NEW YORK ( TheStreet) -- Jinko Solar ( JKS - Get Report) shares are experiencing a big selloff on Tuesday after Goldman Sachs initiated on the Chinese solar stock at a sell citing earnings vulnerability as the solar sector slows in 2011.

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The Goldman analyst wrote in the Jinko sell recommendation, "We believe JKS is a marginal capacity player that entered the branded PV module market with less than two years history.... Jinko has anticipated the demand and price upcycle in 2010, and has announced aggressive expansion plans for 2011E. With a newly acquired customer profile, we expect JKS to face stronger headwinds during an industry downcycle on margin compression and earnings vulnerability."

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.

The primary bearish factors cited by Goldman for the Jinko weakness in 2011 are:
  • Relatively newly acquired customers and weak pricing power forcing the company to cut ASP aggressively, in order to maintain a reasonable utilization rate and cover operating expenses.
  • Relatively stretched balance sheet offering less flexibility to commit to lower-priced sources of wafers; therefore, it might not be able to optimize silicon supply to sustain its gross margin.
  • In summing up its bearish thesis, Goldman argues that these factors suggest Jinko Solar will face margin compression and declining return on equity sooner than its tier-one peers.

    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.

    Roth Capital maintains that Jinko's cost structure will ultimately benefit from more polysilicon production coming online in 2011 and lowering the cost of the solar raw material. A big risk for Jinko is what occurs in the spot market for polysilicon, however with more second and third tier polysilicon producers come online, Jinko's cost structure should not be significantly impacted, Roth argues.

    Goldman sees the spot price for poly declining in 2011, but still estimates that gross margin deterioration from peak third quarter levels will result from spot poly purchasing. Goldman estimates that the silicon cost per watt is expected to be 45 cents in the fourth quarter 2010; 40 cents in the first quarter 2011; and 37 cents in the second half of 2011.

    "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.


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