Covid-19 Affecting Renewable Energy Sector, JA Solar Holdings in the Firing Line
JA Solar is a strong competitor in the renewable energy sector – however, the company faces a strong operational risk due to the epidemic.
JA Solar Holdings Co., Ltd. is a manufacturer of high-performance solar power products that convert sunlight into electricity for residential, commercial and utility-scale power generation. The Company is one of the world's largest producers of solar power products. It's standard and high-efficiency product offerings are among the most powerful and cost-effective in the industry. JA Solar distributes products under its own brand and also produces on behalf of a roster of clients.
The company is headquartered in Beijing and maintains production facilities in Shanghai, Hebei, Jiangsu, Inner Mongolia and Anhui provinces in China, as well as Penang, Malaysia and Bac Giang, Vietnam.
It was founded in 2005 in Shanghai. After 4 years of operating in the renewable energy market, in December 2009 investors began to notice the growing market share of JA Solar, which was fueled by a large subsidy from the Chinese Government. Therefore, the company started trading its stock at the Nasdaq National Market with the ticker JASO (JASO: NASDAQ). However, In November 2017, JA Solar announced that an investor consortium – with its parent company JASO Holdings Limited (Holdco) – would purchase the company in an all-cash transaction, thereby translating into an equity value of approximately USD 362.1 million. After a delay, in March 2018, JA Solar's shareholders gave their approval for the agreement and JA solar went private. As a result, the company delisted itself from the stock market.
Going private was a strategic movement from JA Solar. Almost around the time, JA Solar decided to go private, the Chinese government cut its previous subsidies from the public companies and issued guidelines for boosting private investment in manufacturing, including enhancement of financial support to private firms.
The rationale behind the government decision is that SOEs should be more marketized to boost their productivity in the long run. Currently, private companies are contributing 60 percent of China’s GDP, and are responsible for 70 percent of innovation, 80 percent of urban employment and provide 90 percent of new jobs. Compared to these figures, public companies are way behind private companies, and their main focus is infrastructure projects – building roads and buildings.
Therefore, Beijing began to encourage public companies to go private. Currently, the government is pushing private firms to invest in infrastructure projects that comprise solar energy products. This factor might have been a primary driving force behind JA Solar's decision to become a private firm.
Another underlying reason for this decision is that a publicly trading company must bear huge regulatory as well as procedural costs to maintain all the timely filing of financial reports. Therefore, becoming a private firm means less regulatory and procedural costs.
As can be seen from the above chart, the company altered the decreasing net income by going private from public.
One important aspect of JA Solar’s decision shows that the renewable energy sector is dependent on government subsidies to continue to grow.
Last year, in accordance with recently published financial statements, JA Solar Holdings Co Ltd had a market valuation of USD 1.19 billion. However, the situation might change this year due to the Covid-19 epidemic for JA Solar.
The coronavirus outbreak is threatening to slow the global solar energy industry as it cuts the supply of key equipment for solar and wind farms in China and other leading countries in the industry such as the US and France. This situation will slow and delay the production target of solar panels of many companies. Shutting down production facilities in China has created a shortage of solar wafers and module glass –essential parts in building solar panels.
For companies that want to finish solar installations on time or promise homeowners a roof-top installation within three months before summer begins, demand will rise while supply decreases sharply. As a result, an increase in solar panel prices is very likely, making companies not being able to fulfill installations.
Moreover, many companies might end up delaying residential projects. In return, this will force companies to tightly manage cash flow while the outbreak continues.
“If the virus outbreak lasts beyond the first quarter and spreads to more places, as is currently happening in Korea, Iran and Italy, then it may very well slow down global renewable energy deployment,” said Ali Izadi-Najafabadi, Head of analysis in Asia for Bloomberg NEF to the LA Times, which has downgraded its outlook for installations this year.
These developments will adversely affect JA Solar’s business as well. In fact, in 2007 the company underlined in its financial statement that a major health epidemic such as SARS would risk the operation of the company and reduce revenues:
“Any prolonged recurrence of avian flu, SARS or other adverse public health developments… may have material adverse effects on our business. These could include our ability to travel or ship our products outside China, as well as temporary closure of our manufacturing facilities… We have not adopted any written preventive measures or contingency plans to combat any future outbreak of avian flu, SARS or any other epidemic.”
Therefore, the current Covid-19 pandemic, combined with the company’s previous statement that it has not adopted any preventive measures to combat the outbreak, puts the future revenues of the company at great risk. Altering this unpleasant situation requires the company to adopt new protective measures for its production facilities and find new investors.
In short, JA Solar might need more government support or other financial support from investors to compete in the renewable energy sector in the near future.