Ningjin, Hebei Province Aug 11, 2015 (Thomson StreetEvents) -- Edited Transcript of JA Solar Holdings Co Ltd earnings conference call or presentation Tuesday, August 11, 2015 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Victor Yang JA Solar Holdings Co Ltd - Director, IR * Jian Xie JA Solar Holdings Co Ltd - President * Herman Zhao JA Solar Holdings Co Ltd - CFO ================================================================================ Conference Call Participants ================================================================================ * Justin Clare Roth Capital - Analyst * Patrick Jobin Credit Suisse - Analyst * Emily Liu BESI - Analyst * Keith Layagotha Linden Advisors - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Thank you for standing by and welcome to the JA Solar Holdings second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded and will be available via webcast. If you have any objections, you may disconnect at this time. Now I will turn the call over to Victor Yang, Director of Investor Relations of JA Solar. Mr. Yang, please go ahead. -------------------------------------------------------------------------------- Victor Yang, JA Solar Holdings Co Ltd - Director, IR [2] -------------------------------------------------------------------------------- Thank you and welcome to JA Solar's second-quarter 2015 earnings conference call. Joining us on the call today from the Company are JA Solar's President, Mr. Jian Xie, and Chief Financial Officer, Mr. Herman Zhao. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including statements regarding expected future financial and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. Actual results may differ from management's current expectations. Therefore we refer you to a more detailed discussion of the risks and uncertainties in the Company's annual report on Form 20-F, filed with the Securities and Exchange Commission. All information provided on today's conference call speaks as of today's date unless otherwise stated. The Company undertakes no duty to update any information except as required under applicable law. Also during the call we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our function currency is the Chinese renminbi. We offer these translations into US dollars solely for the convenience of the audience. Now I'd like to turn the call over to Mr. Jian Xie. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [3] -------------------------------------------------------------------------------- Thank you, everyone, for joining our conference call today. We were pleased with our second-quarter results, which were higher than our previous expectations. Total shipments were up 16% both year over year and sequentially. Growth was mainly driven by strong demand in our key markets, such as China, which represented 45% of shipments during the quarter. Module shipments to Europe increased 86% year over year, while we also saw some notable growth in other markets, including Latin America and the Middle East. Despite slightly lower ASPs, our gross margin expanded to 16.4% for the quarter as we generated a higher percentage of our revenue from downstream projects and continued to reduce costs. China demand picked up in the second quarter and we expect the strong demand to continue into the second half given the favorable policy and credit environment. We expect that China will be a notable growth driver for us in the back half of the year. Meanwhile, we are continuing to focus on broadening our geographic mix and expanding our manufacturing network globally. Last quarter we announced our plan to build a new steel manufacturing facility in Penang, Malaysia, which will have an initial annual capacity of 400 megawatts. We recently obtained the manufacturing license for this facility from the Malaysian Investment Development Authority and are on track to launch operations in the fourth quarter of 2015. As we mentioned on our call last quarter, Malaysia offers an ideal location for us to expand our manufacturing capabilities given its proximity to key solar markets in South and Southeast Asia as well as China. Additionally, as we mentioned on last quarter's call, we announced in May our new joint venture with Soventix Chile, a subsidiary of German project developer Soventix, to initially cooperate on developing large-scale downstream solar projects totaling 130 megawatts, which will exclusively use JA Solar modules. As previously discussed, this JV provides us with an opportunity to capture greater market share in the Latin America market and also opens the door to potential future cooperation with Soventix as it continues to develop its pipeline in the region. Looking into the second half of 2015 we anticipate that demand will continue to ramp up. As such, we expect our third-quarter shipments to be in the range of 900 to 950 megawatt and reiterate our full-year shipment guidance of 3.6 to 4 gigawatts. For our downstream business, we now expect to ship 150 megawatts to our downstream projects in 2015. We are working on several projects in China, including projects in Hebei, [Jiangsu], Xinjiang and Inner Mongolia. Now I will turn the call over to our CFO, Herman Zhao, for a detailed review of our financial results. Herman? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [4] -------------------------------------------------------------------------------- Thank you, Mr. Xie, and good day, everyone. Let me walk you through the details of our financial results. Note that I will present all monetary figures in US dollars for the convenience of our listeners. Our press release presents the figures in both RMB and US dollars. Keep in mind that RMB is our reporting currency and we offer the US dollar translation strictly to help our audience compare our results with our industry peers. In the second quarter of 2015, we shipped 790.8 megawatts, an increase of 16% both year over year and sequentially. Module and module tolling shipments were 717.4 megawatts, an increase of 60.9% year over year and 22.8% sequentially. Modules accounted for 90.7% of our total shipments. Cell and cell tolling shipments of 73.4 megawatts represented a decline of 68.9% year over year and of 24.7% sequentially. We continue to utilize the majority of our cell production internally for our own modules. Now let's take a look at our geographic mix. We saw strong demand in China, which represented our largest market for the quarter at 45% of shipments. We expect demand in China to continue to be strong in the second half of 2015. Meanwhile, Japan and Europe continue to be major markets for us, representing 20% and 15% of total shipments respectively. Turning to the income statement, net revenue was $436.8m, up 11.8% year over year and 12.7% sequentially. Year-over-year growth was driven by higher shipment volumes to our key markets, such as China. Gross profit was $71.7m, up 20.8% year over year and 14.9% sequentially. Gross margin was 16.4% compared with 15.2% in the prior-year period and 16.1% in the first quarter of 2015. Within the operating expenses, we invested $5.4m in R&D and spent $41m on SG&A. R&D spending was unchanged from the prior-year period. SG&A was up 4% from the prior-year period and 28.5% sequentially. Operating expense was 10.6% of revenue. Operating profit was $25.2m for the quarter, resulting in operating margin of 5.8% compared to 6.2% in the first quarter of 2015 and 3.7% in the prior-year period. Below the operating line we incurred interest expense of $9.4m, up 6.9% year over year but down 12.1% sequentially. We also incurred a positive impact from the non-cash warrant valuation of $5.7m and income of $4.9m for other items. Taxes was $4.4m. Net income was $21.9m, which was up 289% sequentially and 239% year over year. Diluted earnings per ADS were $0.36. Our non-GAAP earnings per ADS was $0.27. This compares to a non-GAAP earning per ADS of $0.14 in the same quarter last year and $0.13 in the first quarter of 2015. Now let's turn to our balance sheet. At the end of Q2 we had cash and cash equivalents of $282m compared with $306.2m at the end of Q1. Days sales outstanding increased from 86 days to 90 days during the quarter, while inventory days remained unchanged at 90 days. Debt increased slightly to approximately $706.9m. Debt was 44% of our capitalization, remaining stable quarter over quarter. As you can see in our interest coverage, our level of debt can be easily serviced based on our financial performance. Now I will turn the call over to the operator for the question-and-answer segment of our call. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Mahesh Sanganeria, RBC Capital Markets. -------------------------------------------------------------------------------- Unidentified Participant [2] -------------------------------------------------------------------------------- Hi. This is [Shan] here for Mahesh. Thanks for taking my questions. So, Herman, first off, can you just talk about the ASP trend? You mentioned some weakness during the quarter. And right now, based on our track, it looks like ASP is improving. What's your outlook for Q3 and for second half of the year? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [3] -------------------------------------------------------------------------------- Okay. ASP currently in China in Q2, we are in the mid 50s. For the second half we will see the ASP probably will remain flat compared to Q2. For Japanese market, the ASP for Q2 was in high 50s and the trend will turn to mid 50s for Japanese market. For US, roughly in [60s] range. European is minimum price so it will be unchanged. Q2 was the minimum price of EUR0.53 and Q3 will come to EUR0.56. That's overall. -------------------------------------------------------------------------------- Unidentified Participant [4] -------------------------------------------------------------------------------- Got it. And then how would that affect your gross margin? Does that mean your gross margin was better than you expected in Q2 and despite a weaker ASP. So if you're expecting flattish ASP and your cost continues to come down, should we expect margin expansion from here? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [5] -------------------------------------------------------------------------------- For the rest of the year we would expect the margin compared to Q2 would be flat. The reason being is really I think that you have a good chance for a little margin improvement from China market. But the Japanese market, as I mentioned, ASP may tend to be a little bit lower so that will offset some of the margin opportunity from China market. So overall we would say margin for the second half will -- compared to Q2 will be flat. -------------------------------------------------------------------------------- Unidentified Participant [6] -------------------------------------------------------------------------------- One last question regarding your downstream shipment guidance. It's 152 -- sorry, it's 150 megawatt now and previous it's 200 to 300 megawatts. I'm just wondering what has changed that caused you to lower your shipment guidance. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [7] -------------------------------------------------------------------------------- Well before the announcement from the Chairman for [privatization], basically we have very aggressive plan. Basically the reason being if we want to deliver aggressively, if we need money, we can access capital market. But with this kind of announcement, I would say the capital market for overseas market temporary, the opportunity [for growth is tough]. So that's why we have to be a little cautious. Whatever we feel comfortable to finish, build and complete by the end of this year, that number we try to accomplish. That's why we adjust our volume accordingly. -------------------------------------------------------------------------------- Unidentified Participant [8] -------------------------------------------------------------------------------- Great. That's very helpful. Thank you. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [9] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Philip Shen, Roth Capital. -------------------------------------------------------------------------------- Justin Clare, Roth Capital - Analyst [11] -------------------------------------------------------------------------------- Hi, everyone. This is Justin Clare. I'm on for Phil today. I was wondering if you could tell us what financing has been secured in the private bid for the Company and maybe give us an idea how likely is it that JASO could get relisted on a Chinese exchange. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [12] -------------------------------------------------------------------------------- Well your voice is low. We can hardly get your question. But I think your question is regarding privatization. I think as we announced in late July, the [specialty] committee has returned the service of legals and the financial advisor to assist in their deliberations. However, we are unable to offer a specific timeframe for the decision at this time. And there's no comment for relisting Asian market because the Chairman has not made the next move announcement yet. So there is no comment for that. -------------------------------------------------------------------------------- Justin Clare, Roth Capital - Analyst [13] -------------------------------------------------------------------------------- Okay. Thank you. And then maybe moving to costs, could you walk us through your cost roadmap for the next several quarters and maybe go into the key drivers of cost reduction that you're focused on right now? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [14] -------------------------------------------------------------------------------- I think Q2 our costs on the module level, I would say, is in the range of the mid 40s. And our goal by the end of this year, we try to come with all-in cost on module level to a low 40s range. That's the goal. -------------------------------------------------------------------------------- Justin Clare, Roth Capital - Analyst [15] -------------------------------------------------------------------------------- Okay. Great. And then may just one final one for me. I just want to better understand how demand is ramping through the year. Do you have a sense for the sequential growth from June to July and how that compares to what you were seeing last year at the same time? -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [16] -------------------------------------------------------------------------------- I would say for the second half of this year it's slightly stronger than the second half of last year. I would say we are probably the first one to do the Q2 conference call, but you'll probably hear from our peers. Most of our manufacturers, they are fully booked for the second half. Now everybody is doing the application, their headache is a good headache, which is doing the product allocation. And demand, there is no question about demand. Demand is very strong and people's headache is how to do the allocation. -------------------------------------------------------------------------------- Justin Clare, Roth Capital - Analyst [17] -------------------------------------------------------------------------------- Okay. Great. Thanks, guys. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Patrick Jobin, Credit Suisse. -------------------------------------------------------------------------------- Patrick Jobin, Credit Suisse - Analyst [19] -------------------------------------------------------------------------------- Hi. Thanks for taking the question and nice work on the quarter. I just want to follow up again on the pricing expectations, just given your commentary on being sold out for the remainder of the year and looking ahead, allocating to different regions. It suggests that's a pretty good environment to be in if you're sold out. So I'm just trying to understand, from your perspective, why you don't see more margin improvement or pricing power. And then just two follow-up questions, one, just OpEx guidance, how we should think about that as we try to get down to a cash flow projection here. And then also any update on the Malaysia facility timing and spend remaining. Thank you. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [20] -------------------------------------------------------------------------------- I think your first question is ASP overall. Well the demand, the strong demand is really from China and the US. And China, even with current ASP, if everybody has the good chance to continue to move the cost down, so without ASP going up, it's still, as I mentioned, there is a good opportunity for China market to have a gross margin improvement. For US market, currently with the final ruling in July, everybody in line on the tax part. That's what makes the market -- ASP market in US stabilize in mid 60s range. And Europe again is minimum price so there is nothing you can do. And the last one is for Japanese market. That's the only downsizing risk for Japanese market. So that's what really makes us believe the ASP, demand for second half is relatively stable, while even though there is strong demand in China. But as I said, with the cost effort from everybody with the stable ASP still you have a margin improvement opportunity there. I think your second question is for our overseas Malaysia factory update. So far everything is on our schedule. We expect to have 400 megawatt production in production in Q4 of this year. As Mr. Xie just mentioned previously, we get most important manufacturing license from MIDA. So we don't see any risk on that part of this execution. The last one was related to -- what was your last question? -------------------------------------------------------------------------------- Patrick Jobin, Credit Suisse - Analyst [21] -------------------------------------------------------------------------------- OpEx. Yes, Herman, on operating expenses, just as we should think about profitability trends for the remainder of the year. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [22] -------------------------------------------------------------------------------- OpEx. Well no major change as what -- with previous guidance. In the range of 9% to 11%, depending on the volume of our revenue. So with the strong expectation for second half, we will see OpEx will be on the low-end part, which is in the 9% to 10% range. -------------------------------------------------------------------------------- Patrick Jobin, Credit Suisse - Analyst [23] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [24] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Emily Liu, [BESI]. -------------------------------------------------------------------------------- Emily Liu, BESI - Analyst [26] -------------------------------------------------------------------------------- Hi. Thanks for taking my question. My question is regarding the press release in May about the joint venture with India Group Essel for 500 megawatts of cell and module capacity. And can you give some color on the likely timeframe of this new capacity? And also does that mean you will be more aggressive in downstream business in India this or next year? Thanks. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [27] -------------------------------------------------------------------------------- Just to clarify, this is manufacture joint venture. It's not a downstream joint venture. So we are not active on downstream in Indian market. So for the joint venture in India, so we are still working with our partner to build up the business model to work with the local government to do the preparations. So currently we have no specific time schedule for this project. -------------------------------------------------------------------------------- Emily Liu, BESI - Analyst [28] -------------------------------------------------------------------------------- Right. Okay. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [29] -------------------------------------------------------------------------------- Well it's in the early stage. As Mr. Xie mentioned, we are working with the bank for the bank loan part and work with the local landlord on the land part. So it's still in early stage discussion. -------------------------------------------------------------------------------- Emily Liu, BESI - Analyst [30] -------------------------------------------------------------------------------- Okay. Thanks. That's very helpful. Thank you. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [31] -------------------------------------------------------------------------------- We don't see any opportunity to ramp up that part of this in later part of this year. So if anything happens, it should be some time next year. From quarter to quarter we can give more updates. Yes. -------------------------------------------------------------------------------- Emily Liu, BESI - Analyst [32] -------------------------------------------------------------------------------- Okay. Thanks. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [33] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- [Keith Layagotha], Linden Advisors. -------------------------------------------------------------------------------- Keith Layagotha, Linden Advisors - Analyst [35] -------------------------------------------------------------------------------- Hi. I just wanted to understand how the Chinese downstream market is doing, what we're seeing in terms of payment cycle and the demand and just the basic color from what you are seeing on the downstream market in China. Thanks. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [36] -------------------------------------------------------------------------------- The downstream market in China, demand is very strong. As you know, this year the government announced something close to 18 gigawatt plan. We do see there is very strong opportunity for Chinese government to accomplish this goal. So for the downstream demand, it's very strong. The question is regarding the delayed payment [FIT]. Still no major change, no major improvement. So that's why, including JA Solar ourselves and our other peers, we need to work together to deliver that message and ask them to make improvement on the effective payment part. Otherwise really that's only the risk from our -- from us as a module supplier and also downstream participants. For this year, demand, to finish the 18 megawatts -- 18 gigawatts, we still see a good chance -- we do see that demand, as I said, well, the demand for second half year basically is fully booked for module suppliers. So that's what makes us to believe to accomplish this year's goal there is no question. But really going further for next year and year after, really there's no doubt the government needs to make improvements on the effective payment part. -------------------------------------------------------------------------------- Keith Layagotha, Linden Advisors - Analyst [37] -------------------------------------------------------------------------------- And how is the payment right now? Is it delayed by 90 days? Is it delayed by six --? I just wanted to understand what the delay was. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [38] -------------------------------------------------------------------------------- Well basically the two-thirds part from Ministry of Finance, as far as we know, the latest update payment was for the project complete in later part of 2013. So in other words, any downstream project completed in later part of 2013, they get [already] payment. That means any project complete in 2014, people are still waiting for the payment. -------------------------------------------------------------------------------- Keith Layagotha, Linden Advisors - Analyst [39] -------------------------------------------------------------------------------- Got it. Okay. Perfect. Thank you. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- (Operator Instructions). Ladies and gentlemen, showing no further questions. Mr. Xie, please continue with your closing comments. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [42] -------------------------------------------------------------------------------- Thank you, operator. And thank you all for participating on today's call and for your continued support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you all again. This concludes the call. You may now disconnect.
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