Will This Solar Company's Separation Strategy Work?

JinkoSolar recently announced its intention to separate its downstream PV business. Will the strategy benefit shareholders?

Jan 15, 2014 at 10:21AM

On January 13, JinkoSolar (NYSE:JKS) announced its intention to separate its downstream PV business through either a spinoff or a sale. JinkoSolar management said they believe the separation would help sustain its downstream PV project business growth and further enhance value for all shareholders.

JinkoSolar is currently a vertically integrated solar company with an annual production capacity of 1.8 GW for solar PV modules. JinkoSolar , along with Trina Solar (NYSE:TSL) and Canadian Solar (NASDAQ:CSIQ), is one of the leading solar companies in China. 

Downstream potential and growth
The downstream PV sector, which includes distributed rooftop power and utility-scale projects, should see great growth.

China's domestic demand for electricity is rising 15% a year. According to the International Energy Agency, to meet the demand in the next 10 years, China will need to add nine times more electricity generation capacity than the United States will. 

A large part of the future electricity generation capacity will be solar and other renewables.

China is aggressively adopting solar and other renewable technology because pollution is endemic in many parts of the country. Generally as countries become wealthier, their citizens care more for the environment. Since the Chinese government prizes stability above all else, it has set ambitious renewable energy targets.

According to the Chinese Bureau of Energy, China has an official target of 12 GW of solar capacity installed for 2014, which will make it the largest solar market by size in the world.  

To promote adoption, China recently established feed-in-tariffs over 20 years of 1 RMB per kWH. Deutsche bank estimates that the feed-in-tariffs will generate an internal rate of return of low to mid teens for many utility-scale projects.

Because of the attractive returns, the downstream sector should see great growth in 2014.

JinkoSolar connected around 213 MW of solar PV projects to the grid in 2013, and it is aiming for more than 500 MW for 2014, or over 100% annual growth. In addition to the great growth, the downstream business has great margins. According to the last earnings conference call, JinkoSolar's downstream business had gross margins of 60% and net profit margins of 30%. 

The bottom line
The potential size for downstream solar in China is very large, and because of government support, the downstream solar sector should grow rapidly. If JinkoSolar set up IPO of the downstream unit, it could potentially garner a higher multiple than what it is getting currently. 

The money raised from an IPO or sale of the downstream unit should allow JinkoSolar to invest more in its upstream business. I think this is a positive development for the company and it shows that JinkoSolar's management has its shareholders in mind.

JinkoSolar itself is still a very compelling investment. It is one of the lowest cost solar producers in the world with a cost of production at $0.50 per watt. The company is also not as levered as Canadian Solar and is therefore less risky. 

With the large end markets and solar costs coming down, I think JinkoSolar, along with the other leading Chinese solar companies, still has a lot of running room ahead.

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Jun 12, 2015 at 5:01PM

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