Subsidies drive solar energy growth

- When it comes to plentiful resources, it's hard to beat sunlight. The sun is always shining. It might not always shine in your back door, but it's shining in somebody's, every hour of the day, every day of the year.

That's good news for companies like Jinko Solar Holdings JKS, which makes solar energy products.

They don't ever have to worry about their main resource suddenly running out of supply. And let's face it: If the sun ever does stop shining, chances are nobody will be around to notice, anyway.

For now, heavy demand for solar energy products has turned the sector into one of Wall Street's brightest. The 25 stocks in IBD's solar energy group have risen 38 over the past five months.

That group features a number of Chinese firms. In addition to Jinko Solar, the list includes LDK Solar LDK, Trina Solar TSL, Yingli Green Energy YGE and Solarfun Power Holdings SOLF.

Buoyed by global energy demand and initiatives by some government bodies to increase alternative energy sources, solar stocks rank among the top performers of 2010 with several leaders recently surging to new highs.

Jinko Solar, which went public at $11 a share on May 14, is among them. Its shares have more than tripled since the IPO. They touched a high of 41.75 on November 4.

The company makes silicon-based solar wafers, cells and modules. The gear is designed to convert sunlight to electricity. Demand for such products has surged of late.

"What's been helping Jinko and the industry in general is just tremendous growth in demand," analyst Gary Hsueh of Oppenheimer & Co. recently told IBD.

That growth was on display during Jinko's third-quarter earnings call. On November 1, the company reported net income of $38.8 million, or $1.75 per American Depositary Receipt ADR. That was up from 9 cents per ADR the prior year and well above the 96 cents expected by analysts.

Revenue more than tripled to $215 million, well above estimates for $153.3 million. Jinko reported solar product shipments of 134.8 megawatts MW, up from 99.9 MW the prior quarter and 64 MW the previous year. It also exceeded guidance of 100 MW to 110 MW.

Jinko's shares surged 17 on the news.

Among other things, the company has seen a nice payoff from its ongoing move to sell finished solar modules rather than just parts. The share of modules as a percentage of overall shipments rose to 69 during the third quarter from 54 the previous quarter.

"We continued our transition from a wafer manufacturer to an integrated module producer," Chief Executive Kangping Chen said during a conference call. "In the third quarter we have significantly lowered our average non-silicon costs throughout the value chain ahead of schedule."

Meanwhile, the bottom line has gotten a boost from lower costs. Gross margins were a record 33.5 during the quarter, up from 26.9 the prior quarter and 15.8 the prior year. Jinko cut non-silicon costs to 77 cents a watt vs. 83 cents the previous quarter.

"Through continuous improvements in operation efficiency and technology advancements, we have significantly lowered our non-silicon cost ahead of our cost reduction road map throughout the value chain," Chief Financial Officer Longgen Zhang said in a statement.

Jinko also raised its fourth-quarter revenue forecast to a range of $210 million to $220 million from earlier guidance of $162.4 million. It expects Q4 solar product shipments of 130 to 140 MW.

Analysts polled by Thomson Reuters expect fourth-quarter earnings to double from the prior year to $1.08 per ADR.

"We have secured additional solar module contracts for 2011 with both existing and new leading solar companies across a number of geographical regions," CEO Chen said in a statement. "We expect to continue our strong momentum in the fourth quarter."

Jinko should get a lift from Europe, where customers are rushing to get solar projects established before expected subsidy cuts. That's especially true in Germany, which consumes more than half the world's supply of solar modules. Italy and France also have seen heavy demand.

"A lot of projects are trying to skirt underneath the 2010 feed-in tariff schedules as opposed to 2011 feed-in tariffs," analyst Hsueh said.- CEO Chen said Jinko has already secured solar module contracts of more than 400 MW for 2011. It announced several contracts in October.

Analysts expect Jinko to post a triple-digit earnings gain during the first quarter of 2011. Beyond that, the financial outlook is sketchier as Jinko runs up against lower demand.

The company is seen reporting lower earnings the last three quarters of 2011 and all of 2012.