Trina Solar Limited (TSL):  Still Shining Amid Solar Eclipse

It as s been a rough couple of months for the solar industry.  High-flying SunEdison and SolarCity have taken punches to the gut and many of the Yieldco funding vehicles have been cut in half.  Yet, Trina Solar keeps chugging along.

Trina Solar is an integrated global manufacturer of solar panels and components and has more recently entered the solar-development business. Trina was ranked as the largest solar manufacturing company in the world in 2014 and has cracked the sub-$0.40/watt price this year, giving it meaningful economies of scale and cost advantages over competitors.

The company’s China home, however, is a double-edged sword.  On the one hand, China’s pollution problem has given rise to a government-sponsored push to replace dirty burning fossil fuels with renewable energy.  The downside, at least from the market’s perspective, is the slowing economic growth in China.  The current Chinese economic malaise has given rise to doubt as to whether the Chinese government will follow through on its renewable energy efforts.  Energy consumption growth has slowed to a crawl and there are reports that up to nine percent of the country’s solar capacity sits idle. The government continues to delay incentive payments to solar providers by falling behind in connection permits, putting stress on the Chinese solar industry’s financial well-being.

Globally, markets have turned against solar companies that have taken on debt to fund the large upfront costs required in a solar development.  SunEdison common shares are down almost 80% since 2015 highs as investors have questioned the model of heavy borrowing to finance solar growth, causing the fixed-income risk premium to bolt upward. SolarCity stock was slammed last week as the company announced it was slowing its planned growth.  Simply put, solar industry growth has outpaced the debt market’s willingness to lend.

Throw in the drop in oil prices, and the market has sent Trina ADRs on a wild ride to nowhere. Trina’s ADR closed at $10.19/ADR last Friday, up only 3 cents/ADR over the last year. In the interim, however, the stock has been as high as $13/ADR and as low as $7.15/ADR last August when the China market crises was in full swing.

Despite the noise, results have been positive. Trina beat guidance last quarter, shipping 1,231 Megawatts versus a company estimate of 1,140 MW.  Gross margins increased to 20% last quarter, up from 15.4% in Q1 2014, a testament to Trina’s ability to drive down production costs.  That increased efficiency was partially offset by lower selling prices and a less desirable sales mix with China growing in importance. Solar module sales prices are lower in China than the US and Europe.

The increase in sales and improved gross margin led to an earnings beat last quarter. Trina reported earnings of $0.42/ADR versus average analysts’ estimates of $0.25/ADR. Revenue of $722.9 million beat the average analyst estimate by slightly more than 10%. The company raised full-year guidance.

As an industry plus, First Solar said last week that it saw good visibility into 2017, despite the reduction in federal solar investment incentives scheduled for the end of 2016. First Solar sees solar growth continuing as costs come down and utilities become more interested in the fuel for a variety of reasons.

Bottom line, solar investing has been risk off recently as the industry leverages up, but we continue to like Trina over other names for those looking for solar exposure.

Company Description

The company is a vertically integrated solar manufacturer, producing mono- and multi-crystalline ingots, wafers, solar cells and finished solar modules. Solar Panels are primarily sold to wholesalers such as Solar City or SunEdison throughout the world, including the faster growing solar markets in the US, China, India, Japan and the UK.

Production capacity is:

Product Commencement Capacity as of
December 31, 2014
Production Output
for the Year Ended
December 31, 2014
Estimated
Maximum Annual
Capacity as of
December 31, 2015
Silicon ingots August 2005 2,000 MW 2,000 MW 2,900 MW
Silicon wafers February 2006 1,700 MW 1,610 MW 2,300 MW
Solar cells April 2007 3,100 MW 2,764 MW 4,100 MW
PV modules November 2004 4,000 MW 3,287 MW 4,400 MW

Source: SEC Filings

 

At quarter end, Trina had ingot capacity of 2.3 Gigawatts, wafer capacity of 1.8 GW, PV cell capacity of 3.2 GW and PV module capacity of 4.4 GW. Trina’s production strategy is to partner with upstream and wafer suppliers and invest in the downstream process steps of cell and module production, where the company feels it can add the greatest value.  Thus, Trina buys silicon ingots and wafers from third partners to make-up any shortfall in its own production capacities.

Trina is also building a new factory in Thailand and has designated a strategic partner in Malaysia as it begins to move manufacturing offshore to meet its global production needs.

Module shipments over the last six quarters are included in the following charts.

2014
(in Megawatts) Q1 2014 Q2 2014 Q2 2014 Q2 2014 Totals Q1 2015 Q2 2015
Third Party Shipments 534.2 794.6  936.8 1,070.5 3,336.1 891.7 1,000.7
Trina Downstream Shipments   23.8 148.7 127.0      28.3    327.8 134.5    230.9
Total Shipments 558.0 943.3 1,063.8 1,098.8 3,663.9 1,026.2 1,231.6

Source: Company Press Releases and Conference Call Transcripts

In the second quarter, China was Trina’s largest market and the United States was second. Both markets figure to lead solar global adoption over the foreseeable future.  China has a significant pollution problem to deal with and despite the reduction in federal investment incentives, the US still maintains a variety of renewable portfolio requirements that utilities must meet in coming years.

More recently, Trina has expanded to the downstream solar production plant development and construction. Trina’s downstream activity is also global in nature, including China, the UK, Japan, the Middle East and India. Trina completed and connected 211.1 MW of build-to-own projects in 2014 and completed another 40 MW that were not connected as of the end of the year. The company also completed and sold 73.8 MW during 2014.

The following table outlines Trina’s downstream project portfolio of December 31, 2014:

 (in Megawatts) Completed Projects Projects Under
Construction
Projects in Pipeline  
Build-to-sell Build-to-own Subtotal Build-to-sell Build-to-own Subtotal Build-to-sell Build-to-own Subtotal  
China 251.1      251.1 330.0 330.0 220.7 220.7
Europe 18.0 18.0 50.0 50.0 25.0 25.0
Japan 188.4 188.4
Others 4.2 4.2 12.5 12.5
Total 273.3 273.3 50.0 330.0 380.0 213.4 233.2 446.6

Source: Trina SEC Filings 

Trina has expanded the above numbers significantly since the end of 2014. At the end of Q2 2015, Trina had a total of 359 megawatts of operating assets, over 600 megawatts of utility and DG projects under construction and 800 megawatts in the late stage of project development. Trina’s total budgeted capex for 2015 is $300 million to $350 million for the module business and around $1 billion for the downstream business.

Liquidity

Trina maintains adequate liquidity, with $616.3 million in cash at quarter’s end, although it faces challenges on a few fronts.  First, like many Chinese companies, the majority of its debt is short-term bank loans. As of June 20, 2015, over $900 million in debt was short-term bank loans, placing the company in virtual constant refinancing mode. This does not pose undue near-term burdens for Trina, but it does have implications in more challenging times.  Credit can be cut swiftly once a tipping point has been reached. One just has to witness the current pressure Yingli faces with its bloated balance sheet and the constant threat of banks cutting their credit lines.

The other challenge is managing its business strategy of developing downstream solar projects. The ability to finance the projects at a reasonable cost is a major catalyst in a company executing on solar development projects. While development projects are often profitable, upfront costs are steep and profits years away. If funding sources dry up or become more expensive, the results can be challenging. That is what happened to SunEdison.

Trina is aware of the situation and is working to line up longer-term financing. Last week the company announced an RMB 10 billion ($1.58 billion) facility with the CITIC Group. The agreement is split into two RMB 5 billion parts.  The first is a five-year agreement with CITIC Financial Leasing to support equipment upgrades and downstream projects.  The second is a credit line for trade financing including short-, medium-, and long-term loans.  The package is clearly a step in the right direction in terms of putting more desirable, longer-term financing in place for Trina.

Aside from the debt structure, Trina’s debt to EBITDA is on the conservative end of Chinese solar companies, but is growing as it adds development projects. Debt/EBITDA currently is a manageable 3.3 times, far short of Jinko’s 4.3. Jinko’s higher multiple is a result of it being further along the curve in its development projects.  Yingli, a company in financial trouble, is 10 times levered.

So while Trina’s debt load is manageable for now, investors must not lose sight of it.

Conclusions

Trina is a world-class solar manufacturer and a low cost leader in the market.  Given its economies of scale and focus on driving down costs further, Trina is a formidable competitor in the space.

The tide in China also seems to be turning.  Earlier in the month, China raised its solar target by 5.3 GW over the previously announced 17.8 GW with most of the new installations being added in Inner Mongolia and Hebei in the North and Xinjiang in the West.  China only installed 7.73 GW in the first six months of 2015 and although China is notorious for missing targets, it likely means that installations will speed up during the second half of the year offering an opportunity for Chinese solar companies like Trina to beat estimates.

Help may also be on the way for Chinese solar operators to realize fuel revenue potential.  In the past, China has had dispatch quotas on fossil generation, often leading to the curtailment of renewable energy generation. In the first half of 2015, this resulted in a 10% reduction in solar power consumption. However, the Chinese agreed during talks with President Obama to undertake a competitive power dispatch that prioritizes the emissions-free, near-zero marginal dispatch cost of renewable energy.  While this does not alleviate the backlog in solar connections, it does elevate renewable energy to a higher priority.

We think the HOCS scores fairly incorporate the future growth potential and leverage risks associated with the current state of the solar industry. Growth opportunities continue in the solar industry and we believe that Trina is not just a survivor but a leader in the space. While increasing leverage and debt structure is a concern, over the intermediate to long-term, Trina offers opportunities for appreciation for patient investors.

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