Trina Solar (NYSE:TSL), one of China’s largest solar panel manufacturers, reported a strong set of Q4 2013 earnings on March 4, benefiting from higher panel shipments, cost controls and stabilizing panel prices. The company also issued strong guidance for FY 2014, indicating that panel shipments could rise by over 40%, to as much as 3.8 gigawatts (GW). Additionally, the company’s revenues and margins could trend higher as it intends to scale up its presence in the solar projects business. Considering this, we have upgraded our price estimate for Trina Solar’s stock from $14.50 to about $18.50, which is slightly above the current market price. In this note, we highlight some of the key changes to our discounted cash flow model and the related impact of these changes on the price estimate.
According to research firm NPD Solar Buzz, global solar panel demand is expected to grow from around 36 GW in 2013 to about 49 GW in 2014. While China, Japan and the United States are likely to remain among the largest markets, higher growth rates could be expected from emerging solar markets such as the Middle East and Latin America. Trina Solar has been preparing to cater to this growing demand, with plans to increase its module manufacturing capacity from around 2.8 GW in 2013 to about 3.8 GW by the end of 2014 through some strategic agreements. Since much of the new capacity will come from existing facilities of other manufacturers, Trina should be able to quickly scale up its operations without spending time and effort in building out new factories.
We have revised our forecast for the company’s shipments for 2014 to around 3.7 GW (+42% year-over-year), which is the midpoint of the company’s 2014 guidance. According to our estimates, China will continue to be the driving force behind the company’s sales, accounting for about one-third of overall shipments, while the “Rest of the World” segment (which includes Japan and other emerging markets) and the United States will account for about 30% and 15% of sales, respectively. We expect panel shipments (including systems projects) to grow to around 6.3 GW by 2020. We have also increased our forecast for the company’s capital expenditures to about $420 million (around 28% of gross margins) by 2020, keeping in line with the growing shipments.
Closing Supply-Demand Gap: While panel demand is poised to rise significantly this year, global solar manufacturing capacity growth is expected to be negligible, as capital expenditures on solar manufacturing equipment fell to an 8-year low of $1.73 billion in 2013, down from a peak of about $13 billion in 2011.  This could mean that manufacturers will have to produce at near or above their name plate manufacturing capacity, potentially translating into stable or even improved pricing power.
Project Focus: Trina Solar has been focusing on developing its utility-scale solar business, building large-scale solar power plants. This business is more lucrative for solar companies, as it allows them to capture additional value by providing panels along with other balance of systems equipment and the related engineering, procurement and construction services. This year, the company intends to ramp up its project business significantly, anticipating between 400 megawatts (MW) to 500 MW of downstream project sales. 
This means that projects would account for at least 11% of the company’s shipments and potentially a greater portion of revenue. Since the company does not break out the financials for the projects business and historical data is relatively limited, we account for project sales by calculating a blended price per watt estimate, which includes the company’s revenues from stand alone panel sales to third parties as well as its projects. We expect the company’s price per watt to rise to around $0.71 for 2014, accounting for the additional value associated with systems sales. We expect the number to rise to around $0.86 per watt by 2020, as systems constitute a greater percentage of sales.
Impact of Model Changes
The higher module shipment forecast increased our price estimate by roughly $3 per share, while the better outlook for blended average selling prices raised the price estimate by $2 per share. The reduction in the company’s net debt position improved the price estimate by about $1 per share. The increase in capital expenditures reduced the price estimate by roughly $2 per share, translating to a net increase of about $4 per share.Notes:
- New Solar PV Capital Expenditure Cycle to Start in 2015, According to NPD Solarbuzz, SolarBuzz [↩]
- Trina Solar Q4 Earnings Call Transcripts, Seeking Alpha, March 2014 [↩]