JinkoSolar: Have you noticed the value investment of 10x stocks?

I. The best companies

First of all, I would like to say that, at present, JinkoSolar is still the best photovoltaic company in the world and a leading company in the industry, which has been explained in detail in previous articles.

Here, I would like to add that in the past year, in the wave of monocrystalline replacing polycrystalline, every first-tier photovoltaic company has made its own layout.

LONGi: It can be said that the replacement of monocrystalline with polycrystalline was promoted by LONGi. From the industrial application of the entire technology to the entire market promotion, to the resolute capital market operation and capacity expansion, LONGi has done almost impeccable. The technical analysis of monocrystalline vs. polycrystalline has explained to everyone the advantages of monocrystalline vs. polycrystalline. LONGi is a pure monocrystalline company. There is no doubt that LONGi is the leader and biggest beneficiary of this wave.

Note: One thing you should not forget is that because LONGi has been studying monocrystalline, before the technological breakthrough, LONGi's size in the entire market was actually relatively small. In other words, when multicrystalline had an absolute advantage, LONGi was not a mainstream manufacturer.

JinkoSolar: Before 2016, most of JinkoSolar's modules were polycrystalline. When JinkoSolar saw the trend of monocrystalline replacing polycrystalline, it decided to start production of monocrystalline at the end of 2016. It can be said that its strategic vision and execution are excellent. Currently, of JinkoSolar's 8Gw silicon wafer production capacity by the end of the year, 4Gw is monocrystalline, and in 2018, JinkoSolar may expand monocrystalline to 6Gw.

Trina Solar: As Trina was delisted due to privatization, I am not aware of its current monocrystalline layout, but I can vaguely see its monocrystalline layout from the cooperation between Trina and Longi, which put 5Gw monocrystalline ingots into production in early 2017.

JA Solar: As JA Solar has relatively few silicon wafer links, it will be around 3Gw by the end of 2017, while its monocrystalline production capacity is currently 1-1.5Gw. JA Solar has not expanded its silicon wafers, but has a larger production capacity in solar cells, which is also a feature of JA Solar.

Canadian Solar: Canadian Solar was relatively slow in this wave of monocrystalline solar. Canadian Solar started to invest in monocrystalline solar in April 2017, half a year later than JinkoSolar.

GCL-Poly: It can be said that GCL-Poly has been sticking to multi-crystalline because of its heavy historical burden. If this wave of monocrystalline continues, GCL-Poly will become very passive.

Note: Tongwei is not mentioned here because Tongwei does not have components and silicon wafers.

Through the above comparison, we can see that in this wave of monocrystalline silicon led by Longi, JinkoSolar's strategic layout is ahead of other first-tier manufacturers, and it has strong execution capabilities and is the most determined to expand the production of monocrystalline silicon. This also confirms that JinkoSolar is currently the best company among photovoltaic companies.

II. Global Photovoltaic Market

Secondly, I would like to talk about the global photovoltaic market and what the future will be like. Although some securities firms have made very brave predictions for the Chinese market alone, and predicted that the newly installed capacity in the Chinese market alone will exceed 200Gw in 2020:

I don’t want to make any specific predictions here, but I think we need to see two big trends:

Will global electricity consumption increase or decrease in the future?

Let’s look at the past first:

Over the past 16 years, global electricity consumption has continued to increase, with an annual growth rate of 2.98%.

What will the future be like? The future will be an era of interconnected and intelligent everything, and the demand for electricity will continue to increase, including the gradual popularization of electric vehicles that we have already seen.

On the other hand, there are still more than one billion people without electricity in the world, accounting for about 20% of the global total. Take Africa as an example, among the 900 million people, only 300 million have electricity. This strong demand will also be gradually met as energy prices fall.

Therefore, electricity consumption will definitely increase gradually in the future, and the growth rate will exceed the previous growth rate of electricity consumption.

Will the proportion of photovoltaics in the energy structure increase in the future?

As it stands, photovoltaics only account for 1% of photovoltaic electricity generation:

We can see that photovoltaic power has already reached grid parity in many parts of the world, such as the Middle East and India. In China, I expect it to reach grid parity around 2020.

Such competitive photovoltaic energy prices will inevitably make photovoltaics the number one in terms of new installed capacity in the future. In fact, according to the "Renewable Energy Capacity Statistics 2017" report recently released by the International Renewable Energy Agency, on the one hand, the global renewable energy power generation installed capacity increased by 161GW in 2016, an increase of 8.7% over 2015, setting a record high. On the other hand, the new installed capacity of solar energy reached 71GW, while the new installed capacity of wind power was 51GW. This is the first time since 2013 that the new installed capacity of photovoltaic power has exceeded that of wind power.

This means that in the future, the annual newly installed capacity will continue to increase as the demand for electricity increases, and the share of photovoltaics will continue to rise.

It is predicted that by 2040, photovoltaic and wind power will become one of the dominant energy sources, accounting for 32% of the world's total installed power generation capacity, and photovoltaics should account for more than 15% of the global energy supply.

III. JinkoSolar's Profits

After discussing JinkoSolar's strategy and the future photovoltaic market, I will now talk about the issue of profits.

In fact, investment means investing in industries and companies, believing that the companies will be able to make profits for shareholders in the future.

Many people may ask, why do you say JinkoSolar is the leader in photovoltaics, but why is JinkoSolar's profit in the first half of the year only 100 million, while a company like Longi's profitability is 1.2 billion (Longi's profit in the first three quarters was 2.2 billion)?

The core issue here is that Longi's main profit comes from its monocrystalline silicon wafers. According to Longi's report, the gross profit margin of its silicon wafers is around 33%, while JinkoSolar's gross profit margin is around 11%, which actually means that the profits of the entire photovoltaic industry chain are currently in the upstream.

But what I want to ask is, is such profit distribution reasonable?

Now, we see that due to the "huge profits" in the upstream, many companies have expanded production. Taking polysilicon as an example, we see that three Chinese companies have expanded production. The production capacity of Tongwei and Oriental Hope is expected to reach 120,000 tons, becoming the world's first, while the production capacity of Polysilicon (i.e. Jiangsu Zhongneng), which used to be the first in China, is expected to reach 100,000 tons.

If the expansion plans of the above three companies can be realized, the total production capacity of the three companies will reach 320,000 tons, equivalent to 84% of the global polysilicon production in 2016.

Can such huge profits really be sustained? Economic common sense tells me that it is difficult to sustain.

The question we need to think about is actually:

How should the normal profits of the photovoltaic industry chain be distributed?

In fact, if we take a longer-term view of the entire industry chain, we will see it more clearly:

We can clearly see that from 2014 to Q3 2016, JinkoSolar's gross profit margin was maintained at 20%, while the gross profit margin of its upstream suppliers (taking Daquan as an example here) fluctuated greatly, but was basically maintained at around 25%.

Then why did JinkoSolar's gross profit margin continue to decline after Q3 2016, while the upstream gross profit margin suddenly surged?

The core reason is that after the 630 rush to install in 2016, the entire market suddenly cooled down, causing component prices to plummet. For companies like JinkoSolar, they often need to sign many orders for 2017 at the end of 2016, so their prices in 2017 will be relatively low.

In 2017, the entire photovoltaic demand exploded again unexpectedly, causing the prices of upstream raw materials to soar. For component manufacturers such as Jinko, on the one hand, many component prices were determined at the most pessimistic time in 2016, and on the other hand, they had to face rising raw material prices, so their gross profit margin dropped significantly.

But this situation will not last long.

We see that, on the one hand, the upstream is actively expanding production. Once these production capacities are released, there will inevitably be a price war in the upstream. On the other hand, the current gross profit of the downstream is around 11%, which is not profitable for the entire industry, and this will also lead to the withdrawal of many downstream players.

As the upstream increases and the downstream decreases, the gross profit margin of companies like JinkoSolar will gradually return to the normal level of around 20%.

In my opinion, with a normal gross profit margin of about 20% in the future, JinkoSolar's net profit will be around 7% - 10%. If it corresponds to its annual sales of 30 billion, its net profit will be between 2 billion and 3 billion. If the market gives JinkoSolar a 20x PE valuation, its market value will be between 40 billion and 60 billion, which is a 10x stock.

Finally, I want to say that recently, following the privatization of Trina Solar, JA Solar also privatized and delisted from the US stock market, which shows that domestic photovoltaic companies cannot stand the low valuation in the United States. As for JinkoSolar, since its JinkoPower has been spun off and is preparing to return to the A-share market, it has no motivation to privatize in the short term. At the same time, once JinkoSolar's profits begin to recover, I believe that American investors will definitely give a company like JinkoSolar a reasonable valuation.

As for what many people say about American investors not looking at photovoltaic manufacturing companies, in fact, many institutional investors are not as far-sighted as we think. They often focus on profits, and once profits are released, these institutional investors will also rush to the trend.

Like SolarEdge, an Israeli inverter company listed on the US stock market, its performance has increased significantly this year and has also been sought after by investors. Its stock price has also risen 250% from the bottom.