Trina Solar Preview: Gross Margins And Shipments Are Expected To Improve

Trina Solar (NYSE:TSL) is expected to release its second quarter earnings on August 20. While the company’s balance sheet is significantly better that many of its Chinese peers, it has not been immune to oversupply in the global market having posted seven consecutive quarterly losses.

During Q1, Trina’s revenues declined by around 25% since the same quarter last year to $260 million while the net loss widened to around $63 million from around $30 million. However, we believe that the firm could begin to see better times given the recent signs of stabilization of average selling prices (ASP) for panels, growing demand from China and other emerging solar markets, and the recent trade deal between China and the E.U. The company also recently increased its shipment guidance for the second quarter by around 20% to between 630 megawatts (MW) and 660 MW. Here are some of the key trends to look out for when the company releases earnings Tuesday.

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Gross margins Will Improve On Stabilizing Panel Prices

Over 2012, we estimate that Trina’s panel prices declined by around 40% to about $0.80 per watt. However, things improved during Q1 as ASPs fell at a slower rate of around 6%. ^[1] We believe that selling prices could begin to stabilize this quarter and there is a possibility that ASPs could even begin to increase towards the end of this year. Trina’s cost control initiatives coupled with stabilizing prices are likely to bode well for overall margins. For this quarter, the company has guided gross margins of between 11 to 12%, up from less than 2% in the previous quarter. ^[2]

Watching Progress In The U.S. Utility Solar Space And The Japanese Market

Europe remained Trina’s largest market as of Q1, accounting for around half of overall panel shipments. While the recent deal between the E.U. and China to resolve the dumping dispute is definitely a positive for the company as it will allow it to carry on business as usual without having to pay high anti-dumping duties, we believe that overall demand growth in Europe could be subdued in the near term given a spate of subsidy cuts in key markets. (Related read: China And The E.U. Reach A Deal To Resolve Solar Row) In order to make up for any potential sluggishness in Europe, we believe the company will have to focus on the Chinese market as well as higher value markets such as the U.S. and Japan.

U.S. Utility Scale Space: The Solar Energy Industries Association (SEIA) expects 5.3 gigawatts (GW) of solar power to be installed in the United States this year, up from around 3.3 GW last year. The U.S. market has been geared towards large scale solar power projects and Trina has made some significant headway into the space recently, forging a deal with Sempra Energy to supply 1.1 million panels for the 345 MW Copper Mountain Solar 3 project in Nevada.  ((Reuters)) This would be the largest installation of polycrystalline solar panels in the world. While Trina hasn’t disclosed the financial terms of the deal, considering panel prices of around 0.65 cents per watt, we estimate that the total deal could generate revenues of around $200 million. We view this deal as being very significant for the company given the competition in the American utility solar market. We will be interested to hear additional details of this deal and will be watching the firm’s plans in making further inroads into the U.S. utility scale market.

Japanese Rooftop Market: Trina has been focusing on higher value markets such as Japan where the cost per watt of solar power systems are among the highest in the world. For 2013, Trina expects Japan to account for nearly 9% of overall shipments, up from just about 3% last year, banking on the sales of its high efficiency panels which are preferred for distributed solar systems. The firm expanded manufacturing capacity for its high-end ‘Honey’ panels, which offer higher conversion efficiencies compared to conventional polycrystalline panels by around 500 MW last year.

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1. Seeking Alpha [↩]
2. Trina Solar Form 6-K [↩]