Ningjin, Hebei Province Nov 17, 2015 (Thomson StreetEvents) -- Edited Transcript of JA Solar Holdings Co Ltd earnings conference call or presentation Tuesday, November 17, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Victor Yuan 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 ================================================================================ * Philip Shen Roth Capital Partners - Analyst * Mahesh Sanganeria RBC Capital Markets - Analyst * Paul Strigler Esplanade Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Thank you for standing by, and welcome to the JA Solar Holdings third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, today's call is being recorded and will be available via the webcast. If you have any objection, you may disconnect at this time. I will now turn the call over to Mr. Victor Yuan, Director of Investor Relations of JA Solar. Mr. Yuan, please go ahead. -------------------------------------------------------------------------------- Victor Yuan, JA Solar Holdings Co Ltd - Director, IR [2] -------------------------------------------------------------------------------- Thank you, and welcome to JA Solar's third-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 functional 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 are pleased with our strong third-quarter financial results, as shipments exceeded our previous expectations. Total shipments of 1.1 gigawatts were up 43.5% and the 42.5%, sequentially. Shipment growth was driven by strong demand in China, which represented 53% of total shipments during the quarter. Shipments to Europe were up 22% year over year, and we also saw some strong growth in shipments to other Asia-Pacific countries, excluding Japan, which were up 283%. Furthermore, we are seeing some solid growth in India, and there is continued progress in Latin America market, where we continue to establish our market presence and expand our footprint in the region. We expect 2016 to be a strong year for this market. Relatively stable ASPs in our major markets, combined with our continued cost-reduction efforts, allowed our gross margin to expand to 17.7% from 15% in the year-ago quarter, and 16.4% in the second quarter of 2015. Although we expect ASPs to remain at similar levels, increasing wafer costs could pressure margins in the fourth quarter. Moving on to some recent developments, we made significant progress on establishment of our cell manufacturing in Malaysia during the quarter, our first manufacturing facility outside of China. The strategic location of this facility provides us with unique advantages, as we continue to expand our presence in emerging markets and widen our geographic manufacturing footprint. In the US market, we aim to increase shipments, given the strong market demand, before the ITC expiration. We are placing a greater emphasis on key accounts, and expect that rooftop projects will be a major opportunity and area of focus in the US market following the ITC expiration. With this goal in mind, we have enhanced our US team with the addition of Mr. Robert Petrina as the Manager Director and the President of JA Solar North America. His extensive solar industry experience gives us great confidence in our growth prospects for the US market. Looking at the final quarter of 2015, we anticipate that demand will continue to remain strong, particularly in China. As such, we expect our fourth quarter shipments to be in the range of 1.1 to 1.2 gigawatts. Regarding our downstream projects, we have allocated some shipments from these segments to meet strong customer demand in the second half. As a result, we now expect shipments to our downstream projects to be less than 100 megawatts for 2015. 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 dollars translation strictly to help our audience compare our results with industry peers. In the third quarter for 2015, we shipped 1,126.8 megawatts, an increase of 43% -- 43.5% year over year and 42.5% sequentially. Module and module tolling shipments were 1,073.8 megawatts, an increase of 54.8% year over year and 49.7% sequentially. Modules accounted for 95.3% of our total shipments. Cell and cell tolling shipments of 53 megawatts represented a decline of 42.3% year over year and of 27.8% sequentially. We continued to utilize the majority of our cell production internally for our own modules. Now, let's take a look at our geographic mix. We continued to see strong demand in China, which represented 53% of our total shipments during the quarter. We expect demand in China to remain strong going into the final quarter of the year. Meanwhile, Japan and Europe -- Europe remained relatively stable markets for us, representing 10% and 8% of total shipments, respectively. Turning to the income statement, net revenue was $601m, up 26.4% year over year and 41% sequentially. Growth was driven by higher shipments volume to our key markets, especially China. Gross profit was $106.6m, up 49.2% year over year and 52.5% sequentially. Gross margin was 17.7%, compared with 15% in the prior-year period and 16.4% in the second quarter of 2015. Within operating expenses, we invested $5.4m in R&D and spent $54.1m on SG&A. R&D spending was down 12.5% from the prior-year period and was flat when compared with the second quarter of 2015. SG&A was up 52.6% from the prior-year period and 35.2% sequentially. Operating expenses was 9.9% of revenue. Operating profit was $47.1m for the quarter, resulting in an operating margin of 7.8%, compared to 6.3% in the prior-year period and 5.8% in the second quarter of 2015. Below the operating line, we incurred interest expense of $9.2m, up 2.8% year over year but down 0.6% sequentially. We also incurred a positive impact from the non-cash warrant valuation of $0.7m and income of $11.7m for the other items, which includes a gain of $9m from foreign exchange. Taxes was $9.6m. Net income was $40.7m, which was up 90% sequentially and 66% year over year. Diluted earnings per ADS was $0.70. Our non-GAAP earnings per ADS was $0.68. This compares to non-GAAP earnings per ADS of $0.20 in the same quarter last year and $0.26 in the second quarter of 2015. Now, let's turn to the balance sheet. At the end of Q3, we had cash and cash equivalents of $289m, compared with $275.1m at the end of Q1. Days sales outstanding decreased from 90 days to 78 days during the quarter, while inventory days decreased from 90 days to 56 days. Debt increased slightly to approximately $761.6m. Debt was 46% 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). Philip Shen, Roth Capital Partners. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [2] -------------------------------------------------------------------------------- Hey, guys. Congrats on the strong results. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [3] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [4] -------------------------------------------------------------------------------- In terms of margins, to what degree can you quantify the margin impact of the higher wafer costs? Are we looking at 100 basis points or something greater? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [5] -------------------------------------------------------------------------------- You're talking about Q4 of this year? -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [6] -------------------------------------------------------------------------------- That's right, Herman. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [7] -------------------------------------------------------------------------------- I would say that's pretty close, I would say -- yes, 100 to 150 basis points would be a reasonable assumption. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [8] -------------------------------------------------------------------------------- Great. And with your capacity expansions, where do you expect to expand your capacity? How much of the incremental capacity could come or be in Malaysia? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [9] -------------------------------------------------------------------------------- Currently, Malaysia plant is 400 megawatts on an annual basis. That facility can upgrade to 800 megawatts to one gigawatt for cell production there. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [10] -------------------------------------------------------------------------------- So does that imply the wafer and cell -- sorry, the wafer capacity would be in China and then the module capacity to 5 gigawatts would also be in China? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [11] -------------------------------------------------------------------------------- Yes, I don't think we have a very aggressive expansion on the wafer part, just a little bit. But on the module part, probably, Mr. Xie, you want to give some comment on that? -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [12] -------------------------------------------------------------------------------- Yes, this 5 gigawatts module capacity will be in China, and at the same time, we are evaluating to see if we have [efforts] like a possibility to set up overseas module capacity to meet our -- to comply with our cell capacity, 400 megawatts. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [13] -------------------------------------------------------------------------------- Okay, great. And how much -- how many megawatts could the US represent for you in 2016? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [14] -------------------------------------------------------------------------------- 2016, well, let's assume we have a 10-gigawatt market in the US. I would say out of 10 gigawatts, we'd like to obtain around 10% market share there, roughly. That's our goal. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [15] -------------------------------------------------------------------------------- Okay. Okay. Great. And then with your downstream activities, how are you looking at 2016 downstream? Will the focus continue to be on China, or do you have plans to expand beyond, and what kind of downstream megawatts or volumes could we see? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [16] -------------------------------------------------------------------------------- Well, after our Chairman made an announcement of a privatization plan, we decided not to give guidance for 2016. But to answer your questions, I think we can give some general information. For example, downstream business opportunity will mainly focus in China, for sure, and overseas currently -- well, basically, even though we will consider probably at [further] time, we will exit. That's the strategy. No change, still. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [17] -------------------------------------------------------------------------------- Okay, great. One last question from me. From an inventory perspective, our calculation is that you had about 57 days on hand. So how much inventory do you have left to burn in Q4, and how much cash do you generate as working capital comes back to normal, or do you think the Q3 levels are normal? Thanks. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [18] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [19] -------------------------------------------------------------------------------- Yes, I think Q3 is -- we already returned to a normal cash flow performance, so Q4 probably will follow the same pattern. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [20] -------------------------------------------------------------------------------- So do you expect inventory to be taken down more, or do you think inventory will remain about the same in Q4? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [21] -------------------------------------------------------------------------------- Well, basically, strong demand in Q3 and Q4, minimum already maintained at the lowest levels, so that's why we believe end of Q4, inventory level, if there is any room, we can reduce further. It's very limited, so very similar level, I would say. -------------------------------------------------------------------------------- Philip Shen, Roth Capital Partners - Analyst [22] -------------------------------------------------------------------------------- Okay, great. Thank you, Herman. Thank you, Mr. Xie, and congratulations again on the nice results. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [23] -------------------------------------------------------------------------------- Thank you, Phil. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [24] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [26] -------------------------------------------------------------------------------- Yes, thank you very much, and also congratulations on very strong results and margins. The question on -- Herman, you talked about wafer pricing. Can you tell us what is driving that? Is it a supply constraint on the wafer side, manufacturing, because poly price seems to be still declining? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [27] -------------------------------------------------------------------------------- Yes, hi, Mahesh. I think you are right. Poly at current spot market price, $15 plus/minus, is very low, and wafer price did not really come down, as this probably relates to supply and demand. And in recent days, we heard wafer price either stabilizes or has little trend to go up again, slightly, probably. So that's what makes us believe the Q4 we have to face a little gross margin problem. Basically, it's just supply and demand in the wafer segment part. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [28] -------------------------------------------------------------------------------- Okay. Okay, that's helpful. And on your shipment, of course, strong shipment in China, and can you compare -- can you compare Q4 shipment compared to Q3 regionally? I'm just thinking, typically, your Q4 shipments goes up, and this time it's down, probably due to a stronger shipment in Q3, but can you talk a little bit about what's the dynamics between Q3 and Q4? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [29] -------------------------------------------------------------------------------- Q4 percentage base compared to Q3 may come down. For example, Q3, we did 53% in China, Q4 probably something close to 41% probably, then we will see some market share increase in North America. For example, we had a very little in North American, USA, so only 1%. Q4, we may have a good chance to reach close to 10% for US market, so the rest of China, I would say European, a little improvement in Q4 compared to Q3, so basically that's the picture for Q4. China comes down a little bit. The rest of Asia, pretty stable. US has a good chance to pick up. European picks up a little bit. The rest of the world will pick up slightly, as well. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [30] -------------------------------------------------------------------------------- And you talked about next year you want to have 10% market share in US, but I would think that it will make more sense to ship everything from Malaysia to US for your -- from your China factory is the US shipment still profitable, or you plan to ship most of it from Malaysia to US next year? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [31] -------------------------------------------------------------------------------- Well, basically, we would like to ship all the products available from our Malaysia factory, plus OEM [NVNM]. Any shortage, we'll make up from China market -- from China production part. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [32] -------------------------------------------------------------------------------- Okay. And on the cost side, can you talk about what was the cost this quarter and what -- how you are doing in terms of your plan and the cost reduction? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [33] -------------------------------------------------------------------------------- Cost Q3 compared to Q2, we did make some improvement. As you know, Q2, our multi-base cost was in the mid-$40s, and for Q3, our multi-base module cost was between low $40s to mid-$40s, so there is some improvement. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [34] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [35] -------------------------------------------------------------------------------- In Q4, hopefully, we can continue to drive the cost down to offset some of the price increase in wafer part. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [36] -------------------------------------------------------------------------------- And last question for me, what's the timing on coming to a conclusion on Chairman's offer to take the Company private? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [37] -------------------------------------------------------------------------------- Still it's pretty hard to predict the timing. Basically, everything goes step by step, and currently, I think Chairman is still trying to work out his financial plan to take the Company private. So that's the timing consumer process part. Once this part finishes, everything else we can give a better predictable timing, but at this time, once the financial has not come to conclusion yet, there's a little bit difficulty for us to give a timetable at this moment. -------------------------------------------------------------------------------- Mahesh Sanganeria, RBC Capital Markets - Analyst [38] -------------------------------------------------------------------------------- Okay. All right. Thank you so much, and again, congratulations on great results. Thanks. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [39] -------------------------------------------------------------------------------- Thank you, Mahesh. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Patrick Jobin, Credit Suisse. -------------------------------------------------------------------------------- Unidentified Participant [41] -------------------------------------------------------------------------------- Hi. [Maheep] here on behalf of Patrick Jobin. Thanks for taking the question. Herman, could you just talk about in terms of gross margins how should we look at it next year, given your cost-reduction roadmap, slightly higher wafer prices expectations and ASP expectations in the different regions? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [42] -------------------------------------------------------------------------------- Well, I think I said that after Chairman made announcement of a privatization plan, we decided not to give guidance for 2016. But overall, we still believe, even though we don't give a specific guidance -- we still believe module manufacturing part of the business, mid-teens is a reasonable base to think of. -------------------------------------------------------------------------------- Unidentified Participant [43] -------------------------------------------------------------------------------- Thanks. That direction is helpful. And in terms of the China market, when you definitely look at a very strong demand in Q4, but what do you think -- how do you think demand would trend next year, given there are some proposals for the fees and tariff decline? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [44] -------------------------------------------------------------------------------- Well, overall, for the industry, we believe 2016 will be another good year for solar industry, so that's what we can share with you, and of course, we have confidence 2016 will be another good year for us. That's the high-level information I can share with you. And the other thing I can say is based on what we can see for early part of next years, basically, I would say in the recent three or five years, we can't see any better environment visibility for the first half of next year than any other years, in the last three or five years. Yes. -------------------------------------------------------------------------------- Unidentified Participant [45] -------------------------------------------------------------------------------- Thanks. That's helpful. And just last question from my side, on the Malaysian facility, how many megawatts do you plan to ship from it in Q4, and probably it runs at full utilization next year? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [46] -------------------------------------------------------------------------------- Q4 this year, very small amount. I would say probably 20 megawatts, plus/minus? -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [47] -------------------------------------------------------------------------------- 20-something. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [48] -------------------------------------------------------------------------------- 20 megawatts, plus/minus. So this is still in the ramping-up stage. -------------------------------------------------------------------------------- Unidentified Participant [49] -------------------------------------------------------------------------------- Thank you. That's it for me, and congratulations on the great quarter. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [50] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital. -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital - Analyst [52] -------------------------------------------------------------------------------- Hey, Herman, how are you? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [53] -------------------------------------------------------------------------------- Pretty good. How are you, Paul? -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital - Analyst [54] -------------------------------------------------------------------------------- I'm hanging in there. So it looks like you bought back another 2m ADS in the quarter. What was the average purchase price on those shares repurchased? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [55] -------------------------------------------------------------------------------- I think in total we did buy back close to 3m ADS. Average price is between $7.50 to $8. -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital - Analyst [56] -------------------------------------------------------------------------------- And how much capacity do you have left? -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [57] -------------------------------------------------------------------------------- For this buyback program, it's already complete. Basically, the buyback program is already expired, so how much we are going to do really depends on the Board decisions, so at this moment, I have no clue yet. -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital - Analyst [58] -------------------------------------------------------------------------------- And then on the go-private transaction, I heard your comments earlier. In terms of the financing plan, is it -- I assume it will be largely debt financed? And I guess what's holding up the debt financing, if anything? Because you just reported a fantastic -- -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [59] -------------------------------------------------------------------------------- Well, we as a company -- we as a company are not the right party to discuss this part with you, because this kind of financial planning is really the Chairman himself to work with the financial institutions in China, so there is nothing really we can share with you. -------------------------------------------------------------------------------- Paul Strigler, Esplanade Capital - Analyst [60] -------------------------------------------------------------------------------- Okay. Thanks a lot, Herman. Have a good one. -------------------------------------------------------------------------------- Herman Zhao, JA Solar Holdings Co Ltd - CFO [61] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- (Operator Instructions). Ladies and gentlemen, hearing no further question, Mr. Xie, please continue with your closing comments. -------------------------------------------------------------------------------- Jian Xie, JA Solar Holdings Co Ltd - President [63] -------------------------------------------------------------------------------- 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 [64] -------------------------------------------------------------------------------- Thank you again. This concludes the call. You may all disconnect.
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