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JASO AT A GLANCE

P/E ► 9.86 LOW EV/EBITDA ► 9.32 VERY LOW ROA ► 11.1% HIGH ROE ► 11.1% AVG Debt to Equity ► 0.531 AVG Current Ratio ► 4.40 AVG Interest Coverage Ratio ► 4.13 HIGH

 

 

 

 

 

 

JA Solar Holdings Co. (NASDAQ: JASO) is an emerging, Chinese producer of monocrystalline solar cells. The energy sector is becoming increasingly turbulent, with oil recently hitting $100/barrel and alternative energies becoming increasingly popular. JA Solar sells its products to solar module manufacturers who assemble and integrate JA Solar’s solar cells into modules and systems that convert sunlight into electricity. JA Solar currently sells its products to customers in China, Germany, Sweden, Spain, South Korea and the United States. Growth in solar panel efficiency over the last few years has made the sun an increasingly appealing source of power; rising silicon prices threaten the success of the solar industry in this new environment, however, by making photovoltaics more expensive relative to other energy sources like wind. In an industry where the supply of refined silicon has ramped up production costs and crunched margins, JA Solar continues insures itself against rising input prices by establishing supplier relationships with such monocrystalline wafer suppliers as M. Setek, Renesola, and Shunda Semiconductor and contracting for large, low-cost silicon deliveries in coming years. Within the solar industry, JA Solar must compete on the basis of its solar panel efficiency and its manufacturing costs. Though the company is based in China, and therefore keeps production costs down via cheap labor, it is barely above average in both measures of solar success. JASO will either have to develop stronger efficiency technologies or lower-cost production technologies, as 17.7% efficiency^[1] cells that cost $2.37/watt^[2] to manufacture don't compare well against competitors like SunPower or First Solar, with 22% efficiency^[3] and $1.40/watt^[4] manufacturing cost respectively. The solar sector is becoming more and more competitive; among JA Solar's competition are such powerhouses as SunPower, SunTech, BP Solar, Sharp, Kyocera, and Q-Cells.

Company Overview

JA Solar is an international producer of photovoltaic (PV) cells. PV cells absorb light energy (usually from the sun) and convert it to electricity. There are multiple kinds of PV cells; JA Solar produces monosilicon cells. The company takes monocrystalline wafers made by silicon refiners like ReneSola and M. Setek and turns them into PV cells. Each cell has a relatively low power output, but when multiple cells are combined into a system or module, enough electricity can be generated to power a house, a factory, or even contribute to the utilities grid. JASO, however, is only involved in cell production - it sells its products to module manufacturers and systems integrators and lets them do the dirty work.

JA Solar currently sell its products to customers in the U.S., China, South Korea, Germany, Sweden, and Spain.

Source: Lehman Brothers Global Technology Conference Presentation^[5]

In Q2 2007, company revenue reached $61 million. Net income available to ordinary shareholders for the quarter was $9.9 million, with gross profit margin at 24%. Basic and diluted earnings per ADS were $0.22 and US$0.21 respectively. For the same period, manufacturing capacity was 175MW.

JA Solar's monocrystalline solar cells have generally achieved conversion efficiency rates in the range of 16.0% to 16.5%. The highest efficiency level achieved with solar cells produced by JA Solar to date was 17.70%. In terms of wafer thickness, JA Solar is capable of processing silicon wafers that are as thin as 180 microns.

JA Solar currently purchases a large amount of its wafer supplies from Jinglong Group, which is owned by the shareholders of its largest shareholder, Jinglong BVI. Jinglong Group is the largest producer and supplier of monocrystalline wafers in China with more than ten years’ operating history in the silicon processing business. Recently, JASO also entered into supply agreements with wafer manufacturers ReneSola, M. Setek, and Shunda Semiconductor.

Trends and Forces

High production and low installation levels have led to a rise in inventory and a drop in prices

Higher inventory levels in the second half of 2009 have the potential of leading to declining module prices.^[6] The rise in worldwide production was in anticipation of government subsidies in Spain, which were cut in the second half of 2009. Spain accounted for 50% of worldwide installations in 2008, and one out of two solar panels produced in 2009 is expected to remain in inventory through the end of the year as a result. Since the beginning of 2009, prices have fallen 40% due to higher inventory levels and less installations.^[7] Despite lower prices, sales of solar panels depend heavily on government subsidies. Due to the economic recession beginning in 2007, many of these government subsidies have been eliminated or severely cut.^[8]

Silicon ink solar cells have the potential of being the next wave in efficient solar power

In September 2009, Ja Solar announced that it is joining Innovalight, a solar technology producer, to commercialize Innovalight's silicon ink-based solar cells..^[9] Unlike traditional solar cells, the ink-based are "printable" and cheaper to manufacture. In addition, the ink-based solar cells have an 18% conversion rate, which is a conversion comparable to the most efficient non-ink-based solar panels. Ja Solar plans on converting many of its existing plants to manufacture ink-based solar cells.^[10] Ja Solar plans to sell the ink-based solar panels beginning in 2010.^[11]

JA Solar cuts Production amid Weak Demand for Solar Cells, Looks to Chinese Government for Subsidies

In order to keep up with the demand for alternative forms of energy, solar cell manufactures increased production significantly in the June and July of 2008.^[12] In the second half of 2008, solar cells were a more attractive energy investment to volatile oil, gas, and coal prices, which had risen up to 200% in the first seven months of 2008.^[13] Yet, when consumers started to buy less gasoline and power producers started to buy less coal, the prices of both energy sources plummeted. In November 2008, JA Solar cut its expected 2008 earnings 20% amid lower gasoline and coal prices in addition to weak demand for energy.^[14] Since customers have delayed orders or canceled them, JA Solar has a large inventory of solar cells that were produced when orders were increasing in the first half of 2008.^[15] Over-supply and declining demand for solar cells have pushed prices down 20% and the company’s expected gross margin down 14% to 16% in the second half of 2008.^[16] Additionally, JA Solar posted a one-time loss of $107.3 million in the third quarter of 2008 due to investments with Lehman Brothers.^[17] With less money coming in from sales of solar cells and the investment loss at Lehman, third quarter net loss was $21 million. In the second quarter of 2008, JA Solar had a net profit of $24 million.^[18] Reduced prices, weak demand, and losses due to investments in Lehman have forced to cut production costs in order to boost profit. By November 2008, half of JA Solar’s production lines had been closed down.^[19]

Subsidies from the Chinese Government's Economic stimulus package have the potential to improve the profitability of producing and selling solar cells for Chinese solar companies like Ja Solar.^[20] In June 2009, the government outlined its plans for China's first national solar subsidy program. In the plan, Chinese solar companies have to install a minimum of 50 KW to receive the $2.93 per watt subsidy for solar energy.^[21] $1.45 billion has been slated for the subsidy, which is enough to supply an additional 500 megawatts of energy.^[22] While the opportunity to receive government subsidies is available to over 50 solar companies operating in China, analyst predict that the government has the potential of giving 95% of the subsidies to the top ten solar producers including Ja Solar, Suntech Power Holdings (STP), Solarfun Power Holdings (SOLF), ReneSola (SOL), and YINGLI GREEN ENERGY HLDG CO (YGE).^[23]

In addition to subsidies from the Chinese government, Jiangsu province has developed plans for creating a 400 MWp solar power system by 2011.^[24] In the plans, the province outlined its goals for building a roof power generation project of 260 MWp, an integrated power generation project of 10 MWp, and a ground power generation project of 150 MWp.^[25] As of July 2009, the Jiangsu province had alloted subisidies for Ja Solar to build 20 MW by 2011.^[26] According the plan released in July 2009, the province's goal is to create a solar industry that is economically competitive with cheaper forms of electrical generation. To reduce the industry's high operating costs, the Jiangsu province's plan has the potential of including subsidies for research and development departments.^[27] Jiangsu's planned solar subsidies have the potential of benefiting solar companies that operate in the province like Ja solar, Solarfun Power Holdings (SOLF), Suntech Power Holdings (STP), Trina Solar (TSL), and China Sunergy (CSUN).

On the conference call for first quarter 2009, Ja Solar management reported revenues that were 76% lower when compared to the same quarter in 2008.^[28] In 2009, Ja Solar has become increasingly dependent on domestic sales in China. Of Ja Solar's $34 million in sales, 77% came from sales in China.^[29] In the the fourth quarter of 2008, sales in China accounted for 60% of total revenues.^[30]

As profit margins shrink, Chinese solar has the potential of focusing less on earnings in the second half of 2009

In the second quarter of 2009, revenue was $88 million, which was a 160% increase sequentially but a year-over-year decline of 51%.^[31] Gross profit in the second quarter of 2009 was 23.3% lower than gross profit for the same quarter in 2008.^[32] For Ja Solar, operating expenses have increased dramatically in 2009; total operating expenses in the second quarter of 2009 were $26.0 million, compared with $10.6 million in the second quarter of 2008 and $7.4 million in the first quarter of 2009.^[33] According to an analyst report from Barclay's Capital, profitability has the potential of remaining a challenge for Chinese solar companies for the rest of 2009 at least.^[34] According the report, Chinese solar companies have the potential of cutting the prices of their solar panels even more as demand continues to decline.^[35] As a result, many chinese solar companies have stopped concentrating on profitability and have begun offering cheaper contracts to gain more market share.^[36]

Ja Solar to power BP Solar in 2009

In February 2009, Ja Solar and BP Solar International formed a deal in which Ja Solar will supply BP with 175MW of monocrystailline and polycrystalline solar cells.^[37] The deal will supply BP Solar initially with 175MW of solar cells in 2009, but the deal could reach as much as 360MW over the year.^[38] For 2009, Ja Solar has orders for 80% of its projected volumes.^[39]

Investors Worried about Future of European Solar, but Optimistic about Obama

During the second half of 2008, banks and media companies downgraded many publicly traded solar companies. Despite Ja Solar's 150% revenue increase in the third quarter of 2008, analysts were worried that cheaper gas prices, tighter credit will have long term negative effects on solar energy companies.^[40] In addition, many European Governments are starting to cut back subsidy programs for alternative energies. Analysts at Hapoalim Securities believe that, as Spain and Germany cut Government investments in solar technology, market growth for Solar installations could be -2.5% in 2009.^[41] Close to 14% of Ja Solar’s 2007 revenue came from European countries like Sweden, Germany and Spain.

However, the new Obama administration will increase United States programs for alternative energy, possibly making the United States the biggest market for solar installations. By improving current tax credits for alternative energy companies, the United States could surpass Spain and Germany as the biggest market for solar technology.^[42] However, Ja Solar sells about 84% of its products in China and is more indirectly exposed to increases in solar investment by the United States.

JA Solar Keeps a Steady Silicon Supply to Protect Itself against Shortages

Recently, JA Solar has secured large supply deals with major silicon providers, in order to insure that it will have enough of the necessary materials to continue to grow without seeing costs rise. Examples include:

• A December 2007 deal with ReneSola to provide 660MW worth of silicon wafers to JASO from 2008 through 2013^[43].
• A revised contract with M. Setek to provide 1,200,000 wafers per month from January '08 through June '08, 3,000,000 wafers per month from July '08 through June '09, and 5,000,000 wafers per month thereafter until the end of 2011 - all for $100 million. JASO was able to negotiate wafer numbers up significantly; the original deal had M. Setek delivering 500,000 wafers per month from January '08 through June '08, 1,500,000 wafers per month from July '08 through June '09, and 3,000,000 wafers per month thereafter - still for $100 million^[44].
• A $46.4 million dollar contract made in September of 2007 with Shunda Semiconductor for up to 1.2 gigawatts worth of monosilicon wafers, delivered for 41 months^[45].

JASO uses silicon for the majority of its products, as do most solar power companies; currently, there is a worldwide silicon shortage. This shortage has been caused by a lack of silicon refining capacity. In the past, companies like MEMC Electronic Materials (WFR) produced silicon wafers for the semiconductor industry. Now, with the advent of solar power and its rapid growth, demand for silicon has increased greatly, leading to its undersupply as production capacity is not enough to meet current demand. This undersupply has led to rising prices for solar equipment which in turn raises the price of solar power compared to other clean energy production technologies such as wind and ethanol. Furthermore, higher silicon prices mean higher production costs for solar companies - and lower margins. By securing low-priced silicon supplies for the next few years, JA Solar hopes to shelter itself from the silicon price storm, until refining capacity expands to meet demand.

Neither the Efficiency nor the Cost of JASO's Cells are Remarkable for the Emerging Solar Industry

Despite producing monocrystalline solar cells, which tend to have higher efficiencies than multicrystalline cells, JASO's best product has a maximum production efficiency of 17.7%^[46]. JASO produces less efficient cells than major competitors like SunPower (22%^[47]), Suntech Power Holdings (18%^[48]), and Kyocera (18.5%^[49]). Even with lower production costs from using low-wage Chinese labor, JASO's 3Q07 manufacturing cost of about $2.37/watt^[50] is not as low as some competitors like First Solar, with a cost of $1.40/watt^[51]. Solar panel efficiency is important because Oil and gas prices have trended upwards over the past several years. As rising oil and gas prices lead to more expensive commercial electricity, consumers may start to demand new, cheaper sources of power. Solar power is currently less efficient than other energy sources, even wind. Sunlight, however, is available in massive quantities for half the day, and is free, unlike oil or coal. For these reasons, when oil and gas prices rise, solar power becomes a more viable alternative, despite the current level of inefficiency. Concurrently, as solar power's efficiency rises, it becomes more competitive with oil and gas. The solar industry's R&D focus is on increasing this efficiency while minimizing the use of inputs like silicon. If solar companies can develop technology that allows more electricity to be produced with thinner PV cells, for less money, then solar power will become more competitive.

Government Support for Renewable Energy is Vital to the Growth of the Solar Industry...and JA Solar

Governments worldwide have implemented legislation to encourage alternative energy production, due to political pressure from public concerns about climate change and energy independence. Examples include:

• California's mandate that 25% of electricity come from clean sources by 2020 and 75% by 2050
• California's One Million Solar Homes initiative that gives subsidies to developers to build fully solar powered homes
• The European Union's stated desire to get 22% of its energy from clean sources by 2010
• China's Renewable Energy Law aiming to raise the total percentage of renewable energy used in the country to 10% by 2020

Emissions caps and clean energy mandates that are supported by subsidies and tax cuts make solar energy relatively cheaper. This means that corporations and utilities companies may turn to clean energy sources to generate electricity for manufacturing facilities and power plants, directly benefiting solar power companies like JA Solar. Without government support, however, solar companies would have difficulty vending their products, as solar energy is currently much less cost effective than coal or natural gas.

Competition and Market Share

JA Solar only recently emerged as a major player in the solar market, after being formed in 2005 and going public in 2007. The company produces monosilicon PV cells, which are more expensive to produce than polysilicon PV cells, but tend to have higher efficiencies - though JA Solar's cells still have lower efficiencies than many others. Other competitors, with 2005 market shares^[52], include:

• SunPower (SPWR) (insignificant in 2005) - One of the fastest growing solar companies, with one of the most efficient cells around
• Sharp Electronics (24%) - The largest photovoltaic cell manufacturer in the world
• Suntech Power Holdings (4%) - A Chinese photovoltaic cell company that is muscling its way into world solar markets
• Solarfun Power Holdings (insignificant in 2005) - Another Chinese PV company that operates 90% in Europe and makes most of its money by selling modules, rather than individual cells.
• Evergreen Solar (insignificant in 2005) - A solar company that produces string ribbon PV cells and operates at all production levels from silicon wafer to power system.
• Kyocera (8%) - A Japanese electronics company that is also a major manufacturer of solar cells
• Q-Cells (9%) - A privately owned, German solar manufacturer
• First Solar (insignificant in 2005) - A thin cell solar panel manufacturer that uses cadmium telluride instead of silicon for its cells.
• BP (5%), Mitsubishi (6%), and Sanyo (7%) - Not primarily photovoltaic cell manufacturers, but heavy market competitors nonetheless.
• EMCORE (insignificant in 2005) - A Concentrated Photovoltaic System manufacturer that uses Gallium arsenide PV cells and got its start in the solar business making power cells for satellites.
• Energy Conversion Devices - This company uses amorphous thin-film silicon in its ultra-thin, albeit low-efficiency solar cells.

Notes

1. ↑ http://jasolar.com/Web/products-en.asp
2. ↑ JASO Q3 2007 Earnings Call Transcript, Page 2, http://seekingalpha.com/article/53700-ja-solar-holdings-co-ltd-q3-2007-earnings-call-transcript?page=2
3. ↑ SunPower's New Solar Panel Is 22% Efficient; http://www.renewableenergyaccess.com/rea/news/story?id=46286
4. ↑ 2006 First Solar Annual Report, Item 1 (Pg. 3)
5. ↑ JA Solar Presentation for Lehman Brothers Global Technology Conference, http://library.corporate-ir.net/library/20/208/208005/items/272581/JASOPresentation.pdf
6. ↑ Market Place: Solar industry seeing a big glut, August 2009
7. ↑ Market Place: Solar industry seeing a big glut, August 2009
8. ↑ Market Place: Solar industry seeing a big glut, August 2009
9. ↑ Engadget.com: JA Solar and Innovalight team up to commercialize 'silicon ink' solar cells, September 2009
10. ↑ Engadget.com: JA Solar and Innovalight team up to commercialize 'silicon ink' solar cells, September 2009
11. ↑ Engadget.com: JA Solar and Innovalight team up to commercialize 'silicon ink' solar cells, September 2009
12. ↑ Reuters.com: JA Solar cuts forecast, sees solar "panic", November 2008
13. ↑ Reuters.com: JA Solar cuts forecast, sees solar "panic", November 2008
14. ↑ Reuters.com: JA Solar cuts forecast, sees solar "panic", November 2008
15. ↑ Seeking Alpha: JA Solar Blames Lehman for its Q3 losses, November 2008
16. ↑ Reuters.com: JA Solar cuts forecast, sees solar "panic", November 2008
17. ↑ Reuters.com: JA Solar cuts forecast, sees solar "panic", November 2008
18. ↑ Seeking Alpha: JA Solar Blames Lehman for its Q3 losses, November 2008
19. ↑ Seeking Alpha: China Solar Companies Slowing, November 2008
20. ↑ investerms.com: Will China’s Solar Subsidies Meet Expectations?, April 2009
21. ↑ China's First Round of Solar Project Applications, June 2009
22. ↑ China's First Round of Solar Project Applications, June 2009
23. ↑ China's First Round of Solar Project Applications, June 2009
24. ↑ Tradingmarkets.com: CHINA'S JIANGSU PROVINCE TO BUILD 400MWP PV FACILITIES BY 2011, July 2009
25. ↑ Tradingmarkets.com: CHINA'S JIANGSU PROVINCE TO BUILD 400MWP PV FACILITIES BY 2011, July 2009
26. ↑ Tradingmarkets.com: CHINA'S JIANGSU PROVINCE TO BUILD 400MWP PV FACILITIES BY 2011, July 2009
27. ↑ Tradingmarkets.com: CHINA'S JIANGSU PROVINCE TO BUILD 400MWP PV FACILITIES BY 2011, July 2009
28. ↑ Motley Fool : What's missing at Ja Soar
29. ↑ Motley Fool : What's missing at Ja Soar
30. ↑ Motley Fool : What's missing at Ja Soar
31. ↑ WSJ: Ja Solar Announces 2Q results, August 2009
32. ↑ WSJ: Ja Solar Announces 2Q results, August 2009
33. ↑ WSJ: Ja Solar Announces 2Q results, August 2009
34. ↑ Seeking Alpha: Dark Skies Ahead for Solar Sector, August 2009
35. ↑ Seeking Alpha: Dark Skies Ahead for Solar Sector, August 2009
36. ↑ Seeking Alpha: Dark Skies Ahead for Solar Sector, August 2009
37. ↑ Green Stocks Central: JA Solar (JASO) Signs Supply Agreement With BP Solar Intl, March 2009
38. ↑ Green Stocks Central: JA Solar (JASO) Signs Supply Agreement With BP Solar Intl, March 2009
39. ↑ Fool.com: JA Solar Sucks Wind, March 2009
40. ↑ JA Solar: News Release
41. ↑ Barrons.com: Sunset, Sunrise: Solar Stocks Stage Giant Rebound
42. ↑ Barrons.com: Solar: Can U.S. Upside Trump European Slowdown?
43. ↑ AOL Money & Finance: News, "JA Solar Inks New Wafer Supply Agreement With ReneSola", December 18th, 2007, http://money.aol.com/news/articles/_a/ja-solar-inks-new-wafer-supply-agreement/n20071218082709990004
44. ↑ Fabtech.org, "JA Solar, M.Setek restructure solar-wafer deal, cause jaws to drop", June 12th, 2007, http://www.fabtech.org/content/view/5406/121/
45. ↑ Cleantech.com, "China's JA Solar, Shunda in wafer supply deal", September 10th, 2007, http://media.cleantech.com/1755/chinas-ja-solar-shunda-in-wafer-supply-
46. ↑ http://jasolar.com/Web/products-en.asp
47. ↑ SunPower's New Solar Panel Is 22% Efficient; http://www.renewableenergyaccess.com/rea/news/story?id=46286
48. ↑ Forbes - Sun King; http://www.forbes.com/free_forbes/2006/0327/062.html
49. ↑ Kyocera - Solar Timeline; http://kyocerasolar.com/about/timeline.html
50. ↑ JASO Q3 2007 Earnings Call Transcript, Page 2, http://seekingalpha.com/article/53700-ja-solar-holdings-co-ltd-q3-2007-earnings-call-transcript?page=2
51. ↑ 2006 First Solar Annual Report, Item 1 (Pg. 3)
52. ↑ CIBC Initiating Coverage, SOLF, January 29th, 2007
53. ↑ ^{53.0 53.1} [http://www.renewableenergyaccess.com/rea/news/story?id=46286
54. ↑ Forbes - Sun King; SunPower's New Solar Panel Is 22% Efficient
55. ↑ SharpUSA Product Brochure
56. ↑ Kyocera - Solar Timeline
57. ↑ Solarfun Website
58. ↑ http://jasolar.com/Web/products-en.asp
59. ↑ TSL 20-F 2007 Pg. 7
60. ↑ ESLR 2007 Earnings Call Transcript, Page 1
61. ↑ EMCORE.com: Terrestrial Solar Cells and Receivers"
62. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
63. ↑ DSTI 10-k 2007 Pg 1
64. ↑ Ascent First Quarter 2008 10-Q Pg 23