We recently upgraded our recommendation for JA Solar Holdings Company Ltd. (JASO) from Neutral to Outperform.
Leading pure-play solar cell company JA Solar caters to a geographically-diverse pan-continental customer base, which spans Germany, Italy, the U.S., Spain, India, Korea, China and Japan. The company also effectively uses its location advantage in China, with Chinese low-cost solar module manufacturers contributing a substantial portion of its revenue.
JA Solar is based at Ningjin in the Hebei province of the People’s Republic of China and manufactures high-performance solar cells. The company is a recent start-up entity, established in May 2005, which commenced manufacturing operations in April 2006. JA Solar was incorporated in July 2006 followed by its initial public offering in February, 2007.
JA Solar’s principal customers are solar module manufacturers, who assemble and integrate its products into modules and systems. The company follows a strategy of long-term commitments compared to its vendors and suppliers. This has resulted in the entire output of JA Solar being sold at pre-agreed prices.
As a result, the company witnessed steady improvement in its gross margins, which stood at 23.1% in the second quarter of 2010, up from 20.5% in the fourth quarter of 2009. At the same time, it achieved record shipments of 311 MW in the second quarter. In the prior quarter, shipments were only 272 MW, representing a sequential growth of 14%.
With a steadfast focus on R&D, JA Solar is consistently improving upon the conversion efficiency of its solar cells. The company is on a fast track with the commercial launch of its high-efficiency “SECIUM” solar cells. JA Solar has already begun a successful pilot production of “SECIUM” solar cells and will begin commercial production in the final phase of 2010. We expect SECIUM to be a margin booster for the company and will act as a catalyst to gain market share in the fiercely competitive solar space.
In contrast to its peers, who finance their capital expansion through earnings dilutive issuances, JA Solar meets its capital obligations mainly through low cost borrowings. The company has a strong balance sheet with a low long-term debt-to-capitalization of 30.9% at the end of the first half of 2010 (Zacks Industry Average 98.9%).
As of June 30, 2010, the company had approximately $324.6 million in cash and cash equivalents. JA Solar’s debt included $228.2 million of its 4.5% senior convertible notes (maturing May 2013) and $174 million of long-term bank borrowings.
JA Solar in a prudent move towards value creation and differentiating itself from its peers also provides third-party manufacturing services for its customers. The move comes with the dual benefit of vertical integration and wooing away customers from rivals who want to outsource production to third parties but maintain their own brands.
JA Solar is one of the most cost-efficient solar producers with a geographically diverse customer base, as well as silicon wafer supply agreements in place to cater to its production. Positive factors include ongoing expansion programs, a subsidy program in China, improving operating efficiencies, rising margins and higher conversion efficiency.
In the near-term, the stock is trading at a significant discount in terms of future earnings estimates compared to peers like Canadian Solar Inc. (CSIQ), Trina Solar Ltd. (TSL) and SunPower Corporation (SPWRA). However we believe given the above-mentioned positives, the company should trade at par with its peers if not above them. Thus we upgrade our recommendation to Outperform.
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