JinkoSolar - Earnings Call - Q2 2020
September 23, 2020
Transcript
Operator (participant)
Hello, ladies and gentlemen, and thank you for standing by for JinkoSolar Holding Limited's second quarter 2020 earnings conference call. At this time, all participants are on listen-only mode. After management prepares remarks, there will be a question-and-answer section. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Ripple Zhang, JinkoSolar Investor Relations Manager. Please proceed, Ripple.
Ripple Zhang (Investor Relations Manager)
Thank you, Operator. Thank everyone for joining us today for JinkoSolar's second quarter 2020 earnings conference call. The company's results were released earlier today and are available on the company's IR website at www.jinkosolar.com, as well as on Newswire Services. We have also provided a supplemental presentation for today's earnings call, which can also be found on the IR website. On the call today from JinkoSolar are Mr. Chen Kangping, Chief Executive Officer, Mr. Charlie Cao, Chief Financial Officer, and Mr. Gener Miao, Chief Marketing Officer. Mr. Chen will discuss JinkoSolar's business operations and company highlights, followed by Mr. Miao, who will talk about the sales and marketing, and then Mr. Cao, who will go through the financials. They 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 the applicable law. It's now my pleasure to introduce Mr. Chen Kangping, CEO of JinkoSolar. Mr. Chen will speak in Mandarin, and I will translate his comments into English. Please go ahead, Mr. Chen.
Charlie Cao (Director of the Board)
谢谢 Ripple。各位早上好，感谢大家参加今天的电话会议。
Ripple Zhang (Investor Relations Manager)
Thank you, Ripple. Good morning and good evening to everyone, and thank you for joining us today.
Charlie Cao (Director of the Board)
normally, and market share was further improved.
Ripple Zhang (Investor Relations Manager)
During the second quarter, our total solar module shipments reached 4,469 megawatts. Total revenues were $1.2 billion, and gross margin was 17.9%. Demand in the overseas markets was negatively impacted due to the COVID-19 pandemic. Nevertheless, our high-quality products, well-developed global marketing network, and premium customer service stood out among the competition and helped maintain the growth momentum in shipment volume. Most of our orders were executed on time, and we were able to increase our market share.
Charlie Cao (Director of the Board)
二季度前景：海外市场低迷带来组件价格的下跌，为降低风险，上游控制库存，原材料价格相应下跌。产业链中产品的竞争力和成本控制能力有限的企业，相继调低产能利用率或退出市场。二季度后期，由于中国的强劲拉动需求以及海外疫情的缓解，产业链价格出现了上涨，叠加进口硅料供应短缺带来的成本上升，非一体化组件企业的利润空间被进一步压缩。一体化组件企业的产能结构在行业的波动中表现出了良好的抗风险能力。疫情加速了优胜劣汰，产业链的各环节竞争格局进一步改善，一体化组件企业的优势得以放大。今年，前五大组件厂商的出货量有望占到整个行业的65%-70%。
Ripple Zhang (Investor Relations Manager)
At the start of the second quarter, weak demand for the overseas market led to a drop in module prices. Many upstream manufacturing companies controlled inventory in order to reduce risks, leading to a decline in raw material prices. As a result, stiff competition in the solar supply chain made it tough for companies with limited product competitiveness and cost control capabilities to remain competitive. These smaller companies have had to successively reduce their capacity utilization or withdraw from the market completely. Costs in the solar supply chain increased in the latter part of the second quarter, in part due to the rush in installations in China driving up demand, and the overseas market showing positive signs of improvement from the peak of the health outbreaks.
The recent increase in costs was also influenced by the supply shortage of polysilicon, which further squeezed profit margins for non-integrated solar module manufacturers, whereas the production capacity and infrastructure of integrated manufacturers demonstrated strong resilience to risks and price fluctuations. The epidemic has accelerated the survival of the fittest and forced further improvements throughout the industry supply chain, substantially increasing the leverage of integrated module manufacturers. The combined shipment volumes of the top five solar module manufacturers are expected to account for 65%-70% of the industry's total shipments this year.
Charlie Cao (Director of the Board)
明年，前五大组件企业的市场份额将进一步上升。当少数几家企业占据全球绝大部分的市场份额，技术的竞争力就会变得更加重要。未来，由供需关系不平衡带来的利润空间也会越来越小，有技术带来的竞争壁垒和差异化会越来越明显。近期，我们的大面积 N 型电池转化效率达到 24.79%，刷新了之前的世界纪录。我们认为未来两三年，电池环节会对终端产品的竞争力有最大的贡献。我们看好 N 型电池的技术方向，在保持电池技术领先的同时，会持续将研发力量投入到与之相匹配的硅片和组件项目中。今年，大尺寸双面的组件产品得到了超预期的推广，不断降低度电成本的应用依然是光伏持续增强竞争力的一个核心。晶科能源联合几家头部企业共同倡导建立 182 尺寸的硅片标准，以降低因为尺寸多样化带来的行业上下游协同的困扰和成本的上升，促进行业高效规范的发展。我们正在加大高能量密度的 182 尺寸双面电池组件相关技术的研发投入，使其在明年成为我们的主力产品。
Ripple Zhang (Investor Relations Manager)
We expect the market share of the top five module manufacturers to increase next year. When the global market share is dominated by a handful of top solar firms, excellence in technology will stand out even more in this landscape. In the future, profit margins resulting from imbalances between supply and demand are going to be less. Barriers brought by advanced technology and product differentiation will become more significant. Recently, our large area N-type solar cell reached a conversion efficiency of 24.79% and set a new world record for the industry. We believe in the next two or three years, advanced cell technology will make the greatest contribution to the competitiveness of end products. We are optimistic about the direction of our N-type cell technology.
While we currently have the leading edge in the market in terms of cell technology, we will continue to invest heavily in our R&D to ensure the matching competence for silicon wafers and modules. In 2020, the popularity of large-size and bifacial modules exceeded our expectations and demonstrated that further reduction in levelized cost of energy remains the core distinction among clean energies. Together with several leading PV companies, we were working to establish a new standard for 182 millimeter wafers in order to reduce the industry's upstream and downstream coordination problems caused by size diversification and the increase in costs, and promote the efficient and standardized development of the industry. We were currently increasing our R&D resources into technological research related to high power output 182 millimeter modules, with the aim of promoting these modules as our main product for next year.
Charlie Cao (Director of the Board)
二季度至今，全球疫情经历了扩散和逐步缓解的过程。光伏装机需求和全年装机预期也同时经历了低谷和快速修复。疫情在一定程度上影响了需求，价格的下降又一定程度上刺激了需求。随着疫情的缓解，需求被加速释放，中国市场的供不应求带动产业链价格上涨。目前，价格达到新的平衡，旺盛的市场需求将持续到年底。光伏行业的发展今年因为疫情和经济环境的变化受到一定的阻力，但前进的速度让人惊喜。我们坚定地看好光伏新能源的未来。短期来看，今年是中国市场有补贴的最后一年，得益于更充分的前景准备，以及综合实力更强的国企和央企的参与度提升。预计进展项目的年内完成度和节奏均优于 2019 年。海外市场整体复苏良好，部分地区出现了超预期的增长。中长期来看，回顾中国过去的两次五年规划，光伏的实际完成规模都显著超过预期。随着市场补贴退出，行业驱动发生本质的变化，中国的光伏装机进入稳定增长期。在未来的五年内，加速发展是大概率事件。在全球范围内，光伏已是度电成本最低的电源之一，储能将迎来高速发展期。光伏加储能正逐步打开全新的成长周期。总之，光伏成本下降的速度有目共睹。从技术提升和降本空间来看，极具竞争力。从清晰的能源结构转型和丰富的应用场景的角度看，充满了可能。关于市场，后续 Gener 将介绍更详细的情况。
Ripple Zhang (Investor Relations Manager)
Since the second quarter, the global pandemic has experienced gradual recovery in between epidemic waves, causing restrictions to come back into play in certain markets. As a result, global demand for PV installations has gone through extreme lows and then rapid recovery, which have then influenced the annual installation capacity in many regions. The coronavirus pandemic has affected demand to a certain extent. However, the decline in prices has also revived demand. As the epidemic situation continues to ease, we believe demand will eventually accelerate. The shortage of supply in China market has driven up prices along the supply chain. At the moment, prices have stabilized, and we expect strong market demand to continue until the end of 2020. Due to the recent economic environment and the pandemic situation, the growth of the PV industry has slowed down, but the rate of progress in the industry has actually beaten expectations.
We remain firmly confident about the future of the solar as a new energy source. In the short term, 2020 is the last year for subsidies in China market. Thanks to adequate preliminary preparations and the increased participation of more powerful state-owned and central enterprises, the pace and completion progress of bidding projects in 2020 are expected to be better than in 2019. The overall recovery in the overseas markets remains supportive, with some regions experiencing surprising growth. In the mid and long term, looking back to the last two phases of China's five-year plans, the actual completion rate of PV projects has significantly exceeded expectations. With the withdrawal of market subsidies, industry drivers have undergone fundamental changes. China's PV installation capacity has entered into a period of steady growth momentum, which increases the probability of accelerated growth over the next five years.
Solar energy has become one of the most cost-efficient power sources around the world, and we expect new technology in energy storage to usher in a new era of rapid development for this sector and new growth to be the PV energy storage industry. In short, PV has already been extremely competitive in terms of technology improvements and cost reduction capabilities, as well as potentials resulting from accelerated transformation in the energy sector and diversified application scenarios in the downstream market. Gener will address more on markets later.
Charlie Cao (Director of the Board)
截至二季度末，我们的单晶硅片电池组件产能分别为 20、11 和 25 吉瓦。由于上季度有 5 吉瓦的组件产能投产，2020 年底，我们的单晶硅片电池组件的产能预计将达到 20、11 和 30 吉瓦。同时，为了应对广阔的市场空间和明年出货量的增长，我们正在评估增大各环节的产能，以及进一步提升一体化的比例。光伏行业发展变化非常快，我们会持续保持稳健的经营，以市场为导向，在一体化的同时保证产能结构的灵活性。
Ripple Zhang (Investor Relations Manager)
At the end of the second quarter, our in-house production capacities for monocrystalline wafer, cell, and high-efficiency solar modules have reached 20, 11, and 25 gigawatts, respectively, with 5 gigawatts of module capacity ramped up in the third quarter. Our in-house production capacities for monocrystalline wafer cells and high-efficiency solar modules are expected to be reached 20, 11, and 30 gigawatts, respectively, by the end of 2020. In order to benefit from the high growth in the broader market space and total shipments for next year, we are now considering further increases in production capacity for each segment and will increase the proportion of integrating level accordingly. The PV industry is facing rapid changes, and that's why we have to maintain a certain level of flexibility in our production capacity.
This will give our business the advantage to respond to any change in a timely manner while sustaining the reliable operations and remaining fully focused on the evolving market demand.
Charlie Cao (Director of the Board)
本周我们宣布了将主要运营子公司江西金科在上海证券交易所科创板上市的计划，金科能源在女教授的上市，以及江西金科在科创板的上市，将提高我们在中国和全球投资者中的知名度，令我们的未来增长提供更多的支持。
Ripple Zhang (Investor Relations Manager)
This week, we announced our plan to list our principal operating subsidiary, Jiangxi Jinko, on the Shanghai Stock Exchange's STAR Innovation Board, or the STAR Market. We believe the listing of JinkoSolar on the New York Stock Exchange and Jiangxi Jinko on the STAR Market will raise our profile with investors both in China and globally and provide us with additional opportunities to grow in the future.
Charlie Cao (Director of the Board)
GW, operating revenue $1.22 billion-$1.3 billion, gross margin 17%-19%. The full year 2020 module shipment expectation remains unchanged, 18-20 GW.
Ripple Zhang (Investor Relations Manager)
Before turning over to Gener, I would like to quickly go over our guidance for the third quarter of 2020. We expect total solar module shipments to be in the range of five to 5.3 gigawatts for the third quarter of 2020. Total revenues for the third quarter are expected to be in the range of $1.22 billion-$1.3 billion. Gross margin for the third quarter is expected to be in the range of 17%-19%. We will iterate our guidance for the full year 2020 shipments to be in the range of 18 to 20 gigawatts.
Thank you, Ms. Zhang. During the second quarter, total shipments of solar modules reached 4,469 megawatts, covering 91 countries worldwide. Asia Pacific, North America, China, and Europe contributed the largest portions of the total shipments and are expected to continue to contribute substantial volumes in our total shipments for the third and the fourth quarters. In terms of the market demand, a rush in installations in the domestic market drove significant growth in China at the end of the second quarter. As more and more countries return to normalcy and the health crisis continues to improve overseas, we have seen a notable recovery in global sales. Strong market demand in the third quarter has driven prices up sharply throughout the supply chain, forcing some installation demand to be delayed into 2021. At present, supply and demand have re-stabilized, which will keep sales forwarding until the fourth quarter.
We expect the total global installations to be close to 120 gigawatts in 2020. Overseas demand in 2021 is likely to boom with active transactions in Asia Pacific, Middle East, North America, and Europe. There are also a large number of installation projects planned in China in 2021. Given that the original target of 15% of non-fossil energy consumption in 2020 has already been exceeded, the Chinese government is currently drafting its 14th Five-Year Plan to amend the original target to 20% of non-fossil energy consumption by 2030. In the next five years, average annual installations in the Chinese market will most likely reach 60 gigawatts. After the U.S. economy started to recover in May, demand from the residential market has gradually recovered from the lows of the epidemic, and approved small rooftop solar PV installations have returned back to January's pre-pandemic level. The U.S.
imported approximately 15 gigawatts of modules in the first seven months of the year, and the average monthly import volume was over 2 gigawatts. After falling to their lowest record in June, monthly imports rebounded to 2.2 gigawatts level in July. Recently, the U.S. presidential candidate, Joe Biden, proposed a new substantial sustainable infrastructure and a clean energy plan, which aims to achieve carbon-free power generation by 2035 and set clear objectives for the entire economy to be climate neutral with net zero GHG emissions by 2050. In general, Europe has gradually returned to normal. Demand has been relatively stable in several major PV markets, including Spain, Germany, Netherlands, Poland, Portugal, and Italy. Actual installed capacity in the European market this year is expected to be significantly higher than our previous expectation.
Recently, the second round of the solar auctions in Portugal attracted worldwide attention and set a new world record at a price of $0.01316 per kilowatt hour. Germany has amended the Renewable Energy Act to extend bidding for 18.8 gigawatts of PV power generation projects by 2028, which comprises 5.3 gigawatts of rooftop installations and 13.5 gigawatts of large-scale ground power stations. Ireland held its first large-scale solar auctions for renewable energy, and the solar dominated with the largest share of 796 megawatts. Commencing in 2021, the EU's 27 member states are planning to adopt the 2030 climate and energy framework that will require renewable energy to account for at least 32% of primary energy consumption by 2030. This framework will certainly stabilize the long-term development of clean energy in Europe.
India has been one of the most severely affected countries in the world, and the coronavirus pandemic continues to intensify with new infections climbing over 90,000 cases each day. As restrictions continue to ease nationwide, local transmission of the coronavirus is expected to continue in India for some time. Furthermore, India's worsening economic ties and trade barriers with China will further affect many projects currently under development in India, as well as some previously commissioned PPA projects. In particular, the border adjustment tax in India has lowered our expectations for PV installation in the Indian market this year. Coronavirus cases have fallen sharply in the Middle East, and new daily cases in major countries have remained below 2,000. The health pandemic continues to take its toll in Latin America as Brazil emerges as a top global coronavirus hotspot, while Chile and Mexico are both seeing some improvements.
On a brighter note, Brazil has removed import tariffs for 101 specific items, including solar modules, trackers, and inverters, thus reducing taxes from 12% to 0% since August 1st. This is expected to help the distribution market to recover from the impact of COVID-19. In short, although periodic outbreaks of the recurrent pandemic do trigger some concerns, we see economic activity in most regions of the world improving significantly despite the fact that policies and economic slowdowns in certain countries due to COVID-19 will act as a drag on solar installations. The increasing competence of the global solar supply chain and the hybrid advantage of clean energy have won growing support from governments and installers. In the mid to long term, we expect that reductions in solar costs will continuously beat expectations, and as great parity is welcomed everywhere, the impact from policy cycles will greatly diminish.
With continued cost reductions and incremental growth coming from the expanding energy storage business, we are facing exciting new opportunities, and our potential PV market size is expected to grow substantially. Recently, we were ranked as a top solar brand in debt finance projects and named one of the most bankable PV manufacturers in the world by Bloomberg New Energy Finance. 100% of BNEF survey respondents consider the company as highly bankable. This outstanding brand recognition connects us to more customers in the broad PV market space. We will continue to dedicate resources to strengthen the quality control of our high-efficiency products, to improve customer service excellence, and to work more closely with our clients for customized product solutions according to their project requirements. This year, we have been able to accelerate the promotion of applications that enable further reduction of LCOE.
We have also joined up with several leading PV companies to establish a new standard for 182 mm wafers and launched the P-type Tiger Pro and N-type Tiger Pro modules with maximum power output of 580 watt-peak and 610 watt-peak, respectively. So far, we have secured over 1 gigawatt of orders for high-efficiency modules from the Tiger Pro series, and the first batch is scheduled for delivery in October this year. Next year, large-size wafer products are expected to account for over 70% of our total shipments, while significant growth in demand is expected for higher power output bifacial products. Finally, we are currently conducting market research and accelerating technical reserves associated with new products to better understand how we can serve the needs of our customers and facilitate the provision of more differentiated products and services for our global clients.
With that, I will turn it over to Charlie.
Charlie Cao (Director of the Board)
Thank you, Gener. We reported strong operational and financial results for the quarter, with total shipments and gross margin in line with our guidance and total revenue exceeding our guidance. Financial indicators such as total revenues, gross margin, and net income have all increased dramatically compared with the same period last year. The company's increase in-house integration level has contributed to this year-over-year growth. Let's go into more details for the quarter now. Total revenue was $1.2 billion, up 22% year-over-year. Gross margin improved to 17.9% compared to 16.5% last year. EBITDA was $119 million, compared to $66 million in the same period last year. Non-GAAP net income was $53 million, significantly increased year-over-year. This translates into Non-GAAP diluted earnings per share of $1.2.
Total operating expenses accounted for 12.8% of total revenue and increased from 12.6% sequentially and flat with the same period last year. The sequential increase was primarily due to an increase in shipping costs associated with a significant increase in solar module shipments during the second quarter of 2020 and an increase in disposal loss on fixed assets. Moving to the balance sheets, at the end of the second quarter, our balance of cash and cash equivalents were $970 million compared to $670 million by the end of Q1. Accounts receivable turnover days were 71 days compared to 76 days in the second quarter last year. Inventory turnovers were 90 days compared to 140 days in the second quarter last year.
Total debt was $2.3 billion compared to $1.8 billion by the end of Q1, in which $128 million was related to international solar projects. Net debt was $1.37 billion compared to $1.14 billion by the end of Q1 2020. On Monday this week, we announced our strategic plan to list our principal operating subsidiary, Jiangxi Jinko, on the Shanghai Stock Exchange after certain intra-group restructuring. If the listing is successful, we expect to have greater access to cheap resources or capital, which will support us in capturing a greater share of market growth and value creation. We are committed to maintain our New York Stock Exchange listing for JinkoSolar. The pre-IPO financing, which is expected to be completed by the end of next month, will be used for the advanced capacity expansion and the needs of working capital.
This concludes our prepared remarks. We are now happy to take your questions. Operator, please proceed.
Operator (participant)
Thank you, management. We now begin our question and answer sections. If you have a question for today's speaker, please press 01 on your telephone keypad now. You'll be entered at queue. After you are announced, please ask your question. If you find that your question has been answered before your turn to speak, please press 02 to cancel. So once again, 01 on your telephone keypad now to ask your questions.
Charlie Cao (Director of the Board)
Operator, is there any questions from analysts?
Operator (participant)
Yes. Our first question is Philip from Roth Capital Partners. Please go ahead.
Hello?
Philip Shen (Analyst)
Hi, everyone. Thanks for the questions. In terms of, we'd like to talk about the Q4 outlook. I think the implied shipping guide is for 6 gigawatts, which would be up 30% year-over-year. How do you expect your margins to trend in Q4? I think back on the Q1 call, you guys had talked about being 75% booked for the full year of 2020, with pricing through the entire supply chain going higher, including poly and glass. How are you able to kind of can you talk about your margin outlook for Q4, as well as how are you able to maintain the 17%-19% for Q3? Thanks.
Charlie Cao (Director of the Board)
Yeah, Philip, and the outlook in Q4 with respect to the gross margin comparing to the third quarter is roughly slightly going down, given the situation. The production cost, particularly the material cost, is increasing due to the shortage of certain materials. But at the same time, the market price in China, we are expecting to be on the upward side compared to, particularly in the second quarter and third quarter. But given the situations, we are expecting the gross margin. We have some pressure, and it's going to be slightly lower compared to the third quarter.
Philip Shen (Analyst)
Okay. Thank you, Charlie. I think you guys have fixed pricing for your contracts. Have you been able to raise the pricing on customers which had fixed pricing, for example, in either Q3 or for Q4 shipments?
Charlie Cao (Director of the Board)
We are expecting in the second quarter. We're expecting China will be very strong, so we have sufficient and open capacity at that time back to second quarter to catch up the opportunities, the market price increase, and in general, if we sign the contract, we will stick to the original contract terms.
Philip Shen (Analyst)
Got it. Okay. Great. And then can you talk about? I think one of your peers gave some very specific outlook and even guidance for 2021. Can you share what your thoughts are for 2021? So specifically, I think you increased your module capacity to 30 gigawatts. Is that a good number to use for shipments for next year? And how do you expect your margins to trend as we get through each quarter in 2021?
Charlie Cao (Director of the Board)
2021, overall, the market situation, we're expecting a pretty good year. And we announced our plan to get access to the China capital market, and we are expecting to close 3.1 billion RMB, the financing by the end of the month. And we have the plan to invest, particularly the cell capacity as well as the mono wafer capacity. And if you look at the situation now, the Tier 1 companies, they are dominating the market here, and they were expecting more. I think compared this year, we are expecting our growth rate will be relatively higher next year. So 30 gigawatts, we are reaching capacity of the module. I think it's a kind of reasonable, maybe some base case.
Gener Miao (CMO)
Yeah. We are still working, Phil. We are still working on our 2021 plan yet, budget yet. We have not finalized it yet. So we are still working on it. But I think somewhere around 30 gigawatt will definitely be our target to follow.
Philip Shen (Analyst)
Great. Okay. That's helpful. And coming back to your $458 million pre-IPO raise, can you talk through kind of how you got to the valuation at which that equity comes in and also what the use of proceeds will be? I'm imagining a big chunk of that is going to be for capacity expansion in 2021. So I know you just mentioned, Gener, that you guys are still evaluating, but any additional color on that would be fantastic. Thanks.
Charlie Cao (Director of the Board)
Okay. So for the RMB 3.1 billion, it's including third-party reputable investors like the investment arms or reputable commercial banks and investment funds focused on any sector. So back to your first question, how we come out of the valuation is based on the negotiation with third-party investors. And for the needs for the funding, the majority part will be for the advanced capacity expansion. And if you look at our capacity, we have very low capacity in solar cells. That will be our key focus, as well as we plan to increase our mono wafer capacity and to solidify our competitiveness.
Philip Shen (Analyst)
Great. Okay. One last housekeeping question. Can you share what the depreciation and CapEx was for Q2 and then your expectations for Q3 and Q4?
Charlie Cao (Director of the Board)
I need to get back to you the number maybe after call. I think roughly depreciation should be each quarter. Let me get back to you after call. I need to check the numbers. But the CapEx this year is still roughly $3.5 billion this year.
Philip Shen (Analyst)
Great. Okay. Thank you, Charlie and Gener. I'll pass it on.
Kangping Chen (CEO)
Thank you.
Charlie Cao (Director of the Board)
Thank you.
Operator (participant)
As a reminder, please press 01 for questions. Our next question is Brian from Goldman Sachs.
Brian Lee (MD and Equity Research Analyst)
Hey, guys. Thanks for taking the questions. Just maybe a quick housekeeping follow-up from Phil's questions. Do you have the cash flow from operations and free cash flow results for the quarter?
Charlie Cao (Director of the Board)
No. We have the EBITDA number, right? We announced the EBITDA number as well as Phil's question of depreciation. I have the number now. It's roughly $40 million. And the operating cash flow, it's negative because this year, this quarter, we invested. We anticipated next quarter, our shipments will continue to increase. And in terms of detailed numbers, I will get back to you after call.
Brian Lee (MD and Equity Research Analyst)
Okay. Fair enough. We'll follow up. And then on the balance sheet, I noticed that the debt number was up about $500 million from Q1 to Q2. Can you talk to what that was related to and then any kind of bigger picture thoughts around delivering?
Charlie Cao (Director of the Board)
From the delivery perspective, we are in the process of closing pre-IPO financing, CNY 3.1 billion, which will decrease our delivery as a whole. In terms of second quarter, which is the first quarter, the total debt increased a little bit. It's in connection with the capacity expansion as well as the working capital for the inventory accounts receivables.
Brian Lee (MD and Equity Research Analyst)
Okay. Fair enough. And then I guess related to the debt and next steps in the STAR listing process, you mentioned some intercompany restructuring. Could you elaborate on what that means, how long it takes, and then does it have to do with some of the intercompany loans? And can you just kind of give us a bit more detail around what has to happen from here on and how long that will take?
Charlie Cao (Director of the Board)
Yeah. It's a very short timing in terms of internal reorganizations because we need to put 100% assets or manufacturing assets under the China entities, and for us, it's very easy because we only need to reorganize certain if not all entities, particularly the sales entities under the China entities control, and in terms of scope, I just want to emphasize it's 100% manufacturing assets, including wafers, solar module, everything, but we still have some two or three international solar downstream projects which we plan to sell down in the future, so the international solar downstream assets are not in the scope of the entities we plan to launch the IPO in China.
Brian Lee (MD and Equity Research Analyst)
Okay. Appreciate that, Coller. And then maybe just last one from me. I know, Charlie, you said that gross margins, they're being guided flat basically in 3Q, and you're saying down slightly in 4Q. Can you help calibrate that a little bit just given there's so much volatility in the supply chain and specifically on polysilicon costs? One of your peers talked about gross margins being down kind of 500 basis points in the back half of the year versus the first half of the year and being in the mid-teens. Is that how we should think about sort of that slight downtick for you? Are you going to be back into kind of the mid-teens gross margin level in 4Q?
Charlie Cao (Director of the Board)
Yeah. I think back to the second quarter, originally, we have relatively pessimistic outlook for the second half of the year because of the global coronavirus situation. But the situations, and I think most of the participants are not expecting the recovery is so quick for renewable energy. And as well, the price is upwards, reached the bottom in the second quarter and up dramatically in the third quarter and fourth quarter. But on the other side, certain materials, including polysilicon, glasses, are in short supply, which puts some pressure on the internal production cost. So that is why we expect this fourth quarter, the gross margin will be in the downward trend comparing to the second quarter and the third quarter.
Brian Lee (MD and Equity Research Analyst)
All right. Fair enough. But would you say mid-teens is too pessimistic of you, or is that about the right range?
Charlie Cao (Director of the Board)
You mean the fourth quarter, right?
Brian Lee (MD and Equity Research Analyst)
Yeah. Fourth quarter specifically.
Charlie Cao (Director of the Board)
Oh, I think it's slightly down comparing to the third quarter. 15%, I don't expect that number in the fourth quarter.
Brian Lee (MD and Equity Research Analyst)
Okay. Fair enough. Thanks, guys.
Charlie Cao (Director of the Board)
Thank you.
Operator (participant)
Next question is Paul Johnson from GLG.
Paul Johnson (Equity Research Analyst)
Hey, guys. Thanks for taking the question. Can you hear me?
Charlie Cao (Director of the Board)
Yes.
Paul Johnson (Equity Research Analyst)
Yes, please. Hey. Thanks, guys, so there's been a lot of talk about China's next Five-Year Plan, and there's been some speculation that the target could go up to 50 gigawatts a year, but then on the flip side of that, clearly, incentives end next year, so any country where we've seen incentives end, you've seen a big decline in demand, so can you talk about what your view is on what you see with respect to demand in China next year, and then I have a follow-up.
Kangping Chen (CEO)
Sure. I think for China's 14th Five-Year Plan, currently, the market intel is suggesting the total demand side is substantially increasing, and the draft has not been released yet. There's no public information on it. But according to the rumors we are reading or we are seeing in the market right now, I think if you convert the total installation number into annual installation number, I think the number is indicating over 60 gigawatts. It may be at the range around 60-70, even higher.
Charlie Cao (Director of the Board)
Yeah. On top of that, I'm not sure you know or not, and the President had a speech at the United Nations, and China is committed to reach the peak of the carbon emission by the end of 2030, as well as we will try to achieve zero carbon emissions by 2060, which is showing China's commitment to renewable energy. So as well as the next five-year plan, I think it's under, just like Gener said, it's under discussions. But we think the possibilities is the high possibilities and China will raise upward the targets.
Paul Johnson (Equity Research Analyst)
Okay. That's very helpful, and then there's been a lot of focus on relistings and subsidiary listings of US ADR stocks in China on the Shanghai Stock Exchange. Based on our understanding, a lot of US investors are expecting listings on the Shanghai Stock Exchange and then that profit to be used to buy US ADR stocks, but based on our understanding, we believe it's illegal in China to list on the Shanghai Stock Exchange and then use those proceeds outside of China, i.e., outside of Shanghai. Do you guys know if that's true or not, and do you agree with that?
Charlie Cao (Director of the Board)
I think the IPO part is typically in China. Let's say you issue this year 10%, and typically, you have the use of proceeds. Typically, it's used for some CapEx as well as working capital. But in China, for the public companies, there is some requirement, let's say 10% net income each year. The public companies are required to distribute as dividends to investors. From that perspective, I need to check with the lawyer. From that perspective, the 10% net income distribution as dividend, I think from my perspective, I need to check. From the dividend perspective, it's okay. The Chinese entity is able to distribute the dividend out of China and ultimately dividend to the U.S. shareholders. I need to check.
Paul Johnson (Equity Research Analyst)
Okay. Thanks a lot, guys. Good luck.
Charlie Cao (Director of the Board)
Thank you.
Kangping Chen (CEO)
Thank you for your question.
Operator (participant)
As a reminder, please press 01 for questions. There are currently no more questions. Management, do you have any follow-up remark? If not, then this is the end of today's call, and thanks everyone for joining this call, and you may disconnect now. Goodbye.