As part of its tier-one versus tier-two players thesis, Goldman also judges Solarfun Power ( SOLF) to be a tier-two Chinese module maker set for a more difficult set of circumstances in 2011. Goldman initiated on Solarfun at a hold. The difference between a sell on Jinko and a neutral rating on Solarfun was explained by Goldman in its outlook this way: "We believe Solarfun's tier-two branded and OEM business model might bring more ASP pressure or channel conflict in an over capacity environment. However, due to the continuing vertical integration; SOLF should be able to structurally reduce its cost structure and maintain its gross margin going forward." Jinko Solar, which went public earlier this year and saw its shares almost quadruple in value from the IPO price of $11, was declining between 5% and 7 % on Tuesday, on above average trading volume. Jinko has hit all high marks in its first year as a public company, with volume growth, key customer wins, strong average sales prices and a good cost structure. However, Goldman sees these short-term strengths all being subject to pressure in 2011. Jinko Solar shares had reached a 3-month low of $22 last week, after a meteoric rise to near the $40 mark over the past-three months. Jinko Solar shares were still above the $22 mark after the decline in Tuesday morning, and its recent dive was in line with the widespread selloff in solar as the euro fell. Goldman thinks that Jinko Solar gross margin peaked in the third quarter, and will decline further versus its peers during a downcycle in 2011.
Jinko Solar bulls maintain that the outlook for the Chinese solar company remains solid ahead of 2011, and provides a counterpoint to three factors inherent in the Goldman sell rating: (1) Jinko module volume will disappoint in 2011; (2) its average sales price will decline more rapidly than peers; (3) its cost structure will come under pressure. One Jinko bull, Roth Capital, said Jinko Solar 2011 shipment volume estimates still have upside. Phillip Shen, analyst at Roth, said that when Jinko recently completed a secondary offering of shares, the company had 420 megawatts of volume lined up. Goldman is estimating module shipments of 586 MW in 2011. Roth Capital estimates shipment volume of 630 MW and thinks that's a conservative estimate. Goldman thinks that Jinko factory utilization will fall to 70% in the second half of 2011. Goldman referred to Jinko Solar as a tier-two player among solar module manufacturers, and therefore, argued that Jinko's average sales price will deteriorate more quickly than peer companies in the true top tier. Roth Capital disagrees with the Goldman assessment about ASP weakness, also. "We think that Jinko is tier one-plus, and knocking on the door of the tier one club, and that Jinko is well-positioned to potentially even take share from peers in 2011," said Roth Capital analyst Phillip Shen. The Roth Capital analyst noted that Jinko Solar had among the highest average sale prices in the third quarter -- though it was helped by the strong demand across solar and ability to sell into the spot market, as opposed to long-term contracts with fixed pricing.
"Jinko volumes will be better than expected, ASPs and gross margin not as bad as some think, and the company has one of the best cost structures even if you add polysilicon cost in," the Roth Capital analyst Shen maintained. Jinko's bankability headed into 2011 may be undervalued, and not taking into full account that the company's chief strategy officer, Arturo Herrero, has a long history in the solar industry and deep relationships, having joined Jinko directly from Trina Solar. Even though Goldman has rated Jinko Solar a sell, it has a 12-month price target of $24 on the stock, which was 1% upside from Monday's closing price. -- Written by Eric Rosenbaum from New York.
Eric Rosenbaum. >To follow the writer on Twitter, go to Eric Rosenbaum. >To submit a news tip, send an email to: firstname.lastname@example.org.