Factors Influencing Trina Solar’s Gross Margins

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Trina Solar

Trina Solar (NYSE:TSL) has had a solid year so far. The company has seen its stock price rise from under $5 in January to current levels of nearly $12, as a surge in demand for solar panels from markets such as China and Japan has been driving revenues and profit margins. Trina also remains one of the most financially stable Chinese solar companies with a relatively manageable debt load and an adequate liquidity position. In this article, we take a look at some of the key factors influencing the company’s manufacturing costs and gross margins.

According to our estimates Trina Solar’s gross margins have declined from levels of over 30% in 2010 to around 4% in 2012, as panel prices plummeted while utilization rates remained low. However, we estimate that the company’s gross margins will steadily increase going forward rising from current levels of around 11% (in Q2 2013) to about 20% by 2020. Some of the factors supporting our estimates include the company’s recent focus on high-end panels and positive trends in the company’s capacity utilization rates. However, key mitigating factors include a possibility of  an increase in polysilicon and manpower related costs.

Better Utilization And A Drive Towards Higher Efficiency Panels Will Help Margins

Improving Utilization: Trina Solar currently has an annual panel manufacturing capacity of around 2.5 gigawatts (GW). There is a chance that the company could approach 100% capacity utilization towards the end of this year on the back of strong demand from markets such as China, the United States and Japan. Higher utilization rates translate into better allocation of fixed production and labor costs, allowing for better economies of scale. We expect this to be a key driver in reducing production costs going forward. If demand improves further next year, the company could potentially operate above its nameplate manufacturing capacity, further bolstering its gross margins.
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Higher Efficiency Panels: Trina has been focusing on its higher efficiency panels over the past few quarters and recently expanded manufacturing capacity for its high end Honey polycrystalline panels. The focus on these higher efficiency panels is likely to have a positive impact on gross margins since these panels typically require a lower amount of raw material to manufacture while actually commanding a pricing premium over conventional panels in the marketplace.

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Rising Costs Could Play Spoilsport

Polysilicon Prices: The prices for polysilcion have seen a precipitous decline over the last few years as an oversupply of the commodity drove down prices from over $400 per kilogram in 2008 to current levels of close to $20 (in China), helping solar panel manufacturers drastically cut down on their manufacturing costs. [1] However, there have been signs of stabilization in polysilicon prices over the last few months, and there seems to be a strong possibility that prices will actually rise going forward, as the Chinese government is looking to bring about consolidation within the country’s fragmented polysilicon industry. We estimate that polysilicon costs account for between 20% to 25% of  Trina Solar’s module manufacturing costs. The company sources its polysilicon feedstock from both domestic as well as international suppliers through contracts with price adjustment provisions. We believe that higher polysilicon prices could drive up the company’s variable costs thereby impacting gross margins.

Labor Costs: Although solar cell and panel manufacturing is largely automated, China’s lower labor costs have been a factor in giving manufacturers like Trina Solar a cost advantage over American and European rivals. Labor costs for panels manufactured in China are estimated to be $0.07 lower than those manufactured in the United States, which is quite significant since panels are now selling at below $0.70 per watt. [2] However, the country has seen labor costs increase sharply over the past decade, rising by as much as 20% per year,  driven by stronger demand for labor regulations on the minimum wage.  ((WSJ)) As labor costs continue to rise, this could erode the price advantage enjoyed by the company.

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Notes:
  1. Reuters []
  2. R&D Magazine []