Jun 24, 2012
Sometimes financial figures cannot be used as the main criteria for judging a company’s prospects. That sometimes it takes a bit more work to construct the story which will allow you to arrive at a meaningful conclusion.
Currently, their financial statistics along with US government are definitely not in Trina Solar’s(NYSE:TSL) favor as its net income, ROA, ROE are all negative and to put it bluntly the company is bleeding. Trina’s balance sheet is compromised the most by the increase in debt by around 100% between 1st quarter 2011 and 2012 at the expense of a decrease in equity of about 10% as well. Long term Debt to Equity, however, is still a manageable 38%. Though the debt might help the company in long term it has made Trina it look unattractive to investors. Its interest coverage has gone to negative which means it does not have funds to cover its interest expenses.
Trina’s bleeding can be attributed to factors beyond its control like the global crash in solar module average selling price, along with the U.S. government’s imposition of countervailing and anti-dumping duties, which for Trina totaled more than 34%. Trina’s gross margin was 5.8% in Q1 2012 compared to 27.5% for the same quarter in 2011. But if we take out provisioning for potential countervailing and anti-dumping duties, its gross profit and gross margin are $46.5 million and 13.3%, respectively. Despite these issues the company has been able to cut down its operating expenses by 36.0% sequentially and 9.9% year-over-year in the first quarter of 2012.
They will need that kind of operational efficiency to make it through the next few quarters until the massive expansion of solar installation by both China and Japan begin hitting manufacturers sales departments. Japan is reported to be building 4.6 GW of solar power, which China is looking to add 5 GWs per year until 2015 and a full 50 GW installed by 2020. Given the punitive nature of the tariffs imposed by the U.S. it is safe to say that U.S. producers like Sunpower (NASDAQ:SPWR) will not be getting many of those contracts. There will be no shortage of work for Chinese solar producers in the long term.
The heavy subsidization of the solar industry, which has driven cost per watt by the Chinese producers down to $0.65 per watt with eyes of getting costs down to $0.50, has also created a massive over-supply in the industry. Now that the capacity has been built, however, mass production can proceed. One may not be crazy about the process of building out the industry, the net result is that strategically, China now has a highly efficient, if somewhat redundant, solar industry where the best players will reap great benefits when the next phase of deployment and adoption of the technology begins.
When we look at the smaller players similar to Trina, especially those which have market cap in millions, like LDK solar(NYSE:LDK), Suntech(NYSE:STP), Yingli Green Energy all are experiencing similar margin pressure as Trina; all of them have their bottom line in red or at least close to it.
Trina is certainly not giving up in its latest move to plan for the future it has entered into collaboration with Germany-based E3/DC to develop next generation energy storage solutions for homes and small businesses which will help Consumers become independent from rising energy costs by balancing solar energy generation with consumption. Since the cost of the modules of a home solar installation is only 20%, improving the cost structure of storage is an imperative. Trina has numerous projects lined up and in has increased its spending on R&D which have resulted in their Honey Ultra multi-crystalline modules that have the current record for energy density per unit area.
The question will be whether Trina will be able to survive the near term shakeout in the industry. With more than $600 million in cash and $335 in current inventory and is close to operationally neutral prospects look good. After that the sheer volume of solar installations in countries with current account surpluses or strong currencies, like the aforementioned China and Japan, but also India and Saudi Arabia will dominate the market. The U.S. and Europe can no longer afford their solar subsidies, but their rising (from the ashes in the case of Japan) competitors are in a position to do so.
Trina is an ultra-high beta stock, 3.3, so anyone looking to invest should be prepared for a lot of volatility. But Trina looks to have bottomed in the $6 range. If one is convinced that Trina’s story has reached its nadir then this is a low-risk speculative play that has great payout potential.