Jinko Solar – Likely Final Update

When I began purchasing Jinko Solar its share price was around $15 a share. Since then it has quadrupled in value than fell by half and is now trading at $60 a share. Recently, on June 25, Jinko Solar announced Q1 earnings. Their earnings while beating estimates led me to reevaluate the company’s fundamentals. The first major issue I have with the company is the huge disparity between EPS and diluted earnings. The diluted earnings per ADS (American Depository Share) and basic, respectively, was -$.55 and $.71. This disparity >100% means that Jinko Solar is likely to continue dilute any interest. Although this may make operational sense given Jinko Solar requires substantial capital to expand production capacity, I believe it illustrates the lack of responsibility management feels towards common shareholders.

Furthermore, rereading the company’s annual report illustrates substantial shortcomings. Firstly, the corporate structure of the company warrants serious scrutiny. The primary operating subsidiary of Jinko Solar limited is Jiangxi Jinko. Presently, Jinko Solar limited, the holding company JKS represents owns, ~75% of the operating subsidiary. This ownership will be further diminished with the STAR listing of another ~20%. While this capital infusion will be utilized to finance production capacity it is concerning how little Jinko, JKS actually represents. The STAR listing has led to a rapid appreciation of the ADS because the overly enthusiastic domestic Chinese markets will give a too optimistic valuation to Jinko’s common shares. Also, STAR listings do not have restraints on the maximum PE or profitability levels the traditional Chinese exchanges require. However, I do not believe Jinko Solar represents an operationally sound investment for the foreseeable future.

Although the solar industry seems poised for growth, Jinko Solar has seen continued pressure on their gross margins. While, I believe they will successfully expand into more premium products, the corporate structure is simply too complicated for me to be a continued investor. The company forms regional subsidiaries to manage certain operations and then turns over large portions of the equity? This practice seems exceedingly odd. I believe this structure may allow them obscure liabilities? or simply be poor management.

I sold call options at a strike price of $60 that expires August 20th. I expect these shares to be called away by then and any remaining shares I posses will be disposed of at $70. I believe the current price of Jinko Solar represents a fair price and any continued appreciation is speculation on the domestic demand for the new listing. Given that the ADS is not convertible for ordinary shares, this is actually not rational, although I suppose further equity could always be sold by the company at these lofty valuations.

The real mistake with my investment in Jinko Solar was not recognizing how expensive the shares had become at $90 previously. While this represented the optimism of a few incredible quarters, it did not consider the damaging corporate structure or the narrow financial edge that Jinko operates on. Furthermore, this price was achievable because certain senior convertible notes had not been exchanged for equity yet as to not dilute the share price. Any who, I believe going forward a clear price target, that represents fair value of a company, to me, should always be present in my mind. This way I know I should dispose of my shares in a company if they achieve fair value. this will prevent me from excoriating losses like I experienced earlier this year.