JKS - Margin Improvement And Lower Policy Risk Makes JinkoSolar Attractive

2023-04-19 17:47:20 ET

Summary

• JinkoSolar is slated to report Q1 2023 earnings in about a week's time.
• Low polysilicon prices and less policy risk are likely to give the company's bottom line a nice bump.
• Investors should use the upcoming quarterly release to check whether this thesis will play out.

It's early innings into the Q1 2023 earnings season, with only ~10% of S&P 500 companies having returned their quarterly scorecards. According to FactSet data , the S&P 500 is expected to report negative earnings growth to the tune of -6.5%, marking the largest earnings decline by the index since Q2 2020 (-31.8%).

Unlike recent earnings seasons, the current one is shaping up as a disappointment, with 80 companies in the index having issued negative EPS guidance while only 27 have issued positive guidance. Interestingly, some of the better-performing corners of the market have issued some of the gloomiest outlooks. To wit, the Information Technology and Industrials sectors have the highest number of companies issuing negative EPS guidance for the first quarter at 27 and 16, respectively, while the Semiconductors & Semiconductor Equipment industry has the highest number of companies issuing negative EPS guidance in the sector at 11. The IT sector has returned 19.7% in the year-to-date, with only Communication Services outperforming after gaining 23.7% over the timeframe. Meanwhile, on the industry level, the Semiconductors & Semiconductor Equipment Industry has gained 30.1% YTD, a performance only topped by Automobiles (+40.2%) and Interactive Media & Services (+35.9%).

As I was going through the earnings calendar, one of the companies that popped up on my radar is JinkoSolar Holding Co. ( JKS ). JKS will report Q1 2023 earnings on 04/27/2023, one of the few large renewable energy names slated to do so this month. The consensus EPS forecast for the quarter is $0.37, much better than the $0.10 posted for Q1 2022. Over the past four quarters, JKS has exceeded expectations twice and missed twice, managing a slight beat the last time it reported.

After a two-year losing streak, JKS stock appears to be on the mend, having gained 22.2% in the year-to-date. But this China-based solar PV module manufacturer has not been in the doldrums alone. Over the past two years, soaring inflation, rising interest rates, supply chain disruptions, and rich valuations have taken a heavy toll on renewable energy stocks. Renewables are still underperforming in the current year, with the iShares Global Clean Energy ETF (ICLN), a catch-all bet on clean energy, up a mere 1.4% YTD vs. 8.6% by the S&P 500. ICLN is currently trading 40% below its January 2021 peak. Other popular solar and wind energy benchmarks are not faring much better, either, with Invesco Solar ETF ( TAN ) up 8.6% YTD while First Trust Global Wind Energy ETF ( FAN ) has gained 2.7%. The clean energy selloff coincided with a huge rally in the fossil fuel sector, with Wall Street turning highly bullish on the sector for the first time in many years, thanks to the global energy crisis exacerbated by Russia's war in Ukraine.

Stratospheric valuations are a big reason why investors have lately been shunning renewable energy stocks. Many stocks in the space tend to have a lot of growth baked in them, which, coupled with razor-thin margins, leaves them with little room for error when it comes to execution. For instance, First Solar, Inc. (FSLR), a highly popular clean energy stock, recently caught a downgrade from Bank of America with BAC arguing that the benefits of the Inflation Reduction Act of 2022 are already priced into the shares. With a P/E ratio of 170 and a valuation score of C, FSLR certainly doesn't pass the valuation test. A big part of the stratospheric valuation is the stocks' recent huge rally, with FLSR having rocketed nearly 170% over the past 12 months.

Luckily, JKS is much cheaper than many stocks in the sector, with the current PE ratio clocking in at 27 while Forward PE is 7.0. That's much lower than valuations by peers SolarEdge Technologies (SEDG) +182, Enphase Energy, Inc. (ENPH) +81, and Array Technologies (ARRY) +82.

Improving U.S. Policy

JKS has been on the move after ROTH Capital upgraded the company at the beginning of the year to Buy from Neutral with a $70 price target (42% implied upside), citing an improving U.S. policy situation and the potential for margin expansion after polysilicon prices crashed towards the end of 2022.

Post [third-quarter] results, we had already increased our estimates a fair amount. Given the poly price collapse, we see upside potential to margins ahead and plan to update our model following JKS's upcoming Q4 results, " ROTH said in a note.

Last year, after years of record capital spending, wafer companies that had struggled with polysilicon shortages suddenly saw a deluge in supply that triggered a sharp drop in prices. Companies that had previously hoarded polysilicon started opting to tap into their inventories while polysilicon manufacturers rushed to ramp up capacity, with new capacity built over the past few years coming online simultaneously. Meanwhile, the relaxation of China's zero-Covid policies further accelerated the release of supplies. The combination of these factors contributed to plummeting polysilicon prices, with poly prices dropping from nearly $40 per kilo in November to $18 per Kg in early January 2023. It's quite normal for prices to drop in the final months of the year as procurement for year-end PV installations is complete. But the drop this time exceeded average seasonality trends. Poly prices have rebounded this year from their multi-year lows but still remain well below last year's highs, with the current polysilicon spot price at $25.48 per kg. Polysilicon price in China is currently quoted at RMB 198666.67 per tonne ($28.92 per Kg) after peaking at around RMB 220,000 per tonne ($31.90 per Kg) around mid-February.

It's likely that poly prices will remain subdued for the rest of the year, considering that there are several major polysilicon plants expected to come online soon. Among these include; Daqo New Energy Corp.'s ( DQ ) new 100,000 metric tonne factory in Inner Mongolia, a GCL Technology project with a capacity of 100,000 metric tonnes again in Inner Mongolia, and Runyang Silicon's 50,000 MT plant in Ningxia, a new player in the space. However, prices are likely to take at least a few months to ramp up to full production capacity, meaning prices might not fall off a cliff like they did last year.

Nevertheless, JKS is likely to realize significant margin expansion due to lower-than-average poly prices. Currently, the company's margins are not impressive with a gross margin reading of 14.8% compared to the sector median of 50.5%. However, the solar sector's net margins have never been good, with JKS' 0.80% reading just as bad as the sector's 2.7%.

UFLPA

Back in December, U.S. Customs and Border Protection released a significant shipment of solar panels for sale in the U.S. market it had seized under the Uyghur Forced Labor Prevention Act (UFLPA). The UFLPA release is a big boon for JKS as it removes a huge policy risk the company faced. Under the UFLPA, the burden of proof demonstrating that goods imported from China's Xinjiang region were not manufactured with slave labor falls on the buyer. Companies are required to provide a complete list of all employees at their facilities, a detailed distribution network chart, and enough evidence proving that laborers were not subjected to forced labor conditions.

During the second half of 2022, more than 1,000 shipments of solar modules valued at hundreds of millions of dollars accumulated at U.S. ports, with ROTH Capitals estimating that as much as 3 GW were held by U.S. Customs since the law was passed. The release of the panels will benefit JKS and the U.S. utility-scale solar sector.

Overall, JinkoSolar Holdings appears to be in a good place thanks to low polysilicon prices that lay the ground for margin improvements while JKS remains cheap. Investors looking to build long-term positions should wait for the company's upcoming quarterly release and check whether this thesis holds true.

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