Jinko Sees Sunnier Skies In Germany With New Fundraising Plan

Key Takeaways:

• Shanghai-listed Jinko Solar Co. plans to raise more than $600 million through a GDR sale in Germany, using the funds to pay for expansions in China and the U.S.
• The company appears to be selling the global depositary receipts (GDRs) at a relatively large discount to their price in Shanghai

By Doug Young

If American investors don’t appreciate you, then perhaps Germany investors will.

That appears to be the latest thinking at JinkoSolar Holding Co. Ltd. JKS, which has just announced a plan to raise major new funds through the issue of global depositary receipts (GDRs) by its main China-listed unit. The deal will see Jinko Solar Co. Ltd. (688223.SH) raise up to 4.5 billion yuan ($633 million) by selling up to 100 million GDRs to be traded on Germany’s stock exchange in Frankfurt, JinkoSolar said on Monday.

There are quite a few pieces to this story, including a huge valuation gap between the U.S.-listed JinkoSolar Holdings and Shanghai-listed Jinko Solar Co. The U.S.-listed company currently owns 58.6% of the Shanghai-listed company, though that stake will be diluted to about 53.3% after the new share float.

The other big story is why this company, which we’ll just call Jinko to cover both the U.S. and Shanghai listed entities, is raising funds in this particular way. China launched its GDR program around three years ago to encourage companies listed on its domestic A-share markets to raise more funds abroad, and Germany, Switzerland and Britain all currently host some such Chinese listings.

But trading for nearly all of the several dozen Chinese companies now listed in those three countries is very thin, with often days or weeks passing between trades. Valuations are quite similar to those seen for the companies’ A-shares, which may be one reason GDRs are attractive. By comparison, the valuation gap is often quite large for Chinese companies with listings in both China and Hong Kong or the U.S., with international investors in Hong Kong and the U.S. often valuing the exact same company far lower than their domestic Chinese peers in Shanghai and Shenzhen.

Last but not least, Jinko is just one of many solar panel makers finding itself in an increasingly uncomfortable position financially due to huge overcapacity in its sector right now. That situation has caused prices to plunge and pushed many companies into the red. Jinko was among that group, reporting a 101 million yuan net loss in the second quarter, though it remained profitable on an adjusted basis.

All that said, we’ll return to address each of the previously mentioned points in more detail, starting with the valuation gap between the U.S.-listed JinkoSolar and its majority-owned China-listed Jinko Solar subsidiary.

The U.S. listed company’s shares are down 45% this year due to the industry’s current difficulties, giving the company a current market value of about $1 billion and an anemic price-to-earnings (P/E) of just 5.9. By comparison, the Shanghai-listed Jinko Solar’s stock is roughly unchanged this year, giving it a market value of 86 billion yuan, or around $12 billion and a P/E ratio of 19.

That market value means the U.S.-listed company’s 58.6% stake in the Shanghai-listed company should be worth about $7 billion, or seven times the U.S.-listed company’s own market value. That shows that Chinese investors clearly see more value in Jinko than American ones, which is why this new fundraising is being done by the China-listed company rather than the American one. And since the very limited field of GDR buyers tends to value Chinese companies at roughly the same level as domestic A-share investors, the GDRs are likely to trade at a big valuation premium to Jinko’s New York-listed American depositary shares (ADSs).

Thin Trading

While the new GDRs are likely to trade at similarly high valuations to Jinko’s Shanghai-listed stock, the company also appears to be bracing itself for at least some kind of discount through the new share sale – probably due to the relatively large size of the fundraising.

We say that based on the fact that Jinko says the newly issued GDRs will account for up to 10% of its enlarged share capital, which should be worth about 8.6 billion yuan based on the Shanghai-listed company’s latest market value of 86 billion yuan. But that 8.6 billion yuan amount is well above the 4.5 billion yuan in gross proceeds Jinko says it will actually raise, implying it is selling the new GDRs at a relatively large discount to their Shanghai price.

Perhaps sensing that, Jinko Solar’s Shanghai-listed stock was down around 5% in early trade on Tuesday, the first day after the fundraising announcement.

One thing Jinko isn’t doing is selling these shares on the expectation that Frankfurt will become a major new market for the stock. That’s because trading is extremely thin for most Chinese companies traded under the GDR program. Frankfurt-listed shares for two companies we looked at, Junshi Biosciences (688180.SH; 1877.HK; 8SJ.F) and China Yangtze Power (600900.SH; CYZB.F), often went for weeks without a single trade, and the latter only had seven recorded trades so far this year, according to Yahoo Finance.

Thus, we can probably conclude that whoever is buying these new GDRs, and we suspect it might be mostly China-based investors, is probably doing so to get the big discount and doesn’t have any plans to sell the shares in the immediate future.

Last but not least, there are the issues of what Jinko will do with the funds and the company’s own cash situation. In the latest announcement, the company says it will use the funds for construction of a facility in Northwest China’s Shanxi province, as well as a major expansion of its six-year-old facility in the U.S. state of Florida. The U.S. project is particularly noteworthy, as it should help Jinko to keep selling its products in that important market despite growing U.S. restrictions on the import of Chinese-made solar panels.

Jinko is relatively cash rich, with 13.9 billion yuan, or roughly $2 billion, in its coffers at the end of June. But it’s also noteworthy that the latest amount was down by about 20% from the 17.6 billion yuan it had just three months earlier. That would appear to show the company is relying more heavily on its cash reserves these days during the difficult times the sector is facing.

At the end of the day, Jinko’s use of its Shanghai-listed company and the GDR program as its fundraising vehicle looks relatively shrewd, allowing it to maximize its returns from this new share issue. By issuing the GDRs in Germany, where trading is nearly non-existent, it also won’t need to worry about all of these new shares flooding into the market anytime soon.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.