Trina Solar Posts Lackluster Q4 Numbers Despite Shipment Growth

Trina Solar (NYSE:TSL), one of China’s largest solar equipment manufacturers, published its fourth quarter earnings yesterday. Quarterly revenues rose by around 1.5% sequentially to $302 million while operating losses narrowed to around $70 million down from $76 million last quarter. ^[1] Although the earnings were lackluster, there were some encouraging trends including shipment growth to the Chinese market, better cost control and some progress in the utility scale solar business. However, we still believe that 2013 is likely to be a challenging year for the firm due to depressed prices and persisting oversupply plaguing the global solar industry. Here are some of the key takeaways from the firm’s earnings release.

Growth In China And Japan Is Promising

Trina’s revenues from China more than doubled in the fourth quarter to around $100 million. The region accounted for around one-third of quarterly revenues. China is a promising market for Trina as the government has set a target of adding around 10 GW of solar power this year and recently boosted incentives to encourage installations. As of last year, China was the world’s second largest market for solar products and this year it could overtake Germany to become the world’s largest market.

Business in Japan also doubled in Q4 (although on a relatively low base), and the country now accounts for around 7% of Trina’s revenues. Japan has among the highest feed-in-tariffs in the world, which should help boost installations in the near term. Systems costs in the country are typically higher than in the rest of the world and most of the demand is for high efficiency panels. Last year Trina added around 600 MW of capacity for manufacturing its high efficiency ‘Honey’ solar panels and Japan could prove to be a promising market to sell them.

Projects Business Plans

Trina has been gradually developing its solar systems business, which builds large scale solar farms. The firm recently got approval to build a 50 MW plant in China’s Gansu Province and management has indicated that another large project deal is expected in the region. ^[2] Apart from this, the firm is also participating in some projects in the United States. This is definitely an encouraging trend since margins for this business are typically higher than for panels. Growing this business would also help to partly isolate Trina from some of the volatility in panel prices.

Trina recently signed a deal with QBotix, a firm that develops robotic trackers for solar power plants to develop and deploy its solar trackers in its power plants. Trina will be among the first panel manufacturers to utilize QBotix’s innovative technology which can help reduce balance of system costs and improve system efficiency. The firm’s financial position is also a lot better than many other Chinese solar firms, and this could prove an advantage in bagging larger contracts in China and abroad. As of Q4, total debt stood at $1.3 billion while cash was around $920 million.

2013: Losses Could Narrow But A Return To Profitability Seems Unlikely

Gross margins for Q4 came in at around 1.9% due to better control over manufacturing costs. Non-silicon costs per watt, which excludes the prices of polysilcion raw material, fell to around $0.51 from $0.54 in Q3. Management expects this trend to continue into this year as well with costs expected to fall faster than panel prices. Shipments guidance for the year stands at between 2 GW and 2.1 GW, up from around 1.6 GW in 2012, which should help boost capacity utilization (the firm has manufacturing capacity of around 2.4 GW) and enable better absorption of costs. Despite the relatively positive outlook on the cost front, we still think that a return to profitability is highly unlikely given that average selling prices are under severe pressure both in China and globally. However, if there is significant consolidation within the Chinese solar industry and weaker firms file for bankruptcy, things could look up for Trina as this would bring down supply and improve the pricing environment.

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