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JinkoSolar Holding Company (NYSE:JKS)
Q2 2018 Earnings Conference Call
Aug. 13, 2018 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and, welcome to Quarter 2 of 2018 JinkoSolar Holding Company Limited earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr. Sebastian Liu. Thank you, sir.

Please go ahead.

Sebastian Liu -- Director of Investor Relations

Thank you, operator. Thank you, everyone, for joining us today for JinkoSolar second-quarter 2018 earnings conference call. The company's results were released earlier today and available on the company's IR website at www.jinkosolar.com as well as on the newswire services. We have also provided a supplemental presentation for today's earnings call, which can also be found on IR's website.

On the call today from JinkoSolar are Mr. Kangping Chen, chief executive officer; Mr. Haiyun Cao, chief financial officer; Mr. Gener Miao, head of global of sales; and Mr.

Sebastian Liu, IR director. Mr. Chen will discuss JinkoSolar's business operations and company's highlights, followed by Mr. Miao, who will talk about the sales and marketing.

And then Mr. Cao who will [Inaudible] through the financials. We will all be available to answer your questions during the Q&A session that follows. Please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. Forward-looking statements involve [Inaudible] risks and uncertainties. As such as, our future results may be materially different from the views expressed today. Further information regarding this and other risks is included in JinkoSolar's public filings with the Securities and Exchange Commission.

JinkoSolar does not assume any obligation to update any forward-looking statements, except as required under a particular law. It is now my pleasure to introduce Mr. Kangping Chen, CEO of JinkoSolar. Mr.

Chen will speak in Mandarin, and I will translate his comments into English. Please go ahead, Mr. Chen.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Thank you, Sebastian. Good morning, and good evening to everyone, and thank you for joining us today.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Market shipment hit 2,794 megawatt during the quarter, an increase of 38.6% sequentially and a decrease of 3.1% year over year. Total revenue was USD 915.9 million, an increase of 32.7% sequentially and a decrease of 23.5% year over year, whereas gross margin decreased to 12%, compared with 14.4% at last quarter as a result of declining ASP and more usage of OEM. Net income, however, increased to $15 million, compared with $0.6 million of last quarter.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Growth during the quarter was strong, and we expect this momentum will continue into the second half of the year, despite the impact from new policies issued by the Chinese governments on May 31, as shipment overseas market are expected to continue growing and account for an increasing proportion. Leverage in our cutting-edge technology, strong global sales network, and industry-leading cost structure add confidence in our ability to generate sustainable profits and growth going forward. I also expect our gross margin and bottom line will have further room to increase during the second half of the year.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

First, let's take a look at the Chinese market. Approximately 24.5 gigawatts of solar project was installed in the first half of the year with DG project accounting for roughly half. These installation numbers were strong also with grid percentage of DG. The new policy cast a shadow over the Chinese [Inaudible] in the second half of the year.

The market would react quickly [Inaudible] only to stabilize recently. But we remain optimistic as we believe demand from Top Runner project, poverty alleviation project, as well as local government subsidies and self-contained DG projects, will continue to support the Chinese market, especially in the regions with ample sunlight and high commercial power prices. In addition, with solar costs keeping falling, opportunities for comparative project will continue to pop up.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Turning to the U.S. market. We have taken advantage of our strong brand recognition, cutting-edge products, and high-quality local services to continue expanding our presence there, along with our production facility in Florida, which will begin shipment in Q4. Leveraging this difference we plan to fortify our leading position there in utility markets, we're expanding our market share in the residential and commercial segments.

And now in emerging market, continued to grow, especially in Latin America and Middle East and North Africa. We are focused on securing large long-term orders through our mature sales network [Inaudible] a number of market there. We continue to monitor developments in India with regards of the safeguard duty update and as we adjust our strategy there accordingly. We believe India, which has vast regions with ideal sunlight conditions and large energy demands, will maintain the long-term growth momentum of its solar sector, despite the short-term impact of Paris.

I'll let Gener go over in more detail later.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

On the technology front, we continue to locate resources toward application of high-efficiency technology. We are optimizing the cost structure of our products. On the wafer side, we make progress in improving wafer efficiency and reducing both oxygen content and light-induced pigmentation. On the sales side, we continue to increase our mono PERC cell capacity, which will reach 4.2 gigawatts of annual capacity by the end of the year and continue to invest in N-type technology, especially HOT double-sided cell technology.

On the margin side, our [Inaudible] products of 72 pieces high-efficiency Chitah Series hit about 400 watts of efficiency while mass production of 775 watts-plus has already begun. Technology developments, efficiency improvements, and falling costs of raw material allow to further optimize our cost structure and provide our clients with competitive and high-efficiency products at cost-effective prices.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Turning to the manufacturing capacity, our internal wafer, cell, and module capacity reached 9 gigawatts, 5 gigawatts, and 9 gigawatts, respectively, at the end of the second quarter. But we expect to reach 9.7 gigawatts, 7 gigawatts, and 10.8 gigawatts, respectively, at the end of the year, of which approximately 5.7 gigawatts will be mono wafers and approximately, 4.2 gigawatts will be PERC cells.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Though the policy change in China create challenging marketing environments, it has also created opportunities for leading solar companies such as Jinko. On one hand, the new policy will push industrial upgrading and accelerate industrial consolidation by phasing out outdated capacity and replacing it with high-efficiency production. On the other hand, they push solar costs going down, making solar competitive and stimulating global demands. Jinko's advanced technology, global sales network, and strong brand name will provide us with huge competitive advantages and allow us to distinguish ourselves from competition.

We are now in a good position and will be fully prepared for these opportunities to expand our market share and further consolidate our legal position in the industry.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Before turning the call over to Gener, I will quickly go to the guidance. Based on current estimates, total solar market shipments will be in the range of 2.8 gigawatts to 3.8 gigawatts for the second -- for the third quarter and will remain 11.5 gigawatts to 12.5 gigawatts for the full year.

Kangping Chen -- Chief Executive Officer

[Remarks in Mandarin]

Sebastian Liu -- Director of Investor Relations

Thank you, Sebastian. With that, I will turn over to Gener.

Gener Miao -- Head of Global Sales

Thank you, Mr. Chen. We generated strong growth during the quarter and it reinforced our leading position in the industry by achieving 2,794 megawatts of solar modules. Despite the headwinds created by the Chinese government's new policies issued on May 31, we remain confident in our ability to continue generating long-term sustainable growth.

First, let's look at our geographic distribution of our module shipments. China came in first and emerging markets came in the second, followed by the Asia-Pacific and the European markets. As our technology improved and the cost continued to fall, our competitive advantage in the global [Inaudible] industry will only become more [Inaudible]. We are confident that global demand will continue to grow this year and in the future.

China was our largest market in this quarter. During the first half of the year, approximately 24.5 gigawatts of solar were installed in China, of which about half were DG projects. Our focus during the second half of the year will be on the Top Runner projects and then taking advantage of opportunities in self-contained and the local government-supported DG projects. While overall, demand from Chinese market has been affected by the new policies, we are still optimistic about the demand during the second half year, especially as local governments introduce more subsidies and more investment opportunities in self-contained DG projects pop up in the region with high commercial energy costs and good sunshine conditions.

With the impact of the new policies, the future divestment of DG projects will transition from subsidy drivers to market drivers. Residential markets will also face a short-term impact, but demand will continue to grow, especially in the regions that benefit from local subsidies. In the U.S. market, began to -- the U.S.

market began to recover in the second half of the year where we maintained a leading position in the utility market and are gradually expanding into residential and the commercial markets. A couple of our these long-term contracts will begin shipments in the second half of the year. We will leverage our market-leading business plus the name of our brand expanding customer base, local service team, best recognition and the U.S. production capacity should strengthen our position where -- while maintaining our profit flexibility.

Turning to Asia-Pacific region. India's minister of finance and Department of Revenue issued a tax announcement on July 30, which imposes a safeguard duty on the solar cells and the modules imported to India. The duty which is 25% for the first year, 20% for the first six months of second year and 15% for the next six months of second year. This will affect demand from India in the short term, but the size of Indian market is still huge.

And in the early June, the Indian government announced that it will increase the 175 gigawatts of 2020 solar install target to 275 gigawatts. We think the impact of the safeguard duties will be limited in the long run. The new projects after the tariffs are announced, the PPA market will be deep enough to absorb the tangible costs, while projects currently in the pipeline might see some delays, and we are also hearing that a large number of projects that have already been auctioned and to be built in 2019 to 2020 could be grand progress, allowing changes to be passed down to PPA offtakers. Therefore, we are still optimistic about the future development of the Indian market and as we will closely watch the situation and monitor the divestments there.

European markets are doing well. Great parity has created a lot of demand, with solar becoming even more competitive following the May 31 policies, where solar costs have dropped rapidly. We are very optimistic about the market prospects there and in the second half of the year and in the future. As the emerging market grow in importance, competition there is becoming increasingly intense.

Demand there, especially in Latin America and the Middle East and Africa, has been growing swiftly. We remain the leader in terms of market share in a number of Latin American regions and the EMEA regions. We will focus more on long-term cooperation and owners, and contribute to the solar applications there. ASPs during the quarter only decreased slightly when compared with the last quarter.

As Mr. Chen has said, ASPs declined quickly after May 31, but we will benefit from our ability to rapidly develop and deploy new technologies and the drop in raw material prices. We were confident that those will be able to generate sustainable profits and growth. With the decline in solar costs, the competitiveness of solar energy will continue to improve and a significantly reducing dependence on subsidies.

We are prepared to take advantage of our distribution, branding, product and technology to seek future divestment opportunities. We continue to develop our marketing and effective tax [Inaudible] promotion capabilities this quarter. In May, our entire portfolio of PV modules passed the Potential Induced Degradation, PID, resistance test under the condition of 85 degrees Celsius, 85% relative humidity, double 85, as required by TÜV Nord's IEC standards. In May, our P-type monocrystalline cell broke the world record again with efficiency keeping 23.95%.

P-type, our 60 pieces versions of P-type monocrystalline modules output set a world record of 371 watt and N-type monocrystalline modules also set another world record 378.6 watt. JinkoSolar's position as the market leader in the industry continues to be recognized. In April, JinkoSolar attended the World Bank's Singapore Infrastructure Finance Summit as the innovating -- invitation from the World Bank, we were the only Chinese enterprise and the only new energy company present. In June, after invitation of Asian Development Bank we attended and delivered a key note presentation at the 2018 Asia Clean Energy Forum.

In Q2, we attended 15 trade shows and participated in 78 conferences. We also hosted and supported six customer trainings and 87 co-marketing events with key partners across the globe. Our active global marketing events continue to allow us to reach and educate new customers about JinkoSolar's high-quality products and expand our global footprint. With that, I will turn it over to Cao.

Haiyun Cao -- Chief Financial Officer

Thank you, Gener. I'd like to walk you through our Q2 results. Total solar module shipments were 2.8 gigawatts [ fitting ] our Q2 guidance. Total revenue was $916 million, up 33% sequentially.

The sequential increase was mainly due to the strong solar module shipments. Gross profit was USD 110 million, up 11% sequentially, as a result of an increase in shipment of solar modules. Gross margin was 12%, compared to 14.4% in Q1 2018, as a result of the decline of ASP and the increase of OEM volume. Our blended costs including warranty and shipping costs improved to $0.32 per watt, compared to $0.324 per watt in Q1.

After the China new policy, we expect to continue reducing our branding cost with the lowered material costs, technology development and the improvement of production operations. The operating expense represented 10.4% of total revenue, compared to 11.6% in Q1 2018. EBITDA was $59 million, compared to $43 million in Q1. Net income increased to $15 million, compared to $0.6 million in Q1 2018.

Non-GAAP net income was $15 million. This translates into non-GAAP diluted earnings per ADS of $0.41. Now let's move to the balance sheet. The company has $387 million in cash, cash-equivalents, and restricted cash, compared to $457 million at the end of Q1.

The accounts receivables were $1.05 billion, compared to $1.02 billion at the end of Q1. Inventories were $890 million, compared to $715 million at the end of Q1. The increase of inventory is for the strong demand in the third quarter. The total debt was stable, with total amount of $1.4 billion, compared to $1.3 billion at the end of Q2.

At this moment, we're happy to take your questions. Operator?

Sebastian Liu -- Director of Investor Relations

Operator, we're ready to begin the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. [Operator instructions] The first question comes from Philip from Roth Capital Partners. Your line is now open. Please go ahead.

Philip Shen -- Roth Capital Partners -- Analyst

HI. Thank you for taking the question. So I think in the last call you guys talked about Q2 margins being stable relative to Q1, and the Q1 margin I think was 14-ish percents. And Q2, you guys delivered 12%.

What was the cause for that weakness? Were module ASPs in June, what were the -- was the pricing in June low as a result the expectations did not meet kind of what you guys delivered? And then for Q3 and Q4 I know you said in the prepared remarks that you expect an increase. So do you expect that increase to kind of get back to the Q1 level or do you think -- because I think on the last earnings call, the Q1 call, you mentioned that margins of Q3 and 4 could be greater than 15%, is that still the outlook or do you expect Q3 and 4 to be more in line with Q1?

Haiyun Cao -- Chief Financial Officer

Sure, Phillip, this is Charlie. And regarding the gross margin questions. And the Q2 gross margins was 12%, which is lower than our original expectations. And I think it's due to the strong solar module shipments.

If you look at our guidance for the second quarter, which is, I think, 2.4 to 2.5 gigawatts, but we finally delivered 2.8 gigawatts, beating the shipment guidance. But if you look at our capacity, we have only 9 gigawatts annual capacities, which means for each quarter, for second quarter, we need to do a lot of OEMs, which increased the blended costs and result in the lower gross margins. Looking into the third quarter, where I think a lot of positive factors is happening, like we said in the prepared remarks, and we are expecting significant costs reduction after the Chinese new policies, the lower materials and new policies where we are doing a lot of technology improvements. And on top of that, our R&D depreciated a lot, roughly 8% to 9% starting June, which is also helpful for the gross margin.

And we think we are in a good position after the Chinese new policies, given we have very strong international shipments, and we have a lots of visibilities for the international sales. And back to the -- we don't give the guidance for the gross margin for the third quarter, but we -- I will still expect the gross margin will improve to over 15%.

Philip Shen -- Roth Capital Partners -- Analyst

OK. Great. That's helpful. Let's shift to pricing.

My understanding is you guys have good pricing through the end of this year. First of all, can you confirm what the ASP was in Q2? I think we calculated about $0.35. And then as for -- beyond Q4, have you locked in much bookings for Q1 and Q2? Do you expect -- I think, last quarter, just about a couple of months ago, you're still -- and the bookings were limited in Q1 and Q2 have increased. And then finally, I think your ASPs in Q3 and 4 are higher than the market premium in part because of the contracts.

Do you expect your price in Q1 and Q2 to converge to market pricing?

Gener Miao -- Head of Global Sales

OK. So this is Gener. First, regarding the pricing in Q2, like the -- what we said just now, the ASP in Q2 is almost a no change compared with Q1. If you're looking to exact number, I would say low single-digit decline compared with Q1 ASP.

And for the bookings for the second half, we are still having a very, let's say, fully -- almost fully booked orders, order book, mainly because demand in the global market, not only China and India but also all the other markets are still solid. For the ASPs, in second half and also together for Q1 and Q2, we believe the market price will -- we are continuing, let's say, stick to the market price. However, we are participating lots of forward-looking price, which both Jinko side and our customer side agreed are reasonable number based on forward-looking basis. So for that part we are confident that we will continue to lock in those long-term price.

Philip Shen -- Roth Capital Partners -- Analyst

OK. Great. One last question about guidance. I Just want to confirm, I think, you implied Q4 guidance is for 4.5 gigawatts.

So that's a really large jump from about 3 gigawatts in Q3, can -- and this is much higher than typical seasonality? What's driving this? And what do you expect the geographic shipment mix to be for Q4?

Gener Miao -- Head of Global Sales

Phil, this is Gener. For Q4, we are expecting a significant jump, it's really because we believe that the later demand from the course of Paris with -- from India and also the weak demand of first half of in U.S., we'll start to kick in strongly in the Q4. And together, we see a strong European demand for the next -- early next year as well. So adding all these factors together, we are expecting our very strong Q4.

Philip Shen -- Roth Capital Partners -- Analyst

OK. Great. Thanks, Gener. Thanks, Charlie.

I'll pass it on.

Gener Miao -- Head of Global Sales

Thank you.

Operator

Thank you, Philip. Your next question comes from Scott from Citigroup. Your line is open. Please go ahead.

Scott Chui -- Citi -- Analyst

Hello. Thanks for taking the question. My first question is about the cost of guidance. I remember that last quarter you're guiding $0.24, $0.25 by the end.

So after from the policy came out and also the recent price decline, you have an updated cost guidance by the end of this year, and also what is the information of the policy price? And my second question is about the capex. I noticed there is a surge in capex in the same quarter so can you explain more about this and also what is capex guidance for the full year? And...

Sebastian Liu -- Director of Investor Relations

Scott, this is Sebastian. We can answer the first question first and then, yes, we jump to your last question. Starting with routine. Cao, can you add some color on that?

Haiyun Cao -- Chief Financial Officer

For the cost low demand. I think starting from this quarter, which we decided not to disclose the detailed targets for the cost-low or demand given the consideration of the commercial competition, and it is. And if you look at our peers, there are a lot of companies who have been -- have completed prior transition. So what I can say is we have equally comprehensive cost reduction plans and so the technology upgrades and improvements.

And we are in a good position in terms of the market shares and we can leverage our strong market positions to streamline the supply chain, which we are expecting in very favorable mature lowered material costs in the second half of the year. And we are very confident that we expect that cost reduction in the second half of the year is more quicker than the decline of market price.

Scott Chui -- Citi -- Analyst

OK. So...

Haiyun Cao -- Chief Financial Officer

And the -- yes, for the second question and if you look at our guidance for the capacity expansion, by the end of the year, we have reached roughly 10 gigawatts wafer, 7 gigawatts cell, and the 10.8 gigawatts module capacities. And there is a major new capex is for the -- we communicated in the last two quarters overseas capacity expansion for the U.S. market. And we are also doing the U.S.

solar module capacities, and we still stick to our original budget, which is roughly USD 350 million for 2018.

Scott Chui -- Citi -- Analyst

OK. Just one more follow-up question.

Haiyun Cao -- Chief Financial Officer

Yes. I think if you compare maybe the solar cell capacity estimation by the end of the year compared to last quarter, we increased a lot of it. It's not the new capacity expansion, it's kind of the department mix existing in production trend and increase in outputs.

Scott Chui -- Citi -- Analyst

OK. Sure. So cell expansion is very -- I mean, capex is very limited because it's just debottlenecking. And so, the major capex in the same half should be the U.S.

manufacturing plant? Is it?

Haiyun Cao -- Chief Financial Officer

In U.S. solar module capacity, which is 400 megawatts and we also have 1-gigawatt solution solar cell and solar module capacity under construction out of Southeast Asia. So that's a key investment plan, which we have scheduled back to the beginning of the year.

Excuse me, can you repeat the question?

Scott Chui -- Citi -- Analyst

Yes, because you are guiding that on the cost...

Haiyun Cao -- Chief Financial Officer

You're right. Because the new China policies did put us in good position, and also the [Inaudible] depreciation if you look at the cost from the U.S. dollar perspective, cost is moving more quickly.

Gener Miao -- Head of Global Sales

And Scott, just as Mr. Chen said, we think in the second half of the year, both our gross margin and bottom line will improve, I think, especially in Q3.

Scott Chui -- Citi -- Analyst

OK. Sure. Got it. OK.

Just last question about equity income in Q2. I noticed that the equity income increase a lot, and is it mainly due to the OEM facilities that we have? Or that -- I think it's more on the OEM than the Dubai project.

Gener Miao -- Head of Global Sales

Are you talking about the equity income for the Philips company? Right?

Scott Chui -- Citi -- Analyst

Yes.

Gener Miao -- Head of Global Sales

OK. So it's relevant to OEM volume, it's -- I think you may know we have investment of 20% equity of the project in Abu Dhabi, which is 1.2 gigawatts, and the project is under construction. And at the same time, the company enters the interest rate swap, and to hedge the U.S. dollar interest rate hike.

And in this quarter, second quarter, based on the fair value of the -- for the insurance, which is the interest rate swap and we recorded an investment income based on the investee's income of -- 20% of the investee's income.

Scott Chui -- Citi -- Analyst

I see. OK. OK. Got it.

OK. Thank you.

Gener Miao -- Head of Global Sales

Welcome. Is that all, Scott.

Scott Chui -- Citi -- Analyst

Yeah.

Gener Miao -- Head of Global Sales

OK.

Operator

Thanks, Scott. Our next question comes from Maheep from Credit Suisse. Your line is open. Please go ahead.

Maheep Mandloi -- Credit Suisse -- Analyst

Hi. Good evening, everyone. Maheep Mandloi from Credit Suisse. Just on the last question on equity income, could you just clarify if that is a noncash adjustment or is that -- is there any cash portion in there as well?

Haiyun Cao -- Chief Financial Officer

This is a, kind of financial instrument, and to hedge the, no, the solar operating assets over the 25 operating cash flows. So I don't think it's a kind of cash, and it's settled based on a cost-year basis or half-year basis. And in the second quarter, we based on the valuation report and we recorded the anticipated gains, because of -- the U.S. government is hiking the interest rate in this year.

So from an accounting perspective, we don't use the hedge accounting, so we accounted for the fair value of gain and income and because we have 20% of the company, and we recorded 20% of income for the interest rate swap.

Gener Miao -- Head of Global Sales

And Maheep, what Charlie is saying is that it is a fair value gain, but also it's an instrument settled by cash, so you got the idea.

Maheep Mandloi -- Credit Suisse -- Analyst

OK, that makes sense. And just switching gears on your production capacity. So one of the big reasons to move to or adding capacity in the U.S. market was to meet the near-term tariffs and longer-term demand growth.

So after the -- India's tariff announcement, do you plan to expand into the Indian markets as well, especially as the China -- the tariffs on China and Malaysian products would put most of your capacity at a disadvantage?

Gener Miao -- Head of Global Sales

We have not -- this Gener, Maheep. We have not set up any, let's say, confirmed plan to set up any capacity in India. And right now, we are -- keep -- we keep our mind open to any possibilities, but right now, we don't think it's good timing to make the decisions.

Maheep Mandloi -- Credit Suisse -- Analyst

No, it makes sense. And just staying on capacity and just the oversupply in the market. Do you see any consolidation opportunities in China or in Southeast Asia, especially as the margins are lower for your competitors and they might be willing to sell out?

Haiyun Cao -- Chief Financial Officer

In China, the consideration is happening, particularly for the Tier 2, Tier 3 companies. And -- but if you look at the sector, particularly for the wafer and the module capacity, the Tier 2, Tier 3 players, in particular for those who rely on almost 100% on China market, the Chinese demand slowed down. And we are seeing several companies have stopped their productions. And I think, some of them, the capacity will never come back.

Gener Miao -- Head of Global Sales

It's definite -- let me add some colors on it, Maheep. So definitely for the players who rely on China market only, or Indian market only, any single market will put themselves into kind of danger, at least for a short term. For me though, long-term, how the consolidation will happen, it's like what Charlie is saying, would be -- those, let's say, unqualified capacity will be out of the market, even if they have not announced any bankruptcy, also. But it won't -- we won't take them as effective capacity in this market.

Maheep Mandloi -- Credit Suisse -- Analyst

And as you think about your capacity expansion for next year, does it make sense to acquire any of these Tier 2 or Tier 3 companies? And so far...

Gener Miao -- Head of Global Sales

Well, we were looking -- I think we were looking to this high-efficiency capacities, if needed. Right now, we don't have any target or any, per let's say, any setup target or purpose to merge or acquire. Right now, we are really -- we will keep ourselves open, let's say.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And just the last question from me. So most of your peers have either gone private or have announced privatization, at least in the -- the ones let's say in the U.S. that -- and probably that's one of the reasons why you'd -- just shying away from guiding cost reduction targets.

But -- so how does the Chairman think about privatization or -- either for peers for JinkoSolar? Does it make sense or -- just any general thoughts around that would be appreciated?

Haiyun Cao -- Chief Financial Officer

I think -- no, we didn't change our minds. And we -- the company has no plans for the privatization. And we think, as the largest solar module makers, and the top one branding and marketing and the international, the U.S. capital market has worked positive for us.

Maheep Mandloi -- Credit Suisse -- Analyst

OK. Thanks for taking the questions.

Haiyun Cao -- Chief Financial Officer

Thank you.

Gener Miao -- Head of Global Sales

Thank you, Maheep.

Operator

Thank you, Maheep. Your next question comes from Hank from Goldman Sachs. Your line is open. Please go ahead.

Hank Elder -- Goldman Sachs -- Analyst

Hey, thanks. You mentioned the higher OEM manufacturing in the second quarter. What are your plans for the OEM manufacturing in the second half?

Gener Miao -- Head of Global Sales

And -- I think that it's a total different situation after the new China policy. And before the new China policy, because of strong Chinese demand. And we are facing very high cost of OEMs. And after the new China policies, thanks to our strong international sales exposure, and we have a lot of orders with abilities and we have the leverage and to cut the OEM costs.

So what I want to say is, we will continue to use OEM. If you look at our, Jinko's own capacity compared to our total shipment plan, I think in the second half of the year, roughly 20%, 25% OEM volume. But OEM volumes will contribute more profitabilities for the second half-year, because the -- after new China policies, everything is becoming cheaper, and we have the leverage.

Hank Elder -- Goldman Sachs -- Analyst

OK, got it. That makes sense. Maybe in the U.S., in the quarter, the tax credit essentially was, the safe harbor was extended, allowing developers more time to get their projects, and has that impacted you -- any of the demand you're seeing in the U.S., or any of your customers?

Gener Miao -- Head of Global Sales

Yes. So for that, firstly, in short term, we still see -- we do not see any trend for a strong, let's say, a strong U.S. demand coming back, starting by end of this year, and you mentioned, next year. And I -- we believe that the safe harbor policy and tax credit extension for that will further accelerate or you may encourage the customer to expand more or even larger pie size toward their future business.

Of course, they've got more time to do it. So in general, we believe it's a positive for the market, as general. And for the long-term, we believe that demand will become more sustainable, and it will make us -- make the supply stay more, I say, long-term instead of going short.

Hank Elder -- Goldman Sachs -- Analyst

Got it, OK, and then maybe last one from me on the margin outlook for the second half. Could you guys just quantify, or help us think about how much is coming from the expansion you're talking about? How much is coming from a lower RMB versus cost spend and raw materials?

Gener Miao -- Head of Global Sales

I think it's difficult to separate the two combination impacts. And what I want to say is, both factors are positive for the gross margins. And the most important one for the company we -- is we are doing comprehensive cost reductions. And at the same time, we have the sales orders on hand.

Haiyun Cao -- Chief Financial Officer

And also, we want to focus here is that technology improvement is one of the main drivers.

Hank Elder -- Goldman Sachs -- Analyst

Understood. Thanks for taking the questions.

Haiyun Cao -- Chief Financial Officer

No problem. Thank you.

Operator

Thank you, Hank. There are currently no more questions in queue. [Operator instructions] The next question comes from Alex from UBS. Your line is now open.

Please go ahead.

Alex Liu -- UBS -- Analyst

Thanks for taking my question. I got a few questions here. First one is regarding to your wafer capacity. So I do think your in-house produced wafer for all of your commodity production, or do you still have to buy from the third parties, considering the incumbent wafer price is so low.

So is your wafer production cost still below the incumbent wafer cell price? And the second question is about your funds in U.S. So can you add some more color about your [Inaudible] plans? What's the capacity and what's the cost structure compared with your plant in China? And the last question, regarding to the, any potential client, you'll view the plant in India, considering the tariff imposed by the Indian government on imported solar modules. So do you have any plans to build a new factory there?

Gener Miao -- Head of Global Sales

I think the first question is about...

Haiyun Cao -- Chief Financial Officer

The wafer.

Gener Miao -- Head of Global Sales

So from a [Inaudible], I would answer the capacity and Charlie will take the cost side. So the wafer capacity, if you're looking to our capacity numbers, you will find that we have compared with the cell capacity, our wafer capacity is larger. And our module capacity is the largest across the whole three parts of the -- across the value tent. So that means most of time we -- if we manufacture the modules, we can buy some third-party cells instead of the wafers.

So I think that's what we are, right now. I don't think we have purchased a significant volume of the wafers right now. Charlie?

Haiyun Cao -- Chief Financial Officer

Just as -- to supplement the wafer, and we are the cost leader for the production. And I think your question is about, if we -- our cost is higher than the market price, and we should buy from third party, but the fact is, given the -- particular for the module wafer, the lower price in the second quarter in June, and our production cost is still lower than the market price, and we don't need to buy from the third party. And I think your last question is about India, right? India and the factory, right?

Alex Liu -- UBS -- Analyst

The factory [Inaudible]

Gener Miao -- Head of Global Sales

Yes, somebody has asked this question before. We don't -- in short term, we don't have a detailed plan to pick out a factory there. Certainly, we are monitoring the situation there, and we will change our strategy accordingly. But in the short term, no, we don't have any plan so far.

Alex Liu -- UBS -- Analyst

OK. And then last -- second question is regarding to your U.S. plans. So what's the capacity there, and what's the cost structure compared with your past clients?

Haiyun Cao -- Chief Financial Officer

You're asking the module capacity we are doing. It's -- the cost is a little bit higher and the -- than the costs in Southeast Asia, because of the higher labor cost and higher rent and expansion costs, but we -- the cost difference is not so significant. At the same time, we believe that we have the clients premium for the products made in U.S., and we are confident that we can get reasonable gross margin for the U.S. factories, which we are also solidified our leading positions in the U.S.

market.

Alex Liu -- UBS -- Analyst

OK. Got it. Thanks so much.

Haiyun Cao -- Chief Financial Officer

Thank you, Alex.

Operator

Thank you, Alex. As there are no more questions in queue, I would now like to hand the call back to Sebastian. Sebastian, please continue.

Sebastian Liu -- Director of Investor Relations

Thank you, operator. On behalf of the entire JinkoSolar's management team, I want to thank you for your interest and participation on this call. If you have any further questions or concerns, please feel free to contact us. Have a good day, or good evening.

Thank you, and goodbye.

Operator

[Operator signoff]

Duration: 57 minutes

Call Participants:

Sebastian Liu -- Director of Investor Relations

Kangping Chen -- Chief Executive Officer

Gener Miao -- Head of Global Sales

Haiyun Cao -- Chief Financial Officer

Philip Shen -- Roth Capital Partners -- Analyst

Scott Chui -- Citi -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Hank Elder -- Goldman Sachs -- Analyst

Alex Liu -- UBS -- Analyst

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