JinkoSolar Holding-Above expectation:Bullish demand outlook;margin pressure lingers

What surprised us.

    Jinko reported 4Q16 results with core net profit of US$19mn (excludingthe US$145mn gain on disposal of discontinued operations), vs. ourestimate of -US$9mn. Given the sharp decline in selling prices in 4Q16,Jinko managed to lower its blended cost from US$0.40/w in 3Q16 toUS$0.35/W to defend its gross margin at 14.3% in 4Q16, vs. 19.3% in 3Q16.

    What to do with the stock.

    Key takeaways from analyst briefing: (1) Management expressed anoptimistic view on installation in China in 2017E (30GW), vs. NEA's20GW target, as Jinko expects over 5.5GW additional demand from Top-Runner and Poverty Alleviation programs, as well as a pickup indistributed generation projects in 2H17. Jinko targets to ship 1.9-2.0GW /8.5-9.0GW for 1Q17E / FY2017E, respectively. It has locked more than sixmonths’ order backlog so far. (2) Cost reduction is on target to reducenon-silicon cost by 8-10% and to achieve total blended cost of US$0.30-0.31/W in 2017E. Jinko targets a gross margin of 12-15% in 1Q17.

    (3) Capacity expansion plan is aggressive. Jinko will add 2.0GW / 0.5GW/ 1.5GW capacity for wafer / cell / module capacity in 2017E, with monomodule capacity reaching 3GW from 1GW in 2016. Management targets2017 capex of around US$400mn. (4) Mono PERC capacity ramping upto defend margin. Mono PERC module earns a 10-15% premium sellingprice over multi module, while the cost of mono is 8-10% higher. We raiseour 2017E/18E earnings estimates (net income) by 11%/7% to factor inhigher shipment guidance and introduce our 2019E earnings estimate ofUS$103mn. Following this, we increase our 12m TP from US$14.9 toUS$16.2 (still based on 2017E EV/GCI vs. CROCI/WACC; sector cash returnmultiple falls from 0.76x to 0.72x). Maintain Neutral. Key risks: Marketshare gain in module sales (+) lower selling price (-).