JinkoSolar Holding Co., Ltd. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016; annual results, not a standalone fourth-quarter report. Audited consolidated financial statements are prepared under U.S. GAAP. Amounts below are in RMB unless otherwise stated; U.S. dollar equivalents use RMB6.943 per US$1.
Business context
JinkoSolar manufactures photovoltaic products across an integrated value chain, with solar modules its principal product. It shipped 6.225 GW of modules in 2016 and reported annual capacity of 5.0 GW for wafers, 4.0 GW for cells, and 6.5 GW for modules. In October 2016, it disposed of its China downstream solar-project business. Accordingly, that business is presented as discontinued operations and comparative periods were reclassified.
Key financial results
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Revenue | RMB21.401bn (US$3.082bn) | RMB15.454bn | Up 38.5%; higher module shipments offset lower selling prices. |
| Gross profit / margin | RMB3.869bn / 18.1% | RMB2.931bn / 19.0% | Profit rose 32.0%; margin narrowed as module prices fell. |
| Operating income / margin | RMB1.349bn / 6.3% | RMB1.122bn / 7.3% | Income rose 20.3%; margin declined. |
| Continuing-operations net income | RMB990.2m (US$142.6m) | RMB766.5m | Up about 29%. |
| Net income attributable to ordinary shareholders | RMB1.827bn (US$263.1m) | RMB683.8m | Includes substantial discontinued-operation disposal gain. |
| Net cash from operating activities | Outflow RMB1.803bn | Inflow RMB1.339bn | Working-capital demands, including receivables and inventory, were significant. |
| Cash and cash equivalents | RMB2.501bn | RMB2.393bn | Restricted cash was RMB318.8m; restricted short-term investments were RMB3.333bn. |
| Borrowings | Short-term RMB5.489bn; long-term RMB488.5m | Short-term RMB2.590bn; long-term RMB1.309bn | Convertible notes also remained outstanding at year-end. |
Module sales were RMB20.826bn, or 97.3% of revenue. Module volume rose 47.5% to 6.225 GW, while average selling price fell 7.2% to RMB3.33 per watt from RMB3.59. Overseas markets generated 61.5% of revenue; the United States alone represented 36.0%.
Current assets were RMB19.695bn and current liabilities RMB18.363bn, implying positive working capital of approximately RMB1.333bn. However, much of the reported liquidity was restricted or invested, and operating cash flow was negative. Capital expenditures were RMB4.039bn; investing cash outflow was RMB6.909bn and financing cash inflow RMB7.455bn.
Material changes and unusual items
- China project-business disposal: The company received US$250m in cash and recorded a disposal gain of RMB1.008bn before tax (RMB145.2m equivalent). Total 2016 net income was RMB1.992bn, so the disposal materially lifted reported earnings. The transaction involved a buyer consortium led by Chairman Xiande Li; the filing describes related-party guarantees that remained after the sale.
- Liquidity and working capital: Operating cash flow swung from positive to negative as accounts receivable and inventory increased. Third-party net receivables reached RMB4.754bn and inventory RMB4.474bn, compared with RMB2.691bn and RMB3.203bn, respectively, at year-end 2015.
- Inventory and asset charges: Inventory provisions rose to RMB439.0m from RMB98.8m, attributed primarily to falling module prices. Long-lived asset impairment was RMB125.5m, primarily associated with production-equipment upgrades and obsolescence.
- Warranty estimate: JinkoSolar reversed RMB92.1m of previously recorded warranty liability after updating its replacement-cost estimate. Warranty expense for the year was RMB257.5m.
- Foreign exchange and derivatives: A RMB208.8m foreign-exchange gain helped results, while fair-value losses included RMB110.2m on convertible notes and capped call options and RMB52.6m on forward contracts. These non-operating items can fluctuate materially.
- Debt repayment after year-end: The company repurchased substantially all of its 4% convertible notes due 2019 in February 2017; US$10,000 face value remained after that repurchase. At December 31, 2016, the notes’ carrying value was RMB423.7m and the remaining principal was US$61.1m.
Outlook, risks and contingencies
- Management expected cash, operating cash generation, and available bank facilities to cover working capital and capital expenditure needs for at least 12 months from March 29, 2017. It reported positive working capital, but this outlook depends on cash generation and continued access to financing.
- Management described long-term solar demand as having growth potential, while acknowledging near-term dependence on incentives and policy. China reduced utility-scale feed-in tariffs in June 2016; industry oversupply and intensified competition pressured module prices.
- Major risks include falling product prices, subsidy reductions, raw-material supply and pricing volatility, customer credit and collection risk, trade duties, foreign-exchange movements, and substantial debt and refinancing requirements. The company’s five largest customers accounted for 28.5% of revenue; its five largest silicon suppliers represented 59.2% of silicon purchases by value.
- Related-party exposure is material: JinkoSolar guaranteed Jiangxi Jinko Engineering’s loan obligations of RMB6.6bn (US$945.2m) and redemption obligations of US$297.3m. The filing recorded guarantee receivables of RMB235.7m and guarantee liabilities of RMB226.1m. The former project business was sold to a group led by the chairman.
- U.S. and other trade-duty reviews remained pending. The company recorded RMB15.0m for preliminary U.S. anti-dumping and countervailing duties and warned the provision might be insufficient. The Wuxi Zhongcai supply-contract litigation and Zhejiang Qin Ye construction disputes were pending; outcomes were not reliably estimable for the Wuxi matter.
- Estimated unpaid statutory social-insurance and housing-fund contributions were RMB355.8m at year-end 2016. Other risks include environmental and permitting compliance, restrictions on moving cash out of China, and limits on subsidiaries’ dividend distributions.
- No dividend was paid or planned for the foreseeable future. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Separate recurring manufacturing performance from the RMB1.008bn disposal gain when assessing 2016 earnings and future comparability.
- Review the recoverability, aging, and collection terms of receivables, particularly the RMB1.414bn related-party balance and RMB610.2m related-party notes receivable, as well as inventory valuation and cash conversion.
- Confirm the status and terms of the RMB6.6bn debt guarantee and US$297.3m redemption guarantee after the related-party disposal, including any subsequent settlements or changes.
- Check current debt maturities, available facilities, collateral requirements, and the treatment and availability of restricted cash and restricted investments.
- Track module pricing, shipment growth, inventory provisions, U.S. duty reviews, pending litigation, and any required payments for employee welfare contributions.