Ladies and gentlemen, and thank you for standing by, and welcome to Quarter Two 2018 JinkoSolar Holding Company, Ltd Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Sebastian Liu. Thank you sir, please go ahead.

hank you, operator. Thank you, everyone for joining us today for JinkoSolar second quarter 2018 earnings conference call. The company's results were released earlier today and available on the company's IR website at www.jinkosolar.com as well as on the newswire services. We have also provided a supplemental presentation for today's earnings call, which can also be found on IR's website. On the call today from JinkoSolar are Mr. Kangping Chen, Chief Executive Officer; Mr. Haiyun Cao, Chief Financial Officer; Mr. Gener Miao, Head of Global of Sales and Mr. Sebastian Liu, IR Director. Mr. Chen will discuss JinkoSolar's business operations and company's highlights, followed by Mr. Miao who will talk about the sales and marketing. And then Mr. Cao who will take through the financials. We will all be available to answer your questions during the Q&A session that follows. Please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding this and other risks is included in JinkoSolar’s public filings with the Securities and Exchange Commission. JinkoSolar does not assume any obligation to update any forward-looking statements except as required under applicable law. Is it now pleasure to introduce Mr. Chen Kangping, CEO of JinkoSolar. Mr. Chen. ill speak [indiscernible] English. Please go ahead, Mr. Chen.

[Foreign Language] Thank you, Sebastian. Good morning, and good evening to everyone, and thank you for joining us today. [Foreign Language] Market shipment hit 2,794 megawatt during the quarter, an increase of 38.6% sequentially, and a decrease of 3.1% year-over-year. Total revenue was USD 915.9 million, an increase of 32.7% sequentially and a decrease of 23.5% year-over-year. Whereas gross margin decreased to 12% compared with 14.4% at last quarter as a result of declining ASP and more usage of OEM. Net income, however, increased to $15 million, compared with $0.6 million of last quarter.

[Foreign Language] Sebastian Liu Growth during the quarter was strong, and we expect this momentum will continue into the second half of the year, despite the impact from new policies issued by the Chinese governments on May 31, as shipment overseas market are expected to continue growing and account for an increasing proportion. Leverage in our cutting-edge technology, strong global sales network and industry meeting cost structure and confidence in our ability to generate sustainable profits and growth going forward. I also expect our gross margin and bottom line will have further room to increase during the second half of the year.

[Operator Instructions] First, let's take a look at the Chinese market. Approximately 24.5 gigawatts of a solar project were installed in the first half of the year with DG project accounting for roughly half. Whereas these installation numbers were strong also with good percentage of DG. The new policy cast a shadow over the Chinese demand during the second half of the year, the market reacts quickly with [FT] [indiscernible] solar industrial change ratably falling, only to stabilize recently. But we remain optimistic as we believe demand from Top Runner project, Poverty Alleviation project as well as local government subsidies and self-contained DG projects will continue to support the Chinese market, especially in the regions with ample sunlight and high commercial power prices. In addition, with solar cost keeping falling, opportunities for comparative project will continue to pop up.

[Foreign Language] Turning to the U.S. market. We have taken the advantage of our strong brand recognition, cutting-edge products and high-quality local services to continue expanding our presence there, along with our production facility in Florida, which will begin shipment in Q4. Leveraging this difference we plan to fortify our leading position there in utility markets, we're expanding our market share in the residential and commercial segments. And now in emerging market, continued to grow especially in Latin America and Middle East and North Africa. We are focused on securing large long-term orders through our mature sales network, [net expense] a number of market there. We continue to monitor developments in India with regards of the safeguard duty update and as we adjust our strategy there accordingly. We believe, India, which has vast regions with ideal sunlight conditions and large energy demands will maintain the long-term gross momentum of (inaudible) solar sector, despite the short-term impact of Paris. I'll let Gener go over in more detail later. [Foreign Language] On the technology front we continue to locate resources towards application of high-efficiency technology. We're optimizing the cost structure of our products. On the wafers side, we made progress in improving wafer efficiency and reducing both oxygen content and light-induced degradation. Our sales side, we continue to increase our mono PREC cell capacity, which will reach 4.2 gigawatts of annual capacity by the end of the year and continue to invest in N-type technology, especially HOT double sided cell technology. On the margin side, our (inaudible) products of 72 pieces high-efficiency Cheetah Series hit about 400 watts of efficiency where mass production of 775 watts plus has already begun. Technology developments and efficiency improvement and falling cost of raw material allow us to further optimize our cost structure, and provide our clients with competitive and high-efficiency products at cost-effective prices.

[Foreign Language] Turning to the manufacturing capacity, our internal wafer cell and module capacity reached 9 gigawatts, 5 gigawatts and 9 gigawatts, respectively, at the end of the second quarter. But we expect to reach 9.7 gigawatts, 7 gigawatts and 10.8 gigawatts, respectively by end of the year, of which approximately 5.7 gigawatts will be mono wafers and approximately, 4.2 gigawatts will be PERC cells.

[Foreign Language] Where the positive change in China create challenging marketing governments], it has also created opportunities for leading solar companies such as Jinko. On one hand, the new policy will push the industrial upgrading and accelerate industrial consolidation by phasing out outdated capacities and replacing with high-efficiency production. On the other hand, they push solar costs going down making solar competitive and stimulating global demands. Jinko's advanced technology, global sales network and a strong brand name will provide us with huge competitive advantages and allow us to distinguish ourselves from competition. We are now in a good position and will be fully prepared for these opportunities to expand our market share and further consolidate our legal position in the industry.

[Foreign Language] Before turning the call over to Gener, I will quickly over the guidance. Based on the current estimates, total solar market shipments will be in the range of 2.8 to 3 gigawatts for the second -- for the third quarter, and it remains 11.5 to 12 gigawatts for the full year.

Thank you, Sebastian. With that, I will turn over to Gener.

Thank you, Mr. Chen. We generated strong growth during the quarter and it reinforced our leading position in the industry by achieving 2,794 megawatts of solar modules. Despite the headwinds created by the Chinese government, new policies issued on May 31, we remain confident in our ability to continue generating long-term sustainable growth. First, let's look at our geographic distribution of our module shipments. China came in first and emerging markets came in the second, followed by the Asia-Pacific and the European markets. As our technology improved and the cost continued to fall, our competitive advantage in the global (inaudible) industry will only become more announced. We are confident that global demand will continue to grow this year and in the future. China was our largest market in this quarter. During the first half of the year, approximately 24.5 gigawatts of solar were installed in China, of which about half were DG projects. Our focus during the second half of the year will be on the Top Runner projects and then taking advantage of opportunities in self-contained and the local government supported DG projects. While overall, demand from Chinese market has been affected by the new policies, we are still optimistic about the demand during the second half year, especially as local governments introduce more subsidies and more investment opportunities in self-contained DG projects pop up in the region with high commercial energy costs and good sunshine conditions. With the impact of the new policies, the future divestment of DG projects will transition from subsidy drivers to market drivers. Residential markets will also face a short-term impact, but demand will continue to grow, especially in the regions that benefit from local subsidies. In the U.S. market, began to -- the U.S. market began to recover in the second half of…

Thank you, Gener. I would like to walk you through our Q2 results. Total solar module shipments were 2.8 gigawatts, exceeding our Q2 guidance. Total revenue was $916 million, up 33% sequentially. The sequential increase was mainly due to the strong solar module shipments. Gross profit was USD 110 million, up 11% sequentially as a result of an increase in shipment of solar modules. Gross margin was 12% compared to 14.4% in Q1 2018 as a result of the decline of ASP and the increase of OEM volume. Our blended costs including warranty and shipping costs improved to $0.32 per watt compared to $0.324 per watt in Q1. After the China new policy, we expect to continue reducing our blended costs with lower material costs, technology development and the improvement of production operations. The operating expense represented 10.4% of total revenue compared to 11.6% in Q1 2018. EBITDA was $59 million compared to $43 million in Q1. Net income increased to $15 million compared to $0.6 million in Q1 2018. Non-GAAP net income was $15 million, this translates into non-GAAP diluted earnings per ADS of $0.41. Now let's move to the balance sheet. The company has $387 million in cash, cash equivalents and restricted cash compared to $457 million at the end of Q1. The accounts receivables were $1.05 billion compared to $1.02 billion at the end of Q1. Inventories were $890 million compared to $715 million at the end of Q1. The increase of inventory is for the strong demand in the third quarter. The total debt was stable with total amount of $1.4 billion compared to $1.3 billion at the end of Q2. At this moment, we're happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Philip Shen from Roth Capital Partners.

So I think in the last call you guys talked about Q2 margins being stable relative to Q1, and the Q1 margin, I think, was 14-ish percent, and Q2, you guys delivered 12%. What was the cause for that weakness? Were module ASPs in June, what were the -- was the pricing in June low, as a result the expectations did not meet kind of what you guys delivered? And then for Q3 and 4, I know you said in the prepared remarks that you expect an increase, so do you expect that increase to kind of get back to the Q1 level? Or do you think -- because I think on the last earnings call, the Q1 call, you mentioned that margins in Q3 and 4 could be greater than 15%. Is that still the outlook? Or do you expect Q3 and 4 to be more in line with Q1?

Sure. Phillip, this is Charlie. And regarding the gross margin questions, the Q2 gross margins was 12%, which is lower than our original expectations. And I think it's due to the strong solar module shipments. If you look at our guidance for the second quarter, which is, I think, 2.4, 2.5 gigawatts, but we finally delivered 2.8 gigawatts, beating the shipment guidance. But if you look at our capacity, we have only 9 gigawatts annual capacities, which means, for each quarter -- for second quarter, we need to do a lot of OEMs, which increased the [blended] costs and resulted in the lower gross margins. Looking into the third quarter, where I think a lot of positive factors is happening, like the prepared remarks, and we are expecting significant cost reductions after the Chinese new policies. The lower materials and the new process, we are doing a lot of technology improvements. And on top of that our RMB depreciated a lot, roughly 8% to 9% start of June, which is also helpful for the gross margins. And we think we are in a good position after the Chinese new policies, given we have very strong international shipments and we have lots -- have a lot of visibilities for the international sales. And back to the -- we don't give the guidance for the gross margin for the third quarter, but we -- I will still expect the gross margin will improve to over 15%.

Okay, great. That's helpful. Let's shift to pricing. My understanding is you guys have good pricing through the end of this year. First of all, can you confirm what the ASP was in Q2? I think we calculated about $0.35 a watt. And then as for beyond Q4, have you locked in much bookings for Q1 and Q2? Do you expect -- I think last quarter, just about a couple of months ago, you were still -- the bookings were limited in Q1 and Q2. Have they increased? And then finally, I think your ASPs in Q3 and 4 are higher than the market premium, in part because of the contracts. Do you expect your price in Q1 and Q2 to converge to market pricing?

Okay. So this is Gener. First, regarding the pricing in Q2, like the -- what we said just now, the ASP in Q2 is almost no change compared with the Q1. If you look into exact number, it was a low single-digit decline compared with Q1 ASP. And for the booking for the second half, we are still having a very, let's say, fully -- almost a fully booked orders -- order book, mainly [because] demand in global market, not only China and India, but also all the other markets, are still solid. For the ASPs, in second half and also together for nexQ1 and Q2, we believe the market price will -- we are continuing, let's say, stick to the marketplace. However, we are participating lots of forward-looking price, which both Jinko side and our customer side agreed on reasonable number based on forward-looking basis. So for that part we are confident that we will continue to lock in those long-term price.

Okay. Great. One last question about guidance. I Just want to confirm, I think, your implied Q4 guidance is for 4.5 gigawatts. So that's a really large jump from about 3 gigawatts in Q3, can -- and this is much higher than typical seasonality? What's driving this? And what do you expect that geographic shipment mix to be for Q4?

So Phil, this is Gener. For Q4, we are expecting a significant jump, it's really because we believe that the later demand from, because of tariff reasons, from India and also the weak demand of first half in U.S., will start kick in strongly in the Q4. And together, we see a strong European demand for the next -- early next year as well. So adding all these factors together, we are expecting a very strong Q4.

Your next question comes from Scott Chui from Citigroup.

My first question is about the cost of guidance. I remember that last quarter you're guiding $0.24, $0.25 by the end of this year. So after on the policy, and also the recent price decline, you have an updated cost of guidance by the end of this year, and also, what's the affirmation of the policy price? And my second question is about the CapEx. I noticed there is a surge in CapEx in the same quarter, so can you explain more about this and also what is the CapEx guidance for the full year? And...

Hey Scott, we can -- yes, Scott, this is Sebastian. We can answer the first question first, and then, yes, we jump to your last question. Charlie would you please add some color on there?

Yes, so. And for the cost-low demand. I think, starting from this quarter, we decided not to disclose the detailed targets for the cost-low demand, given the consideration of the commercial competition, and it is. And if you look at our peers, there are a lots of companies, have been -- have completed with prior transition. So what I can say is we are incurring comprehensive cost reduction plan, and so the technology upgrades, process improvements, and we are in a good position in terms of the market shares and we can leverage our strong market positions to streamline the supply chain, which we are expecting a very favorable lower material cost in the second half-year. And we are very confident that we expect that the cost reduction in the second half-year is more quicker than the decline of market price.

Okay. So...

And yes, for the second question, and if you look at our guidance for the capacity expansion, by the end of the year, we have reached roughly 10 gigawatts wafer, 7 gigawatts cell and the 10.8 gigawatts module capacities. And there's a major new CapEx is for the -- we communicated in the last 2 quarters, oversee capacity expansion for the U.S. market. And we are also doing the U.S. solar module capacities, and we still stick to our original budget, which is roughly USD 350 million for 2018.

Okay. Just one more follow-up question.

Yes. I think that you maybe -- you compare, the -- maybe the solar cell capacity estimation by the end of the year, compared to last quarter, we increased a lot of it. It's not the new capacity expansion, it's kind of the department mix existing in production trend and increase in outputs.

Okay, sure. So cell expansion is very -- I mean the CapEx is very limited because it's just debottlenecking. And so, the major CapEx in the second half should be the U.S. manufacturing plant? Is it?

In the U.S. solar module capacity, which is 400 megawatts, and we also have 1 gigawatts solar cell and the solar module capacity under construction out of Southeast Asia. So that's a key investment plan, which we have scheduled back to the beginning of the year.

Okay, sure. On the cost side, I'm going to add one more question, just -- so I assume that you're saying that the cost guidance, I mean, the cost reduction will be at least at par to what you are guiding in last quarter?

Excuse me, can you repeat the question?

Yes, because you are guiding that on the costs on...

You're right, you're right. Because the new China policies did put us in a good position, and also the (inaudible) depreciation, if you look at the cost from a U.S. dollar perspective, cost is moving more quickly.

And Scott, just as Mr. Chen said, we think in the second half of the year, both our gross margin and bottom line will improve, I think, especially in Q3.

Okay. Sure. Got it. Okay. Just one last question about equity income in Q2. I noticed that the equity income has increased a lot, and is it mainly due to the OEM facilities that we have? Or that -- I think it's more on the OEM than the Dubai project there.

Are you talking about the equity income for the [Philips] company, right?

Yes.

Okay. So it's relevant to OEM volume, it's -- I think you may know we have investment of 20% equity of the project in Abu Dhabi, which is 1.2 gigawatts, and the project is under construction. And at the same time, the company enters the interest rate swap, and to hedge the U.S. dollar interest rate hike. And in this quarter, second quarter, based on the fair value of the -- for the instruments, which is the interest rate swap, and we recorded an investment income based on the investee's income of -- 20% of the investee's income.

Is that all, Scott?

Yes.

Our next question comes from Maheep Mandloi from Credit Suisse.

Maheep Mandloi from Credit Suisse. Just on the last question on equity income, could you just clarify if that is a noncash adjustment, or is that -- there's any cash portion in there as well?

This is a, kind of financial instruments, and to hedge the, no, the solar operating assets over the 25 operating cash flows. So I don't think it's a kind of cash, and it's settled based on a cost year basis or half-year basis. And in the second quarter, we based on the valuation report and we recorded the anticipated gains, because of -- the U.S. government is hiking the interest rate in this year. So from an accounting perspective, we don't use the hedge accounting, so we accounted for the fair value of gain and income and because we have 20% of the company, and we recorded 20% of income for the interest rate swap.

And Maheep what Charlie is saying is that it is a fair value gain, but also it's an instrument settled by cash, so you got the idea.

Okay, that makes sense. And just switching gears on your production capacity. So one of the big reasons to move to or adding capacity in the U.S. market was to meet the near-term tariffs and longer-term demand growth. So after the -- India's tariff announcement, do you plan to expand into the Indian markets as well, especially as the China -- the tariffs on China and Malaysian products would put most of your capacity at a disadvantage?

We have not -- this Gener, Maheep. We have not set up any, let's say, confirmed plan to set up any capacity in India. And right now, we are -- keep -- we keep our mind open to any possibilities, but right now, we don't think it's good timing to make the decisions.

No, it makes sense. And just staying on capacity and just the oversupply in the market. Do you see any consolidation opportunities in China or in Southeast Asia, especially as the margins are lower for your competitors and they might be willing to sell out?

In China, the consideration is happening, particularly for the Tier 2, Tier 3 companies. And -- but if you look at the sector, particularly for the wafer and the module capacity, the Tier 2, Tier 3 players, in particular for those who rely on almost 100% on China market, the Chinese demand slowed down. And we are seeing several companies have stopped their productions. And I think, some of them, the capacity will never come back.

It's definite -- let me add some colors on it, Maheep. So definitely for the players who rely on China market only, or Indian market only, any single market will put themselves into kind of danger, at least for a short term. For me though, long-term, how the consolidation will happen, it's like what Charlie is saying, would be -- those, let's say, unqualified capacity will be out of the market, even if they have not announced any bankruptcy, also. But it won't -- we won't take them as effective capacity in this market.

And as you think about your capacity expansion for next year, does it make sense to acquire any of these Tier 2 or Tier 3 companies? And so far...

Well, we were looking -- I think we were looking to this high-efficiency capacities, if needed. Right now, we don't have any target or any, per let's say, any setup target or purpose to merge or acquire. Right now, we are really -- we will keep ourselves open, let's say.

Got it. And just the last question from me. So most of your peers have either gone private or have announced privatization, at least in the -- the ones let's say in the U.S. that -- and probably that's one of the reasons why you'd -- just shying away from guiding cost reduction targets. But -- so how does the Chairman think about privatization or -- either for peers for JinkoSolar? Does it make sense or -- just any general thoughts around that would be appreciated?

I think -- no, we didn't change our minds. And we -- the company has no plans for the privatization. And we think, as the largest solar module makers, and the top 1 branding and marketing and the international, the U.S. capital market has worked positive for us.

You're next question comes from Henry Elder from Goldman Sachs.

You mentioned the higher OEM manufacturing in the second quarter. What are your plans for the OEM manufacturing in the second half?

And -- I think that it's a total different situation after the new China policy. And before the new China policy, because of strong Chinese demand. And we are facing very high cost of OEMs. And after the new China policies, thanks to our strong international sales exposure, and we have a lot of orders with abilities and we have the leverage and to cut the OEM costs. So what I want to say is, we will continue to use OEM. If you look at our, Jinko's own capacity compared to our total shipment plan, I think in the second half of the year, roughly 20%, 25% OEM volume. But OEM volumes will contribute more profitabilities for the second half-year, because the -- after new China policies, everything is becoming cheaper, and we have the leverage.

Okay, got it. That makes sense. Maybe in the U.S., in the quarter, the tax credit essentially was, the safe harbor was extended, allowing developers more time to get their projects, and has that impacted you -- any of the demand you're seeing in the U.S., or any of your customers?

Yes. So for that, firstly, in short term, we still see -- we do not see any trend for a strong, let's say, a strong U.S. demand coming back, starting by end of this year, and you mentioned, next year. And I -- we believe that the safe harbor policy and tax credit extension for that will further accelerate or you may encourage the customer to expand more or even larger pie size towards their future business. Of course they've got more time to do it. So in general, we believe it's a positive for the market, as general. And for the long-term, we believe that demand will become more sustainable, and it will make us -- make the supply stay more, I say, long-term instead of going short.

Got it, okay, and then maybe last one from me on the margin outlook for the second half. Could you guys just quantify, or help us think about how much is coming from the expansion you're talking about? How much is coming from a lower RMB versus cost spend and raw materials?

I think it's difficult to separate the 2 combination impacts. And what I want to say is, both factors are positive for the gross margins. And the most important one for the company we -- is we are doing comprehensive cost reductions. And at the same time, we have the sales orders on hand.

And also, we want to focus here is that technology improvement is one of the main drivers.

There are currently no more questions in queue. [Operator Instructions] The next question comes from Alex Liu from UBS.

I got a few questions here. First one is regarding to your wafer capacity. So I do think your in-house produced wafer for all of your commodity production, or do you still have to buy from the third parties, considering the incumbent wafer price is so low. So is your wafer production cost still below the incumbent wafer cell price? And the second question is about your funds in U.S. So can you add some more color about your [indiscernible] plans? What's the capacity and what's the cost structure compared with your plant in China? And the last question, regarding to the, any potential client, you'll view the plant in India, considering the tariff imposed by the Indian government on imported solar modules. So do you have any plans to build a new factory there?

I think the first question is about...

The wafer.

So from a [indiscernible] I would answer the capacity and Charlie will take the cost side. So the wafer capacity, if you're looking to our capacity numbers, you will find that we have compared with the cell capacity, our wafer capacity is larger. And our module capacity is the largest across the whole 3 parts of the -- across the value tent. So that means most of time we -- if we manufacture the modules, we can buy some third-party cells instead of the wafers. So I think that's what we are, right now. I don't think we have purchased a significant volume of the wafers right now. Charlie?

Just as -- to supplement the wafer, and we are the cost leader for the production. And I think your question is about, if we -- our cost is higher than the market price, and we should buy from third party, but the fact is, given the -- particular for the module wafer, the lower price in the second quarter in June, and our production cost is still lower than the market price, and we don't need to buy from the third party. And I think your last question is about India, right? India and the factory, right?

The factory…

Yes, somebody has asked this question before. We don't -- in short term, we don't have a detailed plan to pick out a factory there. Certainly, we are monitoring the situation there, and we will change our strategy accordingly. But in the short term, no, we don't have any plan so far.

Okay. And then last -- second question is regarding to your U.S. plans. So what's the capacity there, and what's the cost structure compared with your past clients?

You're asking the module capacity we are doing. It's -- the cost is a little bit higher and the -- than the costs in Southeast Asia, because of the higher labor cost and higher rent and expansion costs, but we -- the cost difference is not so significant. At the same time, we believe that we have the clients premium for the products made in U.S., and we are confident that we can get reasonable gross margin for the U.S. factories, which we are also solidified our leading positions in the U.S. market.

Thank you, Alex. As there are no more questions in queue, I would now like to hand the call back to Sebastian. Sebastian, please continue.

Thank you, operator. On behalf of the entire JinkoSolar's management team, I want to thank you for your interest and participation on this call. If you have any further questions or concerns, please feel free to contact us. Have a good day, or good evening. Thank you, and goodbye.

Ladies and gentleman, that does conclude our conference for today. Thank you for your participation. You may all now disconnect.