Jinko Solar’s Time May Have Come
What happened in 2016?
- Solar stocks have bottomed.
- Demand for modules is higher than expected.
- Solar has become the cheapest source of energy in some parts of the world.
Since the beginning of last year, Chinese stocks have reached a low and are now on an upward trend. Solar stocks seem to have bottomed in a similar manner. At the same time, according to the Lazard Report, solar has become the most economical source of energy in some parts of the world.
Still in the same period, Solar City has been acquired by Tesla, Trina Solar has revealed plans for going private, and Jinko Solar has spun off part of its business. There is a chance the smart money saw an opportunity too good to miss, despite the recent financial troubles of peers like SunEdison.
JinkoSolar merits the attention of investors who are looking for value and growth at a low price. Looking back to 2016, the fear of a slump in global demand for modules is probably exaggerated, particularly in the case of JinkoSolar. In addition,JinkoSolar is currently the best choice among global module producers because of its cost leadership and relatively solid financial, even after the spin-off.
Demand Side
Lately, there have been some concerns about the future of the solar industry in the U.S. under the incoming president. Also, a new glut in China caused by lower installation targets was feared to lead to tumbling module prices worldwide. On the other hand, if one listens to the last conference call of JinkoSolar, one may think these fears are not entirely justified: the average selling price (APS) for Jinko has fallen by around 20%. However, it has stabilized since then, leaving Jinko with acceptable margins. Overall, demand in China seems to have contracted less than expected after in November the National Energy Administration had cut its target from 150 GW of installations to just 110 GW by 2020, together with announcing lower feed-in tariffs (FITs). It turns out that this number is a minimum target, and with additional programs, such as the Front Runner Program, and the Power Alleviation Program, will create further demand. In addition, for the municipalities of a handful megacities including Beijing, as well as for the region of Tibet, less stringent limits apply. Keep in mind that in these areas have in total over 100 million people.
There is also new demand from players in the emerging markets where solar parks have become the most economical source of energy without incentives. JinkoSolar’s sales results reflect this: from Q2 to Q3 sales to emerging markets were still small with respect to China and North America, but they have grown by almost four times in the same period.
And there is more to come: the Saudi government just announced a plan to extend its investment in solar by 10GW (about a quarter of all solar panels installed in the US).
One can expect good news from Europe as well: more module producers are leaving the Minimum Import Price (MIP) agreement creating fair competition, while at the same time the calls for scraping the agreement all together are becoming louder. This leaves us only with the U.S. market being an uncertainty, but perhaps in the long run Chinese solar firms are in a winning position either way: if the new Administration cuts funding and embarks on a protectionist trade policy, it will probably hurt the US producers more than the Asian ones because it will become more difficult for them to reach scale and compete outside the United States.
Why JinkoSolar?
On the supply side, it is more difficult to have aclear picture of the future. The past is littered with numerous players being pushed out of business, and it seems that in the short run a lot more small firms will encounter difficulties. This, however, should play out in favor for the big ones. From a different perspective, there is a substantial risk that supply will increase more than demand in the years to come, leading to a market with minimum margins and cutthroat competition.
This brings us to the conclusion that long-term investors should prefer top-tier companies with solid balance sheets, with the lowest production costs in the industry, and with large market shares. The top three companies in these terms are Trina Solar, Yingli Green Energyand JinkoSolar. With Trina Solar going private, and Yingli having been unprofitable over the last years, JinkoSolar seems the way to go for a more cautious investor.
Financials after Spin-off
One of the most recent developments at JinkoSolar is the spin-off of the power generation business in Q3 in change for $250m in cash and a 1,252 reduction in debt. The management has provided some preliminary numbers during the last conference call, but it remains to be seen how the spin-off will exactly impact the balance sheet in the upcoming annual report. Using these preliminary numbers and rough estimates based on past reports, it is expected that the spin-off will enerate some pleasant side effects, such as an increase in revenues because the module business keeps selling to the spin-off.
