Renewed Support From The Chinese Government Will Help Trina Solar

10.37
Trefis
TSL: Trina Solar logo
TSL
Trina Solar

The official Chinese securities journal has reported that the China Development Bank, a policy bank sponsored by the Chinese government, will step in to renew financial support to the country’s beleaguered solar industry. [1] The Chinese solar industry has been beset by excess capacity, plummeting panel prices and falling demand in key markets. The situation was  further exacerbated with the initiation of the recent anti-dumping investigation in Europe and the imposition of countervailing tariffs in the U.S.

China has dominated the global solar manufacturing industry in the recent years, commanding over half of the global solar market share. It is estimated that Chinese firms have the capacity to manufacture up to 50 GW of solar panels a year while the annual global demand stands at just 30 GW. [2] The oversupply has resulted in  a free-fall of panel prices. Prices fell by about 45% over the last year causing companies to spill a considerable amount of red ink while struggling to contain their mounting debt.

It is expected that 12 solar firms, including Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL), will receive financial support under the new funding program. The lending is expected to be firmly controlled, and the funding is not expected to be extended for projects solely seeking capacity expansion. The Chinese government is also intent on bringing about consolidation in the industry by supporting acquisitions of weaker firms by larger ones.

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See our complete analysis for Trina Solar

Boosting Domestic Demand

Although China leads the world in panel manufacturing, it is a laggard when it comes to solar installations, accounting for a mere 4.3% of global solar capacity. Cumulative installed capacity in China currently stands at around 3.6 GW. The National Energy Administration (NEA) of China seeks to achieve an installed capacity of 50 GW by 2020. The move to ramp up domestic capacity will help reduce the Chinese solar industry’s dependence on exports and its exposure to changing foreign government regulations.

Trina Solar To Benefit

Three of the industry’s largest players – Suntech Power, Yingli Green Energy and Trina Solar – are expected to be prime beneficiaries of the state support. It however seems unlikely that LDK Solar (NYSE:LDK), the firm most severely affected by the crisis, will receive any benefit. [1]

Trina Solar is among the healthier Chinese solar firms. The company posted gross margins of about 9% in the second quarter, which is reasonable in an industry where companies have been struggling to recoup direct costs. The company also has a better cash position and a relatively lower debt burden compared to most of its peers. With government support, Trina Solar will be in a good position to lead the industry consolidation.

Trina Solar recently announced plans for organizational restructuring, which will include manpower reductions. The company will also extend its focus on the projects business which offers better profitability, allowing it to reduce exposure to largely commoditized businesses such as PV wafers and cells.

We have a price estimate of $6.20 for Trina Solar, which is about 38% ahead of its current market price.

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Notes:
  1. China Development Bank Renews Solar Support, Journal Says, Bloomberg [] []
  2. Inventory Mountain Adds To Pain For Chinese Solar Firms, Reuters []