PV ModuleTech 2019 takes place in Penang, Malaysia on 22-23 October 2019. During this event, I will be giving a 45 minute presentation on the new PV ModuleTech Bankability Ratings, focusing on benchmarking the 14 module suppliers that have rating grades of A or B, and explaining why the other several hundred module suppliers today globally are speculative buys for large-scale utility PV projects.

Within this talk, I will address one of the main questions I have received during the past few weeks, since the full methodology on the PV ModuleTech Bankability ratings was outlined across six articles on PV-Tech, starting here, and ending here.

The specific question centres on why only four module suppliers are in the top-rated category today for module suppliers: AA. (Recall that there are no PV module suppliers today meeting the requirements of the highest rating band of AAA.)

Often, the questions were along the lines of: why is company X not AA-rated? Or more pertinently: why is my company not in the top category today? Of course, many other people simply wanted to know who the 14 companies are with A or B grades, or where the rankings had placed the company they were representing. This broader question will be addressed over time, but for now, the key issue is to provide some explanation on why only four module suppliers are in the highest-grade band of AA.

For those wanting the detailed explanation for this – in addition to the answers to most of the other questions highlighted above – the best option is definitely to be at the PV ModuleTech event in Penang in two weeks from now (22-23 October).

In this article, I will address the main factors surrounding the including of JinkoSolar, First Solar, LONGi Solar and Canadian Solar as the most bankable module suppliers in the sector today.

Manufacturing and financial strength are both essential for bankability

During the series of six feature articles on PV-Tech, I discussed many times that bankability has two key elements: manufacturing, within which the highest weighting is applied to trailing 24 months of module shipment volumes to commercial (non-residential) market segments; and secondly, financial, based on converting Altman-Z scores to a PV-specific 0-10 ranking scale.

This removes the several hundred PV module suppliers that have sub-GW shipment volumes, many of whom operate typically with varying capacity utilization rates, serve a select group of residential-friendly markets, or operate as third-party OEM outlets without any credible own-brand status. It also removes companies (many of whom do have multi-GW shipment volume credentials in the past 3-5 years) but have dreadful financial health and are essentially technically-bankrupt.

While most people tracking the PV industry are long-accustomed to hearing many PV module suppliers shouting about being on one of the various tier-1-type ranking tables that have been in existence within the industry for many years, anyone buying PV modules today for a 100-MW-plus utility-scale solar site is generally only looking at a subset of between five and ten companies.

Therefore, even without doing the full analysis, it is fairly simple to draw a line through all but a few dozen module suppliers. The beauty of the new PV ModuleTech Bankability Ratings output is that these select companies can be benchmarked across different manufacturing and financial strengths and weaknesses.

Only by doing this, can it be seen why a select group of just four PV module suppliers (JinkoSolar, First Solar, LONGi Solar and Canadian Solar) have higher bankability ratings than everyone else.

Overview of what is differentiating the top-4 today

There are certain qualitative pre-requisites that apply, which preclude many of the leading top 20-30 module suppliers from being top-four AA-rated today.

One of these relates to the cumulative non-commercial shipment volumes, going back over a trailing 24 month period (at the end of any given quarter, when the ratings are updated for all companies). This is entirely valid, as consistent and repeat shipments by quarter over an extended time period is one of the most credible means of qualifying market-winners and those that have been consistently approved for large-scale project financing.

The criteria applied in the PV ModuleTech Bankability analysis also classes module shipments as own-brand only (and not OEM supplied, or in the cases where multi-GW capacity owners sublet facilities for tolling). Companies operating predominantly in this mode cannot be considered bankable from a brand perspective, although of course they may have a very workable business plan that satisfies company shareholders or investors.

To be included in the AA-ratings band, multi-GW of annual shipments over the past few years is a must. In fact, the threshold is nearer to 5 GW (utility-specific) these days. However, not all the 3-5 GW annual shipment suppliers qualify of course, as there is the financial aspect to factor in.

Indeed, the second pre-requisite is that financial stability with good financial health is also in place going back 24 months. So much confusion still prevails in the market on this issue today, not helped by companies often simply quoting turnover (revenues, often also of parent entities) as being the metric of value in terms of bankability. However, operating health is a blend of profitability, assets, liabilities, working capital, liquidity, retained earnings, leverage, equity value and sales generation levels.

It has been shown time-and-again that companies operating with strong revenues in the PV industry (especially Chinese firms) can also be carrying excessive debt, losing money every quarter, and having limited working capital to do anything to reverse inevitably bankruptcy. Indeed, when one looks at Chinese module suppliers that are PV-sector specific, only a small handful have operated with consistent and stable financial metrics, and absent of red-flags or risk in terms of ongoing operations.

In this context, for most of the GW-scale Chinese PV module suppliers, shipment volumes have to be very high (and consistently high every quarter), with operating margins positive, given that financial strength is likely contingent on having a non-module-based revenue stream. More on this below that mainly explains why JinkoSolar, Canadian Solar and LONGi Solar are the sole (Chinese-run) representatives in the AA-ratings band today.

Now, let’s look at the four companies and why each is qualifying in the AA-rated band today for PV ModuleTech Bankability.

- JinkoSolar

Having operated for some time with downstream activities, Jinko is now a fully-fledged pure-play PV module producer/supplier, with a remarkably simple business model that can be summarised as follows.

Jinko’s business today is all about module supply growth, investing in having full in-house vertical integration (now all mono prioritized) across ingot-to-module stages. Profitability (operating) therefore relies upon having a 15-20% delta when comparing blended module ASPs with cost-of-good-sold. Keeping operations in check, this translates to an operating margin or around 5%.

There is very little wiggle-room here. Revenues come from selling modules. Therefore, the higher the volumes, the higher the earnings each quarter.

The model works perfectly so long as volumes are high (more than 10 GW annual shipments, growing to 20 GW in the next few years), and costs are keep within target bounds (run factories flat out and hope that polysilicon stays sub-10$/kg going forward). The higher the premium for sales, the better the final earnings are.

Jinko qualifies as AA-rated mainly from its very high module shipment volumes, not by having financial performance that would alone jump out as a special feature.

If shipment volumes drop (sales pipelines slow down) or costs hit any problems at all, then the company would lose its AA-rating grade. Indeed, the business model means that when things are good, they are very good; shipping as much as possible when profitable is great; doing the same when gross margins slip is conversely bad if doing so quarter-on-quarter.

For now however, Jinko does remain the only Chinese PV module supplier (ever) that seems to have worked out how to be master of this business model. To do this, you need to be one step ahead of all your competitors in terms of markets to serve, quality levels to supply, and technologies to invest in. Ultimately, this differentiates Jinko from most other Chinese module suppliers that prioritized leading shipment ranking position over having any long-term plan to stay there.

While Jinko is the only company today to have excelled in module production/supply pure-play operations, the other two Chinese-headquartered module suppliers to have AA-ratings owe their inclusion (as AA) to having other highly profitable non-module-sales revenue streams.

- Canadian Solar

While Jinko sets the gold-standard in terms of c-Si module supply operations, Canadian Solar has a similarly unique position as possibly the only PV module supplier to have successfully combined having dual upstream/downstream strategies that work at the same time.

This goal has been the Achilles heel of so many PV companies over the years, with many of them wrongly thinking that the skill set involved in being a profitable module producer within the sector somehow automatically qualifies them to have similar business acumen when it comes to PV plant investment and market-trading of completed assets.

Inclusion as AA-rated for Canadian comes from having regularly been a top-ranked PV module supplier by volume in the past few years, having one of the more profitable module manufacturing operations (best-in-class typically in terms of being flexible for in-house/third-party component supply), and being smart enough to operate its downstream business at arms-length.

This final point turns out to be key. The mistake many companies seem to make in running dual upstream/downstream operations is trying to couple the strategies into one. This manifests itself often by efforts to grow project pipelines, as a means to create a module supply channel, rather than seeing downstream projects as what they ultimately are: an asset class that is there to be traded as and when market circumstances allow.

Many companies have fallen foul of this trap. Only a few – most notably Canadian Solar – have decoupled upstream from downstream operations. In effect, this allows module operations to be set up optimally (on the basis of selling modules as value-added in their own rights), while it frees up decision-making on project development and secondary asset sales through a different part of the company that for all purposes is fully decoupled from module sales.

In fact, often with Canadian Solar in the past few years, module sales teams were completely unaware of the project pipelines held by the company’s project development teams. While this may sound to many as a company with communication problems, it is the ideal situation. It frees up the downstream operations to make the best commercial decisions, including whose modules (in-house or third-party) are best to optimize site returns on a case-by-case basis.

Ultimately company management can then decide what to do with owned assets, selling them if the company needs cash in the short-term, or if market circumstances make asset sales preferential. Having this revenue stream option, while simultaneously being among the most profitable of the Chinese multi-GW module producers, is what merits Canadian Solar’s inclusion in the top-4 grouping today, although it should be pointed out that the company is the most at risk of moving to A-rated status (based mainly on shipment volumes being some way off the sheer volume of market-leader Jinko).

- LONGi Solar

The third of the three Chinese-headquartered module supply majors featuring as AA-rated suppliers is LONGi, and the reasons for its inclusion are different to the other two companies outlined above.

LONGi is a special case today within the industry, having a highly profitable revenue stream coming from another part of the PV manufacturing value-chain; namely, wafer sales. The growth trajectory of the company has been clear to see over the past 4-5 years, with LONGi implementing highly-ambitious and completely-successful mono ingot/wafer capacity expansion phases within China that have been the catalyst to the whole sector moving from p-type multi to p-type mono as the mainstream technology offering.

However, while simply managing the process of site construction and ramp-up at such a grandiose level is highly laudable, the key has managed to retain cost-control and margins (at a time when component ASPs have been on a steep downward trend). This has been the basis of LONGi’s operating strength, driving the company’s valuation to levels much higher than would have been possible from a stand-alone module supply business model.

The resulting financial strength of the company (from its wafer business), coupled with having annual module shipments now moving into the 10-GW-territory (and increasingly more each year outside China), is what sees LONGi firmly in the AA-rating band as a module supplier today.

As a case-study, LONGi is unique in having a highly profitable PV manufacturing business unit (for wafers), and remains in an enviable situation as virtually all its cell manufacturing customer-base rushes to have mono-PERC based capacity to remain competitive.

This is allowing increased investments into cell and module capacity, as one of the few companies today with cell/module expansion plans that exceed 20-GW and are credible.

However, ongoing favouritism from the investment community (retaining valuation and facilitating expansion plans) is not without risk, in particular from wafer ASPs and the level to which the company can remain in control of this to the market.

It is a precarious position to be in, within the value-chain, if companies producing around you (polysilicon and cells in this case) are seeing a more challenging operating environment and prone to loss making with limited scope to return to profitability. At some point, the squeeze does happen, and margins get compressed to levels seen across the whole manufacturing sector; in particular, at each point where module pricing needs to have a downward adjustment to sustain investor returns in utility-scale solar.

Were it not for a highly-profitable wafer business, LONGi would not have the top-rated module supplier status is commands today. However, if module shipments move into the 10-20 GW annual level (as the company is planning for), and cost-control measures can be industry-leading here, then this situation would only be to the company’s advantage.

- First Solar

The final company today with AA-rated module supplier status is First Solar, and is the only non Chinese-run company in this top grouping.

Indeed, the company is the only western-run PV company (across every PV manufacturing segment from polysilicon to modules) that can be considered a success-story today. In fact, this unique position is further emphasized when one looks forward over the next 2-3 years in terms of business booked at attractive levels of investment return. I will explain more on this below; however, while most PV manufacturers globally are consumed by filling order books for the next quarter.

First Solar is in the almost unheard-of territory in being sold-out for years ahead, at a time when new Series 6 panel factories are being fully ramped up.
There is not a single PV module supplier globally that would not love to be in this position today.

The success in moving from Series 4 to Series 6 and the billion-dollar investment in new factories with bespoke tooling is a strong part of First Solar’s inclusion at one of the four AA-rated module suppliers today. But, as I discussed above, module shipments alone are not sufficient to be highly rated. AA-rating (especially for any module supplier outside of JinkoSolar that is still commanding a significant GW-scale delta as the number-one by volume) needs finances to be strong, and in this regard, First Solar is in a different league to all other PV companies that rely heavily on module operations for their overall performance.

Any investor-based analysis on First Solar’s books over the past years shows consistent and well-managed operations, and decision-making in terms of upstream/downstream priorities, leading to the make-up of the company today that is focused again on profitable module supply (of Series 6) and the other complementary areas where First Solar has a value-added proposition in the geographies in which the company is strong.

First Solar has taken advantage perfectly with the opportunity that has arisen from the strong utility-drive for solar PV in the US, and much of the pipeline is effectively derisked in this way also. This makes the forward-looking issues (pertinent for the other AA-rated companies above) less questionable. In short, assuming ongoing business-as-usual – and the expected continued fast ramp of module supply from factories being ramped globally – First Solar will comfortably stay in the AA-rating grouping during the next couple of years. Whether the company again becomes the only supplier to be AAA-rated is more likely to depend on how just how profitable Series 6 manufacturing turns out to be in the end.