While JA Solar has been slow to reap the benefits of the emerging recovery across the solar sector, it now appears to be quickly making up lost ground. Its factories are now fully adapted to mass produce its new, higher-quality products.
Amid skepticism ahead of Q2 results and just 6 days after Axiom Capital highlighted its concerns for PV module demand through H2 and reiterated its sell ratings on Yingli Green Energy Hold. Co. Ltd. (ADR)(NYSE:YGE), Trina Solar Limited (ADR)(NYSE:TSL) and JA Solar Holdings Co., Ltd. (ADR)(NASDAQ:JASO), share prices across the solar sector hit their lows on 19th August. Since then, Trina has rallied 135%, Yingli is up 85% and JA Solar, the relative laggard, is up “only” 42%. That one of the most technologically advanced companies with a geographically diverse customer base, the most robust balance sheet and a well-connected and highly regarded management should lag behind its peers so decisively has inevitably prompted much debate.
Click to enlarge image JA Solar vs. Trina.png JA Solar vs. Trina Solar
Indeed, that interest has been further heightened as the encouraging technical profile of JA Solar recently prompted Barrons to highlight the bullish views of two separate technical analysts (see chart 2 below). Opinions on the precise point where the technical break is confirmed vary between $11.25 and $11.50; however, there is wholehearted agreement that any decisive break above this level would then see the stock price quickly rise toward $20.
Fundamental developments now underway also suggest such a target is wholly realistic. However, before considering future prospects, it is important to understand the context of JA Solar’s relative underperformance to then see how that might be changing, where some encouraging surprises might now lie ahead and why the technical analysts could indeed be accurate in their predictions for the stock price.
Click to enlarge image JASOTechGraph.png JASO Technical Chart
The fortunes of PV-related product manufacturers hinge on two simple variables: the volume of products they are able to sell, and the margins that they are able to achieve on those sales. Set in this context, JA Solar’s Q2 results were disappointing. Although gross margins improved 210bps QoQ to 8.1% (on account of better ASPs in Japan), total non-silicon module production costs were unchanged QoQ at $0.49/watt, and product shipments rose just 5% QoQ while revenues actually fell $12mn QoQ to $257mn (due to accounting treatment of tolling-based sales).
Guidance for Q3 and beyond offered little reassurance, either. Gross margins for 2013 overall were expected to remain between 6% and 8%, Q3 shipments were expected to be flat QoQ at 450-470MW, non-silicon production costs would only reach $0.46/watt by the year-end and silicon costs would be up marginally in Q3. It’s therefore little surprise that analysts and investors alike heaved a collective sigh of disappointment, especially when JA Solar’s two closest peers, its Hebei-based neighbor, Yingli Green Energy, and Trina Solar, were issuing more upbeat results and outlooks.
Q2 saw Yingli’s module shipments climb 24% from Q1 and revenue rise 28% to reach the highest level since Q3 2011. Moreover, cost cuts and economies of scale (driven by higher volumes) also combined to push gross margins up 770bps QoQ to 11.8%, and analysts now expect them to continue rising in Q3 and Q4, to 14.3% and 17.3% respectively. The situation at Trina was more encouraging yet. Q2 shipments were up 65% QoQ and non-silicon costs fell 10% QoQ, so gross margins rose 1,000bps from Q1 to reach 11.6% in Q2. Management also offered an optimistic prospect: order backlogs for Q3 were sufficient to ensure that shipments would remain stable at this higher level, new product launches suggested ASPs should continue higher and that they’ll “achieve profitability in Q4” which, depending on cost management through Q3, may come even earlier. Charts 3 and 4 put this stark difference in consensus expectations for both margins and sales at Yingli, Trina and JA Solar in perspective.
Click to enlarge image MW Sales.png Volume Sales in MM
Such lackluster performance inevitably sparked deep-seated concerns about JA Solar: Was it losing market share? Would it simply fade into an “also ran” of the module manufacturing segment? At this point, it is important to be aware of three distinct strategic priorities, which management has consistently emphasized and which have powerfully influenced JA Solar’s path through the recovery thus far.
First, technological superiority is paramount. In the medium and long term, this will ensure that JA Solar’s modules continue to compete effectively on both performance and cost. In the short term, however, it has postponed the emergence of full production capacity, as the upgrade of cell and module lines to manufacture new, higher-efficiency products was only completed in early summer.
Second, the CEO, presumably hoping to maximize the advantage of their technological lead, has consistently prioritized margins over volumes. While this strategy permitted a successful and hugely profitable launch in Japan, it has also stymied module sales in China where, until recently, ASPs remained below management’s hurdle to secure the returns necessary to justify their investment in production. Taken together, these two factors have delayed the steep volume growth in shipments enjoyed by JA Solar’s peers. They have also postponed the steep declines in costs for JA Solar, which are commensurate with rising economies of scale.
Click to enlarge image Gross Margins.png Gross Margins
Finally, JA Solar’s management is inherently cautious. This has had three important consequences. Although this attitude has ensured that the company’s balance sheet and liquidity rank among the most secure and well-managed of the US-listed solar product manufacturers, it also prompted a rights issue back in August that was hugely dilutive to existing shareholders. It has delayed the company’s full-scale entry into project development. Lastly, it has distorted the company’s view of future demand with shipment guidance consistently undershooting reality; JASO has beat shipment guidance in six of the last seven quarters.
JA Solar will shortly release Q3 results and the combination of official data releases, contract announcements and management comments not only allow a reasonably accurate assessment of these impending results to be made, but do indeed suggest that management was unduly cautious in its guidance for Q3. Shipment volumes seem likely to exceed the 460MW that was projected. Officially released export data shows that JA Solar shipped 163MW of modules between July and September. On 10th September, an official release also revealed that JA Solar would deliver 96MW of modules to CPI Huanghe Hydropower in Qinghai Province “by October.” Finally, JA Solar delivered 60MW of modules to Chinese-based customers in Q2. Since then, both demand and ASPs have improved markedly in China, while the CEO admitted in an interview on 9th September that the company was consistently receiving large orders in China with “good news, again and again.”
Even assuming, conservatively, that module shipments to Chinese customers are 45MW still suggests that 300MW of module sales in Q3 is easily achievable. The company therefore needs to sell just 160MW of cells in order to achieve its targets. Having sold 210MW in Q2, and with PVInsights’ weekly market comment consistently emphasizing the strength of cell demand across Asia, a view echoed by an article in November’s PV Magazine, it seems reasonable to assume cell sales will be at least flat QoQ in Q3. JA Solar can therefore easily achieve 510MW volume shipments in Q3, i.e. up 10% QoQ and in line with comments recently in an interview with the company’s marketing director.
However, indications on JASO’s cost structure and ASPs suggest profitability is unlikely to emerge until Q4. Module ASPs are likely to be approximately $0.68, up $0.02 from Q2. The average of declared prices for JA Solar modules at Chinese customs in Q3 was $0.685. In the meantime, domestic prices are likely to match this level with management noting on 29th August that they “expect the price in China in Q3 and Q4 should be similar to worldwide.” Meanwhile, non-silicon production costs could have declined marginally from $0.49 in Q2 to $0.48 in Q3 as volumes improve; however, some of this is likely to be lost due to a 5% rise in silicon costs. Hence, we assume total module production costs will decline only marginally from $0.58 in Q2 to $0.575 in Q3.
Assuming that cell prices and costs remained flat QoQ, we can infer that gross profit could reach $33.6mn in Q3. Admittedly, this suggests gross margins could rise to 11.3%; however, it’s still insufficient to cover the $26mn of operating expenses and $14mn in quarterly interest costs. Net profits therefore seem unlikely in Q3. However, with none of this likely to prove any surprise to consensus expectations, Q4 trends will be closely scrutinized. On this point, the situation becomes more encouraging.
It seems very likely that JA Solar’s 1.8GW of module production capacity, 2.5GW of cell manufacturing lines and 1GW of wafer facilities are now operating at 100%, against just 56% capacity utilization at its module plants and 74% at its cell factories in Q2. A spokesman at its 500MW module plant in Hefei noted, in an article on 12th October, that the company’s modules were in short supply. Moreover, the Chief Technology Officer announced at the Q2 results call that mass production had started up in July for the new, Cypress II cells, the new 60-cell multi- and mono-crystalline modules and the 72-cell, 325W mono-crystalline modules. Chinese language recruitment sites also indicate that JA Solar has been actively seeking 60 new personnel at the company’s 1.3GW Fengxian module facility.
Vacant positions range from module processing engineers, export/import commissioners and quality monitoring staff through to warehouse supervisors and purchasing clerks, and suggest a proactive effort to expand, as opposed to replacing the natural fluctuations in the workforce. Finally, it seems very unlikely that a well-managed, profit-focused company, whose CEO is making very encouraging comments about the levels of demand and whose products now sell at a price sufficient to achieve almost 18% margins, is not maximizing output in this newly profitable environment.
The recovery in ASPs, both outside and within China, is now well underway and JASO’s stringent pricing strategy appears to be reaping the benefits. Module prices in China (which accounted for 25% of JASO’s Q2 module sales) now range between $0.69 and $0.71/watt, with some as high as $0.74/watt. In the US (10% of Q2 module sales), prices have also climbed from $0.62-0.64/watt back in April/May to $0.68-0.7/watt currently. Meanwhile, JASO’s module prices in Japan (35% of Q2 module sales) have remained broadly stable at $0.69-0.7/watt through Q3, while the robust demand anticipated in Q4 also suggests the downside is protected.
In recent interviews, Jin Baofang, the CEO, has twice quoted the statistic that a 1% improvement in a module’s conversion efficiency reduces the total installment costs of a solar plant by 5-7%, and it would appear that the company has been using this as a marketing tool to maximize the price of their high-efficiency modules. Export data through August and September reveals that, relative to those of its US-listed module producing peers, JA Solar’s products have consistently achieved top-end pricing levels in export markets.
Production costs are also likely to have declined further in Q4. By the end of 2013, management expected non-silicon costs to fall “below $0.46/watt,” and further progress is likely on that front. The advent of full capacity utilization will provide further support in this respect. Though difficult to predict, the impact of economies of scale is usually very substantial for volume manufacturers.
Collating these various assumptions suggests that Q4 module and cell shipments will reach 450MW and 175MW respectively. With module ASPs at $0.7/watt and cell ASPs at $0.4/watt (i.e. up $0.01 QoQ), total revenues could be $385mn. In the meantime, with module costs at $0.565/watt and cell costs at $0.36/watt, cost of goods sold could total $317mn. Gross profit would therefore reach $68mn, from which $40mn of quarterly operating and interest costs must be deducted. Pre-tax profit would then be $28mn and, assuming a 15% tax rate, net profit would be $$23.8mn, which would bring quarterly EPS to approximately $0.61, or $2.5 annualized. If a P/E of 8X is applied to this earnings profile, a target price of $20 seems entirely plausible.
However, none of this analysis considers the potentially substantial profit contribution from JA Solar’s expansion into the development of solar power projects, an area where management are clearly optimistic. At the Q2 results call, the CEO noted: “We are looking at opportunities to expand our involvement in project development…we have built up solid experience (in this area)…and are well positioned to (make the) transition.” Thus far, the company has announced agreements to develop 400MW of projects, of which development rights have been granted on 100MW and a further 100MW are expected to be approved by year end. However, the CEO also commented, “We are working on a number of other projects that are in early phases. We remain optimistic on the project development front.”
Further details explain management’s enthusiasm. Project development is expected to generate gross margins of approximately 12%, when adjusted for the government’s new VAT rebate. With project costs estimated at $1.5/watt and 400MW of projects likely to be developed and sold in 2014, revenues from this business could reach $660mn, thus generating gross profits of $79mn. Further details should emerge at the company’s Q3 results call on the timing of construction and sale, the scale of the project pipeline and the growth potential. It therefore seems likely that this nascent business will draw increasing interest from investors over the next 6 months as the prospect of meaningful profit contribution draws closer.
While JA Solar has been slow to reap the benefits of the emerging recovery across the solar sector, it now appears to be quickly making up lost ground. Its factories are now fully adapted to mass produce its new, higher-quality products. High conversion efficiency is evidently in strong demand and JASO’s modules are achieving strong sales and high prices in both overseas and domestic markets. Moreover, its production costs, already tightly controlled, are likely to continue declining toward the year end. As a result, there now appears to be a high likelihood that the company will achieve positive quarterly net profits in the current period. With consensus expectations currently forecasting quarterly losses continuing through until late 2014, such a result will inevitably prompt a rapid and substantial reassessment of the company’s prospects, especially when the potential contribution from the company’s project development are also considered. It would therefore appear that the technical analysts are, in this case, a step ahead of the fundamental analysts on JA Solar.
|
Thread abonnieren
