Refining China / South East Asia Strategy
Two New Positions: Pinduoduo ($PDD) & JinkoSolar ($JKS)
Summary:
Refining my Asia exposure: 20% China, 15% South East Asia
Reducing Alibaba and Sea Ltd in favor of Pinduoduo
New Position in JinkoSolar
Disclaimer: This writeup is not investment advice. I am sharing my research insights and positioning on individual companies for informational and entertainment purposes. In particular, I do not take into account any readers personal financial situation. Please do your own research.
Portfolio Update - Asia Exposure
Overall, my current exposure to Chinese and South East Asian Companies is 35%. My exposure to China is 20%, and as a result my exposure to South East Asia is 15%. Below is the full list of my current holdings ordered by position size:
Jardine Matheson (10%)
Sea Limited (5%)
Alibaba (4%)
Pinduoduo (4%)
Finvolution (4%)
Jinkosolar (4%)
YY Inc. (2%)
JD.com (2%)
Refining Chinese E-Commerce Exposure: Adding Pinduoduo
Following somewhat disappointing revenue growth revealed in Alibaba’s Q4 report, I have decided to diversify my holdings in Chinese E-commerce names. In Q4, Alibaba’s revenue grew only 5% year over year, down from 10% growth in the previous quarter. This negative change raised once again concerns over e-commerce competition in China, where in particular Pinduoduo has been taken share. Moreover, Alibaba’s Aliexpress competes with Pinduoduo’s Temu in the rest of the word.
I have now 10% exposure to Chinese ecommerce names: 4% in Alibaba, 4% in Pinduoduo, and 2% in JD.com. This refined positioning has the advantage that I can be rather indifferent who takes or successfully defends market share in China. Overall, JD.com and Tmall provide a superior customer experience and logistics. However, Pinduoduo has been successfully taking share, especially in rural Chinese areas.
Pinduoduo is not as (dirt) cheap as Alibaba and JD.com. It is currently trading at about 17x forward earnings, which sounds pricey at a first glance given how cheap Chinese stocks trade in general. However, the picture quickly changes when taking into account growth. In Q3 2023, PDD grew revenues 94%! Much of this extraordinary growth is coming from its Temu app that has taken global app charts by storm. In essence, PDD is replicating its Chinese success model to the rest of the world with Temu.
Overall, I feel pretty comfortable about my 10% exposure to Chinese ecommerce names. The current valuations of the companies allow for a pretty cheap starting point to benefit from the continued growth of the Chinese consumer. Moreover, Aliexpress and Temu can be seen as excellent “mouse traps” to export cheap Chinese goods into the rest of the word. Both companies well compete with Amazon (in the countries where Amazon is offered at all). In the end many of the products offered on Amazon are produced in China. Aliexpress and Temu provide a more direct way for these products to be sold to the rest of the world, similar to a new silk road.
In addition, Alibaba is more than a pure play e-commerce company. It provides diversification through its media assets and in particular a lot of promise through its cloud business, as cloud computing in China is underdeveloped compared to the West.
New Position: JinkoSolar
For the remaining 10% of my China portfolio, I have a 4% position in Finvolution and a 2% Position in YY. Moreover, I have used proceeds from the reduction in Alibaba and Sea Ltd to build a new 4% position in JinkoSolar.
I have long been intrigued by the potential of solar energy. In a world that is committed to achieving net zero carbon emissions, there is almost no way around solar energy. However, for me to invest, it must also make economically sense. Over the past decades solar energy production has become increasingly cost effective:
Of course every long term prediction should be taken with a grain of salt, but by many current projections, solar energy production will be the single biggest winner:
In particular, solar is also the single most promising renewable energy source:
All these projects suggest that solar energy related stocks may prove a fertile hunting ground when it comes to searching for stocks with substantial long term potential.
In particular 2023 has turned out a disastrous year for solar stocks. High interest rates have had a disadvantageous impact on investments in this area in the U.S. and several former investor darlings such as Enphase have suffered substantial losses. By the end of October 2023, Enphase was down 69% year to date. Meanwhile Enphase is up almost 70% from the lows:
While interest rates can have temporary impacts on the adaption of solar energy, I do not anticipate a change in the long term trajectory. If solar energy production keeps becoming more cost effective, the long term growth potential of the sector is enormous.
Why JinkoSolar?
Similar to Enphase, JinkoSolar is currently down about two thirds from the recent high. However, while the revenue of Enphase was down 58% year over year in the most recent quarter, the revenue of Jinkosolar was up 60%.
Jinkosolar is one of the world’s five largest solar module manufacturers. Importantly, it has also built a highly vertically integrated company as shown by the following overview from S&P Global:
A Global Player with Limited Exposure to US-China Tensions
Only a fraction of Jinkosolar’s current revenue is in the US, which limits its exposure to any political tensions. Importantly, JinkoSolar has a production facility in the US, which should further limit political risks, while maintaining maximum upside from the growth of solar energy in the US:
“To help meet U.S. demand, we’ve launched one of the world’s most advanced, fully automated module assembly facilities in Jacksonville, Florida. Locating our first factory in the United States puts us even closer to our key U.S. and Canadian customers, allows us to provide tariff-free modules and better, more efficient local service. Over 300 American workers are manufacturing and delivering a full lineup of our latest modules.” JinkoSolar.us
Technology Leadership
According to this recent article, JinkoSolar was even on track to become the world’s no 1 module supplier in 2023. The article highlighted Jinko’s transition to n-type cells:
Leading the Transition from P-Type vs. N-Type Silicon
The shift from p-type to n-type silicon in the manufacturing of solar panels is a significant development in the solar energy industry, driven by the ongoing pursuit of higher efficiency and better performance. To understand this transition and its implications, let's first clarify what p-type and n-type silicon means, and then delve into why the industry is moving towards n-type silicon.
Silicon, the primary material used in most solar cells, can be doped with other elements to alter its electrical properties, creating either p-type or n-type semiconductors.
P-type (Positive-type) Silicon: This is doped with elements like boron, which create "holes" or positive charge carriers. It has been the more commonly used material in solar cells due to its initial cost-effectiveness and simpler manufacturing process.
N-type (Negative-type) Silicon: This is doped with elements like phosphorus, adding extra electrons or negative charge carriers. N-type silicon is considered to offer several performance advantages over p-type silicon.
Why the Shift to N-Type Silicon?
1. Higher Efficiency: N-type silicon has a higher potential for conversion efficiency, meaning it can convert more sunlight into electricity compared to p-type silicon. This is partly due to its lower susceptibility to certain types of defects that can recombine (cancel out) the electrons and holes that carry electric current.
2. Less Degradation: N-type cells are less prone to light-induced degradation (LID) and potential-induced degradation (PID), common issues that reduce the performance and lifespan of solar panels made with p-type cells. This means n-type solar panels can maintain their efficiency over a longer period.
3. Better Performance in High Temperatures: N-type silicon typically performs better than p-type in high-temperature environments, maintaining higher efficiency when the temperature rises.
For the average person or potential solar energy user, the shift from p-type to n-type silicon means: 1) More Power Output: Solar panels using n-type silicon can potentially generate more electricity from the same amount of sunlight than those using p-type silicon, making them more efficient. 2) Longer Lifespan: With reduced degradation, n-type solar panels can offer a longer service life, enhancing the return on investment over time. 3) Better Performance in Varied Conditions: These panels can perform better in a wider range of environmental conditions, including high temperatures, which makes them suitable for more geographic locations.
Licensing N-Type Technology to Competitors
In a press release from February 6th, 2024, JinkoSolar informed that it had signed a TOPCon patent license agreement with one of the world's top five solar cell companies ("Licensee"), granting rights to certain of its N-type TOPCon related patents to Licensee for a fee, allowing Licensee to use certain JinkoSolar's patented TOPCon technologies in its relevant TOPCon products. This agreement follows the agreement signed with one of the world's top ten solar module companies as announced on January 5, 2024.
The two licensing agreements are directly tied to Jinkosolar’s leadership in n-type technology. TOPCon, which stands for Tunnel Oxide Passivated Contact, is a type of advanced solar cell technology that is part of the broader family of n-type silicon solar cells. This technology is aimed at increasing the efficiency of solar cells by reducing recombination losses and enhancing the electrical properties of the solar cell's surface.
The fact that JinkoSolar is licensing its N-type TOPCon related patents to another leading solar cell company indicates several key points:
Innovation and Leadership: JinkoSolar is positioning itself as a leader in the n-type technology space, specifically in TOPCon technology. Having a large number of granted N-type TOPCon patents showcases their commitment to research and development and their role in advancing solar cell technology.
Industry Adoption: The licensing agreement with a top solar cell company signifies that TOPCon technology is gaining traction within the industry. It shows that other major players are interested in adopting this advanced technology for their products, recognizing its potential to improve efficiency and performance.
Collaboration for Growth: By licensing its technology, JinkoSolar is fostering a collaborative environment within the solar industry. This approach not only benefits JinkoSolar through licensing fees but also helps the industry move forward by adopting more efficient technologies, which can lead to better products in the market.
Global Impact: JinkoSolar's emphasis on enhancing its patent protection system and encouraging respect for technology underscores its vision for a mature PV industry. This approach aims to ensure that advancements in technology lead to the global availability of more efficient and reliable solar energy products.
Valuation - Is JinkoSolar Available for an Attractive Price?
Judging by the long term potential of solar energy and JinkoSolar’s strong positioning within the sector thanks to its vertical integration and technology leadership, one might expect the company would trade at a rather high valuation. However, this is absolutely not the case.
During the last four quarters, Jinkosolar generated GAAP net income of $572 million. At the current market capitalization of $1.35 billion, this puts the company’s trailing 12 month PE ratio at 2.36. Such a low valuation is especially surprising given the strong growth demonstrated. Total revenues for the last quarter were $4.36b, up 61% year over year.
Why Is the Valuation so Low?
Despite the long term promise of solar energy, it is clear that the sector is currently avoided, if not hated by investors. If we add the fact that JinkoSolar is a Chinese company, we have a perfect storm of a Chinese company in a hated sector. As a rather contrarian with a long term investing horizon, I am not bothered by the current fads of the market, so I am using the opportunity to gain exposure to a Chinese export hit at a rock bottom valuation.
I have read some investors are concerned about the capital structure. The slide from the recent investor presentation provides an overview:
Total debt is at $4.2 billion, however, Jinkosolar also had $1.9b in cash, which results in net debt of $2.3 billion. To me this level of debt sounds manageable given Jinkosolar’s net income over the previous 12 months.
Share Repurchase Program
As many other Chinese companies these days, JinkoSolar has a substantial share repurchase program of $200 million in place. At the current market capitalization of only $1.35b, JinkoSolar could buy back 15% of outstanding shares with the current buyback program.
On February 5, 2024, JinkoSolar informed in a press release that the company had repurchased 400,000 American depositary shares in an aggregate amount of approximately US$11.8 million in the open market between December 20, 2023 and February 2, 2024.
Closing Thoughts
Jinkosolar is almost too cheap to be true, but that could be said of many Chinese companies these days. These days, Mr. Market does not like solar stocks, he does not like Chinese stocks, and he likely also does not like JinkoSolar’s level of debt.
I am happy to once again take a contrarian position. As a part of a diversified portfolio, to me JinkoSolar seems like an ideal company to gain exposure to the growth of the solar energy sector. Frankly, a P/E ratio of 20 or higher does not seem outlandish high for such a strong company, once Chinese stocks and the solar sector are less out of favor.