a combined capacity of 4.65 megawatts in the first quarter of 2018.

In addition to those geographies I just mentioned, we are actively pursuing opportunities in markets including Spain, South Korea and India. For instance, in India, we have an early-stage pipeline of 162 megawatts. As you see, we have a geographically diversified portfolio, and I'm very excited about the opportunities we are going after.

Before I turn the call over to Weiguo, I would like to reiterate our business model and the strategy.

In China, we implement IPP model for DG projects, giving us the resulting high-margin recurring revenue. As I mentioned earlier, we were focused on the well-developed eastern province and the select high-quality rooftop under commercial and industrial electricity users. Overseas, we implement an asset-light project development model, involving earlier development stage to sell projects right at shovel-ready stage or to build and transfer projects after grid connections. We have achieved a very high gross margin in the projects right there. We are expecting significant profit derived from overseas project development business, thus accelerating our China DG IPP business.

In summary, downstream projects represent a large opportunity globally, and I'm excited about the opportunity ahead of us. We have a strong team in place, and the team continues to execute. We successfully connected a total of 76.8 megawatts of projects in China and generated 22.6 million kilowatt-hours of electricity from DG solar projects in China in Q4. We currently have over 92 megawatts of projects under construction globally. We believe that our talented team, diversified geographic coverage and the track record of success at every stage of project development well position us for profitable growth.

With that, let me now turn the call to Weiguo for comments on our financial performance. Weiguo?

Thank you, Mr. Li and Johnny, and thank you, everyone, for joining us on the call today. This will be my first exposure to many of you. I look forward to meeting and speaking with all of you in the near future and would encourage you to reach out as appropriate.

I have been on the ReneSola Board of Directors since 2016, and I'm very familiar with the company, its leadership and the opportunities and the challenges before us. Note that unless otherwise specified, the results presented during the call exclude the discontinued operations related to the company's manufacturing business and LED distribution business, which was disposed of in the third quarter of 2017. Also, note that the company's full financial results, including discontinued operations, are not available at this time.

I will now review our financial performance for the fourth quarter and full year 2017 for the continuing business and will discuss our outlook.

For the fourth quarter, revenue of $64.8 million was up 61% year-over-year. This compares to our guidance of $55 million to $60 million.

Revenue from the project development business in the quarter was $44.4 million as we recognized revenue from several project sales, including 44.2 megawatts of new power projects in China, 13.3 megawatts of community projects in the U.S. and 8.1 megawatts of utility projects in Turkey. Revenue from the EPC business was $15.4 million as we recognized revenue from the provision of EPC service for 25 megawatts of rooftop projects in China.

Electricity sales was -- were $5 million. As Mr. Li mentioned, the company generated 22.6 million kilowatt hours of electricity from its operating projects in China in Q4.

Full-year 2017 revenue was $103 million, up 28% when compared to last year. Revenue from the project development business was $64.8 million. Revenue from the EPC business was $25.9 million. Electricity sales were $12.3 million.

For the fourth quarter, gross profits of $6.8 million was up over 70% year-over-year. Gross margin was 10.5% within our guidance range of 10% to 15%. Gross margin from the electricity sale was 49.8%, in line with our expectation of 48% to 53%.

Full-year 2017 gross profit was $14.1 million, up 95% year-over-year. Gross margin for full year 2017 was 13.7%, up from 9% in 2016.

Q4 EBITDA was $4.7 million, and full year 2017 EBITDA was $11.6 million.

Now let's turn our attention to operating income. For the fourth quarter, operating income was $4.9 million compared to operating income of $2.1 million in the same quarter last year. Operating margin was $7.6 million -- 7.6% compared to 5.2% in the same period last year.

Fourth quarter operating expenses were $2 million, down sequentially from $2.5 million in Q3 2017 and up from $1.9 million in Q4 2016. Sales and marketing expenses were $0.6 million, largely flat when compared to Q3 2017. General and administrative expenses were $1.7 million, down from $1.9 million in Q3 2017.

Full-year 2017 operating income was $6.6 million, up from $2.3 million in 2016. Operating expenses were $7.6 million, up from $4.9 million in 2016. Sales and marketing expenses were $1.7 million, up from $0.5 million in 2016. General and administrative expenses were $6.2 million, down from $6.8 million in 2016.

Below the operating line, fourth quarter nonoperating expenses of $2.9 million included interest expenses of $1.1 million and foreign exchange loss of $1.7 million. Full-year 2017 nonoperating expenses were $3 million, which included interest expenses of $3.9 million and foreign exchange gains of $0.9 million.

For the fourth quarter, income before tax and noncontrolling interests from continuing operations was $2 million compared to $4 million last quarter and $1.7 million in the same quarter last year. Full-year 2017 income before tax and noncontrolling interests from continuing operations was $3.5 million, up from $2.2 million in 2016.

Now let's turn to our balance sheet. The company had a cash and cash equivalents of $13.4 million as of December 31, 2017, compared to $5.2 million as of September 15, 2017. Long-term borrowings were $32.5 million as of December 31, 2017, associated with the Romanian project. Other long-term liabilities were $77.5 million (sic) [$67.5 million] as of December 31, 2017, associated with the financial leasing payables for rooftop projects in China.

Finally, we conclude with our guidance. For the first quarter of 2018, the company's project business is expected to generate revenue in the range of $30 million to $35 million, with overall gross margin in the range of 15% to 20%. The company expects to connect 5 to 10 megawatts of DG projects in China and to monetize 5-megawatt projects in international markets during the first quarter of 2018.

For 2018, the company expects revenue to be in the range of $130 million to $140 million and overall gross margin in the range of 20% to 25%. The company intends to connect 150 megawatts to 200 megawatts of DG projects in China and to monetize 50 megawatts to 70 megawatts of projects in international markets.

With that, we would now like to open the call for any questions that you may have for us. Operator, please go ahead.

(Operator Instructions) Your first question comes from the line of Justin Clare from Roth Capital Partners.

So first off, I wanted to start with the guidance. Can you share what the expected revenue mix is between electricity sales, project sales and the EPC business for both Q1 and for 2018?

(foreign language)

In terms for -- can you translate? Then we -- I will answer the question.

Okay, just a minute. (foreign language)

No problem.

(foreign language)

(foreign language)

Just a minute.

(foreign language)

We will have the project development business about -- comprised of about 25% of the total revenue in Q1. And we will have around 60% of revenue coming from project development for the 2018 full year. For the EPC, we will have over 10% for Q1 and over 20% for the full year.

Okay. And then the EPC -- that is EPC, okay.

No, it's not EPC. We have some revenue recognized for the U.K. projects we sold in 2015.

I see, okay. And then so also on the guidance, can you also share what your expectations are for the gross margin for electricity sales versus the project sales. If you can share for both Q1 and 2018, that would be helpful.

So for Q1, the gross margin for the IPP business, we expect around 40% because it's in the spring, so solar radiation is compared -- is slightly lower than summer. The IPP gross margin for the full year, we're expecting to be 50% to 55%.

Okay. And then what about for the projects that you plan to sell in Q1 and the projects that you plan to sell for the full year, can you share what the gross margins might be for those?

Okay, just a minute. (foreign language) The project development business, we expect the gross margins to be over 10%, 10% to -- around 10% both for Q1 and 2018.

Okay, got it. So then moving to the capital that you're going to need to develop the projects for 2018, you've talked about adding 150 to 200 megawatts to the balance sheet. Can you share what your expectations are for the total capital that you'll need and then also how you plan to fund that capital expense in terms of how much debt, how much equity you may need? And I know part of that may come from the strategic investment, but could you help us understand how that all will play out?

Yes. (foreign language)

(foreign language)

So for the DG market, if we -- assuming if we connect 200 megawatts in China, we will need CNY 1 billion, and around 70% of them were coming from the project finance. So we need around CNY 300 million as equity. We currently have a strategic investor who would like to inject CNY 200 million in a few days.

(foreign language)

And we are planning to continuously look for strategic investors in the next half of 2018.

Okay, I got it. So then -- so thinking about the strategic investor, I know the deal is not done yet, so you may not be able to share much here. But I just wanted to ask, can you talk about how much you might be considering for sale in terms of the China DG holdco? What percent of that subsidiary might you sell? And then for your projects, would the strategic investment be for all of your current operational projects and all future projects that would be put into that holdco? Or would it be just for operational projects right now?

Okay, a few minutes. (foreign language)

(foreign language)

We expect to give the strategic investor 40% -- around 40% of the holdco shares. And the holdco will hold the operating assets already connected, and so late-stage pipeline.

Okay, I got it. So one other thing I wanted to understand here, then I can pass it on. The financing in China, if I look at your balance sheet right now, it doesn't look you've -- you have any project debt associated with your operational Chinese projects. Can you talk about, do have the ability to add project debt to those projects? And if so, why have you not done that already?

(foreign language) Actually, we do have project finance in the balance sheet. We have $67.5 million on the balance sheet as other long-term liabilities. That's for financial leasing payables for rooftop projects in China.

(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenter. Please continue.

Okay. Thank you, operator.

We have one -- I'm sorry, sir.

Go ahead.

Your next question comes from the line of Philip Shen from Roth Capital.

A very quick question here. In terms of the China DG market, last year, I think the size of the market was 19 gigawatts. What do you think the size of the market could be in China for DG in 2018?

(foreign language)

(foreign language)

Mr. Li forecast is around 20 gigawatts for the 2018 full year.

Okay. So he doesn't see much growth then. So he thinks the -- because the Q1 DG interconnections were up meaningfully over last year's Q1, maybe up 200%. So do you -- does he expect it to slow down in Q2, 3 and 4? And why doesn't he see some more growth in 2018?

(foreign language)

(foreign language)

Mr. Li thinks the Q1 figures of new installation is not so credible because solar installation has seasonalities, in spring, in winter. During winter or spring, we won't install a lot. But the reason why the Q1 figures are so high might be because of the projects that was rushing -- were rushing for December 31 last year. They are late for connection, so they are connected in Q1. So Mr. Li thinks conservatively about the new installation in the following quarters because the government limits the new installation for gross metering scheme. And gross metering projects, we have quota, and the management of the NRDC -- NDRC, sorry. And Mr. Li also thinks the interest rates in China will be -- remain high in the following quarters.

Okay, great. That's helpful. One other one. In terms of the deadline for the traditional utility-scale projects, historically or in the past, the deadline to receive the 2017 or the prior year feed-in tariff was June 30 of the following year. It sounds like and there are rumors that that deadline could be pulled to December 31. So this year, I think there's a rush by June 30, 2018, to receive the 2017 feed-in tariff. If they pull forward that -- I guess the question is, does he think the deadline for June 30, 2019, will be pulled forward to December 31, 2018? So in China, could we see 2 different rush periods in 2018?

(foreign language)

(foreign language)

(foreign language) Mr. Li thinks in this year, 2018, the market shows relatively lower demand than last year or before. He does think that the markets will rush for June 30 or December 30, 2018.

Can you ask him to explain why there's no rush this year?

[ph] Because of low demand for the projects.

And is that caused by the financial buyers or the -- are the banks slowing down their activity in investing in the sector? What is the cause of the lower demand?

(foreign language)

(foreign language)

Mr. Li thinks reason 1 will be the banks because the interest rate is hiking, and second one is the reducing FIT rates, bringing down the projects written. And the third one is the government will restrict scales of solar projects.

Okay, that's really helpful. And then one other question here. Of your operating assets, I think you have 187 megawatts for China DG.

Yes.

What percentage of that is receiving the full feed-in tariff today? So for example, or what -- how much -- are you receiving all the cash of those DG projects right away? If not, what percentage is waiting? And then how long do you think that wait could be?

(foreign language)

(foreign language)

(foreign language)

We have around 50% of operating assets located in Zhejiang, Shanghai and the Jiangsu province. In those 3 provinces, we receive full subsidies, but for the others, we only receive the price for the electricity, not the subsidy. (foreign language)

(foreign language)

We're expecting 2 years to 3 years delay for those with subsidy delay. And in 2018, we focus to develop projects in Zhejiang, Jiangsu and Shanghai because we're based in Shanghai, and we are -- we have -- our factory was in Zhejiang province. We have a lot -- we have Zhejiang enterprises.

Okay. So of the 500 -- well, actually, for China, I think it's 125 megawatts, what percentage is in Zhejiang, Jiangsu and Shanghai?

(foreign language)

(foreign language)

(foreign language) Around 90 megawatts in Zhejiang, Shanghai and Jiangsu late in [2019].

(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to today's presenter. Please continue.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. Project development and IPP business is our business focus, and we are very excited about the opportunities ahead of us. We are looking forward to providing you with our business update in a few months. Thank you all again. This concludes our call today. You may all disconnect.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.