Saturday, August 02, 2014

JKS may be mispriced

I haven't posted in forever (1.5 years) and I've laid off the solar stock picking "advice" for almost 3 years (which is just as well considering the poor performance of my picks over this period).  And rather that offer advice at this point, I will simply make some observations about a solar stock that I've previously discussed: Jinko Solar (ticker JKS).

On Friday 8/1/14 JKS closed a few cents under $24/share about the middle of its 12 month range of $12-$38.  JKS has 30.88M shares (technically ADRs--but I'll call them shares) so the market cap is $740M.  Market Cap(italization) is price per share x number of shares = the value of the company assigned by the market.

Earlier this week JKS announced that it sold 45% of a subsidiary (called Jinko Solar "Power") that owns/operates solar power plants to a trio of firms for $225M.  Thus the value of the subsidiary is $500M, of which JKS owns 55% post deal.  It is not entirely clear what assets "Power" holds, but let us assume it holds all built (~250MW) under construction (~250MW) and planned to be completed in 2014 (~300MW, up from 100MW before this announcement) aka 800MW.  JKS said the new investment will support an additional 200-300MW under construction at year end--implying that in early 2015 JKS "Power" could have 1GW or more of operating solar projects.

Now this potential 1GW within the next 6-12 months (of which only about 25% is currently complete) requires a lot of work and risk, but that risk is presumably built into the ~$0.50/watt price that the trio of firms paid.  By way of comparison Sun Edison (SUNE) recently IPO'd TerraForm Power (TERP) which holds ~800MW of completed solar projects.  TERP is set up as a "yieldco" where it pays shareholders a dividend based on the earnings of its projects.  TERP is valued at ~$3B.

A similar multiple placed just on JKS Power's completed 250MW of solar projects would value these existing assests at $938M.  (Now a 1-1 comparison is probably not fair/proper since the solar projects likely do not generate equivalent earnings.  Still I think it helps illustrate the potential value of JKS "Power" were it ready to IPO today.  1GW of projects would surely be worth at least $3B, if TERP's 0.8GW is.  And 55% of $3B is $1.65B about 6x the current value assigned to it.)

Still, let us assume for a moment that $500M is the best current/proper valuation for JKS "Power".

The remaining business of JKS is being valued at $740M-$500M = $240M

As of 3/31/14, the most recent earnings report JKS reported having $271M of cash and cash equivalents.

Therefore the market is assigning a negative $31M value to the rest of JKS (based on the Q1 figures). 

The rest of JKS is a company with annual manuacturing capacity of ~2.4GW of solar modules, and annual installation capacity of 400MW-600MW of solar power plants.

JKS is widely reported to be the lowest cost top-tier module producer in China and profitable.  Net income was above $50M over the last 12 months and is expected to be ~$100M for FY 2014 based on installing 400MW of solar power plants.  Presumably it should earn more money if it installs an additional 200MW in the next 6 months.  The rest of JKS is profitable and growing.

Now it is true that JKS has debt, in the most recent quarter JKS reported ~$320M total of short and long-term debt. Some of this debt is supported by ~250MW of completed power projects (i.e. some of this debt belongs to JKS "Power") and the rest is presumably supported by its manufacturing assets.  I don't know how to apportion the debt between JKS "Power" and the remaining JKS. Still JKS earned over $50M in the past twelve months (Q1 2014) and should earn at least $100M in FY 2014, so it doesn't seem the debt level is excessive (i.e. to the point the market value should be negative).

As of 7/15/14 Nasdaq reported that JKS had 2.9M shares shorted.

It seems to me that the market is not properly valuing JKS.  It has been my experience that growing, profitable, companies generally achieve a positive multiple of earnings, not a negative multiple...