Trina Solar Looks Fairly Valued As International Growth Offsets Margin Pressure

Trina Solar (NYSE:TSL) recently released its Q4 2012 earnings. We have updated our model to account for some of the recent trends and the firms guidance for 2013. Our new price estimate stands at around $3.97, which is about in line with the current market price.

Here is a brief overview of the key model changes.

1) Reduced Outlook For Italy And Spain Modules Sales: We estimate that shipments to Spain fell by around 80% in 2012 to around 32 MW while shipments to Italy also decreased by 50% to 97 MW. The declines were primarily due to cutbacks in subsidies and the weak macroeconomic environment in the E.U. Going forward, we estimate that shipments in Spain will gradually increase to around 55 MW by the end of the Trefis forecast period while shipments in Italy will grow to around 180 MW.  We do not expect shipments to grow at their historical rates since they were largely subsidy-driven.

2) Increased Rest of The World And U.S. Shipment Forecasts: Sales to countries such as China, Japan and South Africa have increased significantly over the past year.  We believe that these markets will be a driving factor in Trina’s revenue growth going forward. Shipments to the rest of the world segment more than doubled in 2012, and we expect it to grow by around 40% this year as well as the firm accelerates sales to China. China is expected to overtake Germany to become the world’s largest market for solar products this year. Trina’s sales to the U.S. have also been growing rapidly over the past few years. We estimate that sales will grow by around 30% in 2013 as the firm boosts supplies to power plants.

3) Gross Margins Expected To Grow: Trina has typically had gross margins of between 15% and 30%. However, in 2012 margins declined to around 4% due to under-utilization of capacity and significant pricing pressures. We believe that gross margins will recover to around 15% by the end of the Trefis forecast period as the firm streamlines its manufacturing operations and improves efficiency.

4) Module Selling Prices Will Continue To Decline: Average selling price per watt for modules declined by nearly 40% in 2012 to around $0.81. We estimate prices will continue to decline due to strong competition among Chinese manufacturers and also due to decline in production costs. We estimate that prices will be around $0.58/watt by the end of the Trefis forecast period. However, if there is significant consolidation within the Chinese solar industry and weaker firms file for bankruptcy, it could reduce the rate of decline in module selling prices.

5) Lower CapEx Forecast: Trina has invested heavily in expanding manufacturing facilities over the last few years. CapEx was around $160 million in 2012 and around $360 million in 2011. The firm has no plans for capital expenditures in 2013. We believe that the firm will gradually increase spending to around $100 million by the end of the Trefis forecast period; however, the number is still well below historical CapEx levels that we had seen between 2008 and 2012.

Understand how a company’s products impact its stock price on Trefis