Baskin Wealth Management Equity Research Report

Jinko Solar NYSE:JKS

January 28 2018
Shayne Rebello
Investment Summary
Jinko Solar is a Chinese solar module, cell and wafer manufacture founded in 2006, and based in
Shanghai. The firm produces its equipment in production facilities throughout China and
Malaysia and plans to add capacity in the US by 2019. The company derives its revenue from
sales to medium to large scale solar energy park projects and is led by a skilled management
team that has carved out a sustainable competitive advantage founded in cost leadership and
technological innovation. According to most recent 2017 Q3 earnings report, the company
reported revenues of 964 m USD and shipped a total of 2374 megawatts worth of modules;
exceeding company and analyst expectations. Income from operations increased 7% from Q2
while EPS came in at $0.01 which beat expectations by $0.02. Since then the company has
experienced a number of important developments which include:
In November 2017, Jinko revealed that they had eclipsed a number of solar module records.
Most notably, the firm had achieved a 23.45% sunlight- energy conversion efficiency on their P-
Type Monocrystalline Solar Cells which beat the previous record which was set by themselves
earlier in the year.
The company was also recently revealed its involvement in powering Armenia’s largest power
solar park and was also recognized as the most ‘bankable pv manufacturer’ by Bloomberg New
Energy Finance; cementing its position as one of the healthiest and well managed firms in the
industry.
Most notably, the company announced on Jan 22 2018 that they had negotiated a contract with
the City of Jacksonville to build and operate a large module production facility. While capacity
details are limited, the factory is expected to add 800 US jobs and will benefit from over 70
million in tax incentives. In response to Trump’s newly declared 30% tariff on all foreign solar
equipment, this investment in US production facility represents and important long term strategic
initiative.

Investment Advice
On a relative and absolute basis, Jinko appears to be undervalued by around 35-45%. YTD, the
stock has performed well, returning 64%, however prices peaked at $29 in September and have
fallen below $23 following news of new tariffs imposed on China by President Trump (Fig
1).These tariffs deescalate from 30% to 15% by 2022 and could lead to short term headwinds
considering the firm’s reliance on the US market (Fig 2). Despite these risks, the recent price
decline seen over the last 5 months appears to be unwarranted for two main reasons and
represents a good entry opportunity for medium to long term investors looking to capitalize on
the growth of the booming solar power revolution.
Firstly, aggressive US foreign tariff policy issues are nothing new for management. Under
Obama’s administration, a similar tariff targeting China was imposed and the firm overcame this
obstacle by building capacity in Malaysia. Furthermore, Trump’s decision was expected long
before the ruling and management smartly began plans to build capacity in the US in order to
mitigate this threat. Key to the success of this investment lies in management’s ability implement
the production techniques used in China to new facilities in domestic markets. If management is
successful, Jinko will likely be capable of outcompeting domestic producers and capture a
greater share of the US market without being impeded by tariffs.
Secondly, the market at large appears to be discounting Jinko’s cost leadership (Figure 3),
module conversion efficiency (Figure 4) and R&D efficiency (Figure 5). Despite having world
record Mono-si cell efficiency, Jinko spends significantly less on R&D compared to its peers. In
the long run, the race to the bottom expected in the pv manufacturing industry will favor the
firms that produce the cheapest and most efficient products. Only those firms who invest smartly
in R&D will be able to produce efficient cells at a cost competitive level. Management has
demonstrated an ability to deploy R&D capital efficiently-as evidenced by the achievement of
numerous efficiency records- however the market does not appear to be taking this crucial
advantage into account.

Business Description
Jinko Solar engages in the production of solar modules, cells and wafers and sells these products
to power distributors, system integrators and solar farm developers in China and the US as well
as to growing markets in India and South America. The firm’s competitive advantage is rooted in
its focus on R&D which has enabled the company to provide some of the cheapest and most
efficient solar modules in the global market. This focus on cost and efficiency has positioned
Jinko to take advantage of increased global appetite for large solar projects which have seen a
surge in popularity over the last 5 years.
Over the last 10 years, Jinko has grown and expanded its business both domestically and
internationally. On average the firm grew revenues 64% yoy and has experienced a 23% 5 year
CAGR (Fig 6). Gross margins have fluctuated from a low of 4% to high of 29% but generally
trend around 15%-20% (Fig 7). Recently, gross margins have come under pressure for Jinko and
the broader industry but are expected to recover as the production glut that began in late 2015
works its way though the system and reduces pressure on ASPs. Additionally, operating margins
have compressed due to rising R&D expenditure and SG&A expense. While continued R&D
expenditure will likely be a necessity, investments in technology, transportation and production
optimization will allow the firm to reduce admin, overhead and other operational costs.

Competitor Overview
The global PV manufacturing industry is fiercely competitive and driven by a continual push for
innovation, cost reductions and efficiency gains. Manufacturing centres have developed in US
and Europe but Asian firms known collectively as the Silicon Module Super League currently
dominate and capture around 50% of global equipment volume. According to most recent annual
data compiled by the US Department of Energy, Jinko led the industry in global shipments
(Figure 8) while producing one of the cheapest and most efficient systems on the market. (Figure
3,4) In the short term, shipments from the SMSL may fall in response to new tariffs in the US,
however the growing demand in India, Australia and Saudi Arabia and most importantly China
will support growth in the long run.
Valuation (Figures 9-15)
Based on a DCF analysis the firm appears to be undervalued by around 35% (Fig 13). A detailed
description of the methodology used is included in the appendix but the key assumptions
(highlighted in blue) include declining revenue for 2018 and 2019 in order to factor in potential
for declining US sales. Revenue is assumed to pick up in 2020 when the Jacksonville facility
become operational and further production facilities are secured. Secondly, gross margins are
assumed to improve and hover around the long term average of 15%. This recent quarter saw
pressure on gross margins, however falling silicon prices and increased module demand should
have a positive impact on ASP. Additionally, operating margins are assumed to increase and
stabilize around 3%. Although operating margins fell to 1% last quarter, operating income was
affected by a number of extraordinary and nonrecurring events. Finally, a perpetual growth rate
of 6.5% is assumed into perpetuity and seems to be conservative considering the long term
growth potential of the industry.
In order to complement the DCF, a comparable firm analysis was conducted by first creating a
universe of comparable pure play solar manufacturing firms, with similar levels of revenue,
market cap and enterprise value. With this criteria Hanwa Q cells, Canadian Solar, and JA Solar
were chosen while large diversified firms like First Solar, Yingli and GCL Poly were excluded
for comparative purposes. Considering a number of key operating rations and multiples, it
appears that Jinko is currently being undervalued by the market. On a forward P/E basis, Jinko is
currently trading at a 20.03 multiple which is above the industry average but significantly below
that of Canadian Solar (Figure 14). Despite higher revenues, healthier gross margins, operating
margins and cell efficiency the market appears to be undervaluing Jinko’s earning potential
heading into 2018 relative to its competitor. Based on competitor analysis, Jinko deserves a
multiple of at least 30 x forward EPS which would imply a per share valuation of $33.90.
Secondly, on a forward EV/Sales basis Jinko appears to be undervalued (Fig 15). Assuming 2018
sales drop 8% from 2017, the firm is trading at forward EV/Sales ratio of 0.46 which is below
the universe average and significantly below Hanwa and JA solar. Considering the superior
historical growth rate displayed by Jinko, the firm deserves at a minimum, a forward EV/Sales
multiple of 0.54 (industry average) which would imply an enterprise value of 1.8 B and a per
share value of $28.91. Finally, considering a number of key profitability and operating ratios
provided (Fig 6, 7, 16, 17), Jinko is clearly one of the healthiest and most operationally efficient
pv manufacturers. They have complemented strong revenue growth with healthy margins and
attractive returns which has translated into strong and sustainable earnings growth. Furthermore,
the company has demonstrated an ability to survive contractions in the market as was seen in
2011-2012. Despite the track record, Trump’s decision has seemingly impacted Jinko’s share
price disproportionally and has rendered it undervalued relatively.
In conclusion, after considering the various valuation outputs, Jinko appears to be undervalued at
current prices and should be trading around $30/share (Fig 18). In the short run, investors may
experience volatility as the industry adjusts to the newly issued tariffs. Despite this Jinko’s
dominant position in an industry poised for long term growth should reward medium to long
term investors who are able to tolerate above average risk. As a result a buy rating would be
recommended.
Appendix

Figure 1- Stock Price Chart

Figure 2 - Geographical Distribution of Sales

Figure 3- Jinko’s Cost/watt vs low cost competitor

Figure 4-Effeciency of competitor cells vs Jinko

Figure 5- R&D Effeciency of Jinko

Figure 6- Yoy Revenue Growth (All Manufacturers)

Figure 7- Gross Margins (All Manufacturers)

Figure 8- Global market share by volume
Valuation Procedure
In order to estimate the per share value, I attempted to calculate the value of the entire firm by
discounting the projected Free Cash Flow to the Firm (unlevered cash flows) by the weighted average
cost of capital as shown in figure 11 and 12. The Chinese 10 year bond, and Chinese equity market risk
premium were used as inputs in the CAPM model and average yield to maturity on the company’s bonds
were used to calculate the pre tax cost of debt. After discounting and adding the projected UCF from
2018-2023 and the terminal value perpetuity, I subtract net debt to arrive at a value for equity. I then
divided the estimate equity value by shares outstanding and deduct a 20% control premium in order to
arrive a non controlling share price estimate

Figure 9- Discounted Cash Flow (2018-2025)

Figure 10- Terminal Value

Figure 11- Cost of Capital Calculation

Figure 12- Weighted Average Cost of Capital

Figure 13- Valuation Summary

Figure 14- Market Comps PE Ratio

Figure 15- Market Comps EV/Sales

Figure 16- Return on Assets

Figure 17- Return on Equity

Figure 18