JKS - JinkoSolar Is Growing Rapidly With A Good Margin Of Safety

Summary

• JinkoSolar is growing at a rapid pace and taking more and more market share from competitors. I believe the current share price is presenting a good margin of safety for investors.
• With assets growing at a much faster pace than liabilities and a strong cash position, JinkoSolar is in a good spot financially.
• With the solar sector expected to grow 20% CAGR until 2027, JinkoSolar is a good bet to take advantage of the movement.
• With so many tailwinds for the company and a strong financial position, I am strongly considering opening a position in the company in the near future.

Taking A Look At The Balance Sheet

Understanding the financial position of any company is an important part in evaluating whether or not you should invest in them or not. Some of the things I look at first for high-growth companies especially the cash position, asset/liabilities ratio, and also inventory.

The solar sector is known for being quite capital-intensive in order to get ahead of competitors and get an advantage. JinkoSolar Holding ( JKS ) has a massive cash position sitting at over $2 billion, almost up 100% from last year's quarter. As a potential investor, I really like to see numbers like this. With an upcoming recession and slowdown in spending, it's great to see the company preparing like this.

Another highlight on the balance sheet is the ratio between assets and liabilities. Here it's important to see a number above 1 at the very least. JinkoSolar has a ratio of 1.3 here. This means they are not drowning in liabilities and if worst comes to worst and they are liquidated, the shareholders would be eligible for more money than they are putting in - meaning that the shareholders' equity is larger than the company's current market cap. For me, that's a great sign that they might be undervalued.

Lastly, I want to take a look at the inventory. This is important as if the company is increasing inventory faster than their revenues are growing then it could start digging into earnings . From last quarter, JKS has doubled their inventory, but they have also more than doubled their revenue. This means they have a strong demand for their product, and they aren't wasting space keeping products that aren't selling fast enough.

Company Highlights And Tailwinds

Let's take a look at some of the highlights the company provided in the last earnings report . What a company like JinkoSolar is doing will be incredibly important for future generations. They are supplying the world with a green energy source, and it's fantastic they are seeing such great demand.

They reached their goal of shipping out their N-type modules, reaching a total of 10GW. They are also the first one in the industry to ship out a total of 100 GW in solar modules - setting a strong bar for the rest of the companies to follow after.

With an industry expected to grow at an annual rate of 20 % until 2027, JinkoSolar is at the forefront of this movement. I believe that with strong fundamentals and a competent management team, these headwinds will lead JKS to becoming an industry leader. With a focus on generating revenue and providing value for investors and shareholders, I like the idea of perhaps investing money in this venture.

JinkoSolar's Current Market Share

Right now, JinkoSolar holds a 12.8 % market share in the PV cell and module shipment space. This is a substantial share and something that they can expand with and take up even more space.

The business that they have grown is a very profitable one. With a return of about 13.9% on the money they invest, I see them as highly scalable. They don't have the greatest net margins in the industry, but being a younger company, I expect them to start focusing on this later on. At the very least, they are profitable and trade at a good multiple.

With a vast network of suppliers and the capability of supplying some of the largest and most demanding markets, I don't see JinkoSolar having any issues shipping and delivering their product.

Summary Of Recent Q3 Earnings Report

In the last earnings report , JinkoSolar provided exceptional results. Topping estimates and generating 127% more revenues compared to last year's quarter. Like the cherry on the top, they also managed to increase their gross margins too. Increasing 0.6% on a YoY basis.

Much of the reason for this large increase in revenues comes at the back of a large demand for its products. Sales increased around 117% on a YoY basis. I have mentioned here previously that the solar sector is a very capital-intensive one where it's tough to have positive net margins, so it gives me great relief that JinkoSolar is able to do this whilst growing so quickly.

Growth Outlook

JinkoSolar is a part of the solar industry, supplying customers with its solar modules. In recent years, this has become one of the most hyped and exciting new industries. It has an incredible path ahead of itself and will grow rapidly. Expected to grow about 20% each year until 2027 topping out to becoming a $200 billion industry, JinkoSolar can be a market leader in the space.

As the company already is known worldwide, it shouldn't be difficult for them to generate YoY revenues of over 20% until 2027. One of the many tailwinds that JinkoSolar has is the social demand for its products. We are seeing increasing pressures being placed on both companies and governments to find more green energy sources. Solar modules offer a great renewable energy source that is efficient at setting up and won't require too much maintenance during its lifespan.

One thing I want to highlight in terms of the solar sector is the increased demand by residents. JinkoSolar provides solar modules for residential homes too. With the chart above, we see a clear demand by not only companies but regular people too that want to have a green energy source.

Valuing The Competitors

Knowing how the competition is currently valued is very important to me when deciding whether or not to put money into a company. It gives me an idea about how the market is valuing different companies depending on their recent and future performance.

Looking at some of the competition, I can quite quickly see that JinkoSolar has the most favorable valuation currently. I think SolarEdge Technologies ( SEDG ), Sunrun Inc. ( RUN ), and SunPower Corporation ( SPWR ) all have quite rich multiples. This means that it will need to take some time until the p/e can go down enough to have something that mimics the market as a whole. As an investor, you shouldn't be paying 50x or 70x what a company is making in profits. You will lose out with time without a doubt because the amount of growth needed to justify valuations like that is rare to happen.

Even though JKS has the lowest margins, they are a scalable business that with time can focus more on the bottom line later on. Scaling and getting a larger market share makes more sense for JinkoSolar right now.

Valuing JinkoSolar

JinkoSolar is in my opinion right now a great opportunity to get some more exposure to the solar sector. With a future p/e of 8 and great revenue growth projections, I think any potential risks don't outweigh the rewards.

Above are my current price targets for the company. They offer a very favorable return over the next 5 years. I expect that the company will be able to grow their bottom line by 15% YoY until 2027, with an increase in net margins along the way too. The P/E of 10, I justify by the company having a very low profit margin. That makes me more prone to give a lower multiple.

In case JinkoSolar achieves a higher profit margin, then I would consider adding a higher p/e. With JKS currently being valued at $52 per share, this chart would suggest an annual growth rate of 24.2%, a market-beating return.

Right now, I think JinkoSolar offers a great entry point for any investor looking to get a long-term position in a company able to efficiently scale and increase revenues. But with the current macroeconomics being shaky and futures foggy, I think it's not out of the possibility that the shares could fall as the entire market falls too. It's a smaller company that will have bigger swings, and volatility should be expected. But if the investment thesis stays the same, then you should have nothing to worry about, I don't at least.

Risks With Investing In JinkoSolar

With all investments, you should be aware of the risks that come with the company. I have identified a few different ones that come with JinkoSolar. The first red flag would be the very low net margin. With just 0.28% there is not much room for mistakes or sudden events that cause issues. I know the sector is cutthroat and margins are incredibly slim, but higher net margins would give me more comfort.

The second would be about the cash flows. They have been significantly in the negative for the last 5 years. Unless the company is able to turn cash flow positive and give some confidence, then the share price will stay suppressed.

Conclusion

All in all, I think that JinkoSolar currently offers great value for anyone wanting to get more exposure into the solar sector. With so much upcoming demand for solar modules, JKS will have an easier time getting their products sold.

With a much lower multiple compared to many of the competitors in the space, JKS has a higher margin of safety. It's a profitable company that is expecting to grow faster than the market it's in. For me, that means they have a hungry management ready to become one of the largest players in the sector.

Looking at the balance sheet, they have a massive cash position that gives me comfort they will be able to weather any storm that might come their way. I currently do not have a position in the company, but I am considering opening one in the next few months. The markets right now are quite shaky, and it's not impossible we can see lower prices. That would for me, however, just make this company an even better deal.

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