Time Is Energy

JKS a better value 3 months on

Today is the three month anniversary of my buying shares in Jinko Solar (JKS). Unfortunately panel prices fell further and faster than I expected. So while I wish I had waited a bit to make the purchase--the shares currently trade for $21.5, down ~20%--I am glad that I sold my SPWRB position when I did, as that has fallen by even more than JKS. Besides JKS--the company--by all accounts is performing well under challenging circumstances. It is just the shares that are misbehaving!

JKS will announce Q2 earnings August 16th. I believe investors are aware that q2 was a difficult quarter for margins, since panel prices dropped up to 20% from q1. Estimates are for $1.46/sh in the quarter. In the past JKS has beaten by a wide margin, I'll be pleased if they just meet estimates this quarter. While margins are a very important metric (they surely slipped a few percent in the quarter), I think the current low P/E (below 3) is already discounting a terrible quarter..probably an earnings miss. Anything better than disaster should provide support for the shares. Most important for me will be insight into q3 and q4 which historically are strong quarters.

If demand is growing again, that could be very bullish. Recent indications out of Germany and Italy is that demand is up in q3 over q2, but I'll be interested if JKS management confirms this. Also the recent announcement by China of a national tariff (FIT) set at 1 yuan/kwh (~15cents/kwh) should provide a substantial increase in domestic demand for JKS. While it will take months (years?) for us to understand how quickly the China market can grow with this newly announced policy, I expect it could change the panel pricing dynamic in JKS favor much sooner. Finally I expect Japan will soon revamp its incentives to jump-start the amount of solar it installs in coming years--perhaps announcing details later this week.

I will also be interested to learn if the company has begun its share buyback ($30M authorized) and any additional information they provide in this regard. Recent figures show that short sellers have increased their bet against the company in the past 3 months (from 3.8M short in mid April to 6.5M short in mid July). High (and increasing) short interest should generally be viewed as a warning light--one could argue that the short sellers have been right about JKS recently. Although I'd like to see them cover 2.7M shares and see where the price is before I admit this. With short interest increasing almost 1M shares/month (JKS only has an 11M float) it may simply be the extra selling from shorts that has pushed the price down to these absurd levels. Going forward the high short interest is a positive, because eventually those shares have to be bought back and that will help support the price. [6.5M x $21.5 = $140M in latent demand.]

While the past few months show that the shorts "control" JKS stock price, with 60% of the float already short, the shorts simply cannot continue shorting 1M shares/month indefinitely, and they are rather vulnerable to a short squeeze if JKS or the solar market in general start getting some positive news flow--which I believe must happen eventually!

Frankly I (still) can't understand why a highly profitable company that is growing revenues and earnings by triple digits, gets stuck with a P/E under 3. [Or how short sellers can sleep at night given their precarious position.] One of these days someone with deep pockets will see JKS for the incredible value it is and start the ball rolling...then simple momentum will bring JKS to a more rational share price.

posted by Daniel @ 12:13 PM