Trina Solar (NYSE:TSL), one of China’s largest solar panel manufacturers, is expected to release its fourth quarter earnings on February 26. While the firm’s operational performance over the last few quarters has been poor, keeping in line with the broader industry, it distinguishes itself from the other Chinese solar stocks that we cover, thanks to its relatively lower leverage and its recent focus on high efficiency panels.
In Q3 2012, revenues declined by around 39% y-o-y to $297 million while the net loss widened to $57 million from around $31 million.  Things are not expected to get much better in Q4 as the company has guided gross margins of around 1% (similar to Q3) and expects only a marginal increase in panel shipments. ((Q3 Earnings Presentation)) Here are some of the key indicators that we will be watching when the firm releases earnings Tuesday.
Trends We Are Watching
Progress in The Chinese Market: The Chinese government has set a target of adding around 10 GW of solar power this year and has recently boosted subsidies to encourage installations.  As of last year, China was the worlds second largest market for photovoltaics and this year, it could overtake Germany to become the world’s largest market. This makes it a very important market for Chinese photovoltaic manufacturers like Trina Solar. At present, Chinese sales account for just around 13% of the Trina’s revenues (Germany in comparison accounts for 38%), giving the firm significant scope to scale up shipments.
Performance of The Systems Business: The company plans to expand its photovoltaic system business by developing its own projects and recently got approval to build a 50 MW plant in China’s Gansu Province.  The firm has also mentioned that it is open to purchasing solar project developers. Solar projects enable companies to capture downstream value by providing the design, engineering and construction services to build solar farms. Margins are also typically higher for this business since it is less dependent on volatile panel prices. We will be watching the firms progress in bagging new projects.
Focus On New Markets: As panel prices continue to fall, the firm is seeking markets where subsidies are still provided and electricity prices are relatively higher, allowing solar power to reach grid parity sooner. Over the last year, the company opened up new business development offices in Canada and Chile. Other markets that the firm is focusing on include Japan, which now has among the highest feed-in-tariffs in the world and could be an attractive market for high efficiency panels. Expanding in these markets will help the firm reduce its dependency on the German and U.S. solar markets, which together account for more than half of the revenues.
Capacity Utilization And Manufacturing Costs: While most manufacturers have been postponing their capacity expansion plans considering the weak pricing environment, Trina Solar took a bold step of adding about 500 MW of cell and module manufacturing capacity last year to produce its high efficiency ‘Honey’ modules. While the move could pay off in the long term, it has been impacting margins off late due to under-utilization of capacity. During Q3 2012, under-utilization caused the non-silicon costs to increase by 2 cents, bringing total modules manufacturing costs to about $0.67 during Q3 2012. We will be watching the firm’s progress in cutting direct costs and improving utilization levels.Notes: