Trina Solar Needs Good News On Costs Or New Markets To Lift Earnings

China’s Trina Solar (NYSE: TSL) is set to release its Q3 earnings on Tuesday, November 20. The firm’s stock has taken a beating this year losing almost half its value since January. In the second quarter, the firm posted net loss of $92 million on sales of about $346 million due to lower selling prices for its panels. Things don’t seem to have improved much in the third quarter either. Last week, the company slashed its Q3 guidance figures, warning that gross margins would decline to between 0% and 1.5% and also cut its module shipment estimates by about 20%, citing high inventory levels and a tough pricing environment.

Although its performance over the last few quarters has been poor when viewed separately, it has been fairly better than that of the broader Chinese solar industry. Trina has been focusing on reducing operating costs and expanding into new geographic markets to bolster profitability going forward. Here are some of the key factors that we will be watching in Trina’s Q3 earnings release.

Operating Cost Control

Given the panel glut and a weak pricing environment, Trina Solar is being forced to prune down costs to stay competitive. In the second quarter, the firm reduced non-silicon costs, which are a good measure of manufacturing costs since they exclude the effects of volatile polysilicon prices, to $0.52 per watt from $0.58 in Q1. ^[1] The company expects these costs to decline further as it takes initiatives to streamline its supply chain and improve panel conversion efficiency. During Q3, the company also unveiled plans to restructure its business by separating its PV module and systems business units and also outlined a program to reduce its operating costs, which included some manpower reductions.

New Market Development

Anti-dumping duties in the United States and the subsidy cutbacks in Europe are weighing on the demand in Trina’s key markets. The firm is now looking to the Middle East, Japan, South Africa and China to drive growth.

Trina Solar for its part looks very bullish on the Chinese market. Based on the guidance provided in Q2, Trina Solar expects China to account for 16% of annual shipments in 2012, up from 7% last year. The Chinese  government has introduced incentives like feed-in-tariffs to promote solar energy in the country.  The government  has an ambitious road map for  increasing  solar installations to about 21 GW by 2015 from the present level of about 3.6 GW. This would make China one of the world’s largest solar markets.

Another area where the company is focusing on is the forward integration into the the downstream and utility projects businesses. This will allow the firm to capture significant downstream value and improve its revenues and profits.

Balance Sheet Position

The Chinese government has made its views clear on consolidation within the domestic solar industry, calling for larger firms to acquire smaller, weaker firms. We believe that Trina Solar has a balance sheet that lends itself well to acquisitions compared to the other large Chinese players.  At the end of Q2, the firm had a debt load of about $1.3 billion and about $660 million in unrestricted cash. With government support, Trina Solar will be in a good position to lead industry consolidation.

We will be updating our price estimate for Trina Solar following the earnings release.

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1. Trina Solar Form 6-K [↩]