Solar storm takes the shine off JinkoSolar

The solar panel maker’s revenue rose just 9.4% in last year’s fourth quarter, far slower than its 66% jump in product shipments, as the industry suffered from tumbling prices

Key Takeaways:

• JinkoSolar’s margins plunged in the fourth quarter due to sinking prices, and the company may have only remained profitable with help from government subsidies
• The company predicted consolidation in the solar sector will accelerate this year, with the top 10 producers controlling 90% of the market by year-end, up from 70% in 2023

By Doug Young

Thank goodness for government subsidies.

Such largess appears to an important factor that kept JinkoSolar Holding Co. Ltd. (JKS.US; 688223.SH) from sinking into the red in last year’s fourth quarter. The leading solar panel maker forecast more turbulence ahead in 2024, predicting consolidation would accelerate for a sector now grappling with tumbling prices caused by huge oversupply in manufacturing capacity.

Despite managing to stay profitable in the final quarter of last year, investors didn’t seem too impressed with JinkoSolar’s latest results announced on Wednesday. The stock sank 10.5% in the two trading days after the announcement and is now down 34% this year. That’s far worse than the 1.6% drop this year for the iShares MSCI China ETF, which broadly tracks offshore-listed Chinese stocks.

While it’s not surprising to see JinkoSolar lag other Chinese stocks due to turbulence in the solar sector, the company is also quite the laggard in the solar sector as well. Its stock currently trades at a lowly price-to-earnings (P/E) ratio of just 2.3 after the selloff, trailing New York-listed peer Canadian Solar (CSIQ.US) at 3.8, and China-listed peers Longi (601012.SH) and JA Solar (002459.SZ) at 10 and 6.8, respectively.

There’s no obvious reason why JinkoSolar is getting punished more than its peers, though its heavy reliance on its home China market – which accounted for half of its sales in the fourth quarter – could be partly to blame. That’s because construction of new solar plants in China is expected to start slowing sharply this year after several years of explosive growth.

JinkoSolar and its peers have been rushing to build more production capacity to cater to strong demand for solar energy as countries race to reduce their carbon emissions. The company has boosted its production capacity by around 50% or more over each of the last two years, even as its rivals make similar additions. All of that has led to a current state of overcapacity, which is pressuring prices.

“As module prices fell more than expected in the fourth quarter and nearly 50% of our modules were sold to the Chinese market at lower prices, gross margin for the fourth quarter decreased significantly to 12.5% from 19.3% in the third quarter,” said Chairman and CEO Li Xiande.

The falling prices are reflected in the huge gap between JinkoSolar’s product sales, which rose quite strongly in the fourth quarter, compared with much slower growth in its actual revenue. The company shipped 27.9 GW of its various products during the quarter, mostly solar modules, which was up 66% from the 16.8 GW it shipped a year earlier. But its actual revenue rose just 9.4% over that period to 32.8 billion yuan ($4.6 billion).

The company’s saving grace was a huge jump in its subsidy income, which rose to 555 million yuan from 94 million yuan a year earlier. That addition helped the company to stay in the black with a net profit of 29.3 million yuan, down sharply from a 665 million yuan profit a year earlier and 1.32 billion yuan profit in the third quarter.

Accelerating consolidation

Despite the reliance on government subsidies to stay in the black, analysts still expect JinkoSolar and most of its peers to remain profitable this year, even as they continue to build new capacity. JinkSolar said it expects to boost its production capacity for its various products by between 45% and 60% this year, even as it predicted its own module shipments for the year would rise by a slower 34% to between 100 GW and 110 GW.

That forecast would represent a sharp slowdown from last year when the company’s module shipments jumped 76% to 78.5 GW from 44.5 GW in 2022.

The expected slowdown in new solar power plant construction this year comes as Wood Mackenzie forecast the industry is entering a new phase of slow or no growth after several years of rapid expansion. The consultancy said new solar power installations grew by around 28% annually between 2019 and 2023. But it said there will be little or no growth in the next four years, adding new installations could even contract in some years.

By comparison, BloombergNEF expects new installations will keep growing strongly this year. It predicted such new installations would rise nearly 30% in 2024 to 547 GW, though it forecast the rate would slow sharply to just 9% in 2025.

While the exact timing of the slowdown looks uncertain, one thing that’s more certain is that prices will remain so low that many smaller, less efficient solar panel producers will start losing money. As that happens, JinkoSolar predicted that consolidation will accelerate this year. It said it expects that the top 10 manufacturers will account for 90% of global sales by the end of this year, up from the 70% of the market they controlled in 2023.

As a leading player, JinkoSolar certainly looks likely to emerge in a stronger position once the consolidation runs its course. The company had nearly 20 billion yuan in cash and short-term investments in its coffers at the end of last year, up sharply from the 11.3 billion yuan it had at the end of 2022, meaning it’s unlikely to face a cash crunch anytime soon.

Two slightly worrisome trends for the company include its growing accounts receivables, and also its growing inventory. The former grew to 22.7 billion yuan in last year’s fourth quarter, equal to 71% of its revenue for the period, much higher than the 56% figure a year earlier. Its inventory also rose 4% to 18.2 billion yuan from 17.5 billion yuan a year earlier, though the actual amount of product in its warehouses probably rose by a much higher amount since prices now are so much lower now than where they were a year earlier.

All things considered, JinkoSolar’s stock looks a bit undervalued at the moment, which reflects broader bearishness on the solar sector as it undergoes a major adjustment. That means the stock could be a good value at its current price, as there will probably be healthy upside potential over the medium to longer-term after the correction runs its course over the next year or two.

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