We noticed a bear case thesis on JinkoSolar (JKS) on Valueinvestorsclub authored by falcon44. We find articles on VIC thoroughly researched by aspiring analysts who tend to think out of the box. Click here for the full article. Here is the summary.
Headquartered in Shanghai, China, originally, a wafer manufacturer since 2006, JinkoSolar Holding Co., Ltd. (JKS) is currently the world’s largest solar panel manufacturer in the highly competitive industry. JKS shipped 11.4 GW of modules in 2018. The company went public on the New York Stock Exchange in 2010.
As the JKS stock experienced a meteoric rise from June to October the author believes there are holes in the fundamentals behind the euphoric upswing. The three primary contributors to the stock price movement seem to be misplaced.
(Misconceived) Notion 1.
Improved margins can be sustained on the back of higher global demand.
Reality
As JKS brings the arguably low-cost supply (China factor) to the table, there are lower-cost suppliers creating tough competition. Additionally, the earnings picture is looking rosier than the factual numbers. JKS’ 3Q and 4Q guidance do not sync with the current order flow. The fact that the Chinese companies’ disclosures are generally subdued highlights the hype of earnings potential. Industry demand tends to be cyclical.
(Misconceived) Notion 2.
An incumbent defeat in the White House will bring incremental earnings growth.
Reality
A Joe Biden victory will most probably see the tariffs on solar modules abolished. Section 201 tariffs were implemented by President Donald Trump to encourage local production of solar cells and modules, which had virtually pushed the US solar power prices to highest levels globally. Elimination of tariffs would open flood gates of imports adversely impacting the pricing power. Key rival Longi and Zhonghuan alone could possibly meet the global solar module demand. Developers would rush to exhaust their inventory to take advantage of the extension of the current investor tax credit further reducing the 2021 import demand. The accelerated pace of low cost module imports could see the global solar module market, the USA no exception, oversupplied in 2021. This would bring the US solar power prices in line with the global average.
(Misconceived) Notion 3.
JKS’ plans to list a subsidiary in the mainland’s A-share market has prompted speculation that the proceeds would be used to buy back the ADRs listed on the NYSE. The notion was derived due to current premium the ADRs are enjoying.
Reality
Investors seem to ignore JKS management’s stance that proceeds from A-shares cannot be used to buy back the ADRs. The company lacks a mechanism to converge the value between the two scrips. Besides, A-shares in China and H-shares listed in Hong Kong showing high valuation gaps with ADRs can be arbitrary due to the closed nature of the mainland China’s financial system, including stock exchanges.
The steep rise in its stock price based on distorted earnings, demand, and market share projections coupled with dynamic industry challenges make a case to short JKS.
