Trina Solar Has A Solid Q3 As Industry Conditions Continue To Improve

Trina Solar (NYSE:TSL) reported its Q3 2013 numbers on November 19th, posting its first profit in nine quarters. The company’s results benefited both from strong demand (in markets such as China, the United States and Japan) and from stabilizing panel prices as well as lower manufacturing costs. Net revenues were up by 84% year over year to $548.4 million while net income stood at $9.9, a big improvement over the prior year loss of $57.5 million. ^[1] The company’s outlook also remains bright as it raised full year shipment guidance to a mid-point of around 2.6 gigawatts (GW), indicating that factories will run at above 100% capacity. Here is a brief look at some of the trends that influenced the company’s results.

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China Continues To Drive Volumes Growth

Trina Solar’s quarterly modules shipments stood at around 774.6 megawatts (MW), rising by 20% sequentially. China continues to be the key driver of the company’s shipments growth, with revenues from the country accounting for close to 40% of total quarterly revenues. Demand for photovoltaic products has been on the uptrend in China, driven largely by a conducive regulatory environment. For instance, the Chinese government provides incentives, including feed-in-tariffs as well as other infrastructure-related support such as free-grid connectivity for solar projects.

Demand and shipments aside, overall industry conditions also seem to be getting better. Pricing and receivables collections, which have traditionally been an issue in the Chinese market, have been showing signs of improvement in recent quarters.  The difference in Average Selling Prices (ASP’s) between China and the rest of the world have been narrowing while receivables velocity has grown in line with higher sales and improved end-market demand. ^[2] The near-term outlook for the market is largely positive as the government is targeting about 11.8 GW of new solar installations for the year 2014.  This equates to about 25% of projected global solar demand.

Trina Solar has been focusing on beefing up its presence in the Chinese Utility Scale solar market and currently has a project development pipeline of between 500 MW and 700 MW. ^[3] However, we believe that this business could face some near-term risks. According to the China’s central planning committee, the NDRC, Utility Scale solar projects will account for just about 4.2 GW (about 35%), of the government’s installation target for the next year.  This is not only lower than previously anticipated and but also significantly lower than the development pipelines (about 7 GW) held by some of China’s largest solar companies and project developers. ^[3] While this creates some uncertainty over the overall utility solar projects market in China, Trina’s stronger balance sheet and relatively lower leverage could put it at an advantage over other players.

Margins Rise On Utilization And Conversion Efficiency Improvements

Trina Solar’s gross margins rose by 3.5 percentage points sequentially to about 15.2% for the quarter, driven by stabilizing Average Selling Prices as well as lower per-watt manufacturing costs. ASP’s for the quarter held largely steady at around $0.64 per watt, while manufacturing costs trended lower due to improved cost controls in the company’s supply chain; also contributing were increased utilization of in-house manufacturing capacity, as well as module conversion efficiency improvements. Based on Trina’s annual module shipments guidance of about 2.6 GW, the company will be operating at an nearly 10% over capacity for this year. This marks a significant turnaround from the last year when a large part of the company’s capacity was underutilized.  Higher utilization rates help manufacturing companies better allocate their fixed production costs over a larger number of units and improve their gross margins. The company expects gross margins to remain in the mid-double digits for the fourth quarter as well. ((Trina Solar Supplemental Presentation))

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1. Trina Solar Press Release [↩]
2. Seeking Alpha [↩]
3. Market Watch [↩] [↩]