Trina Solar Q2 Preview:Margins Could Shrink On Higher Costs, Less Favorable Sales Mix

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Trina Solar (NYSE:TSL), one of China’s largest solar companies, is expected to publish its Q2 2014 earnings on August 26. The company has guided panel shipments of between 950 megawatts (MW) and 1.01 GW for Q2, which could possibly make it the first solar company to ship upwards of a gigawatt in a single quarter. However, despite the strong shipments, we do not expect to see a significant sequential bump in earnings or margins, given that the company could see higher polysilicon costs. Additionally, the company saw a favorable sales mix to high value markets during Q1 and this is a trend that it may not be able to replicate in Q2. During Q1, revenues rose by around 71% year-over-year to $445 million, while net income came in at around $26.5 million, compared to a loss of about $64 million a year ago. ((Trina Solar Q1 2014 Earnings Press Release, Trina Solar, May 2014)) Below is a brief look at some of the trends that we will be watching when the company reports earnings.

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Trefis has a $14 price estimate for Trina Solar, which is about 20% above the current market price.

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Gross Margins Expected To Fall As Costs Rise

Trina Solar has largely relied on reducing its direct manufacturing costs and improving its manufacturing efficiency to drive growth. Over the last three years, the company has reduced its core manufacturing costs from above $1 per watt to less than $0.50 per watt (as of Q4 2013).  However, we estimate that only about 25% of the cost improvements came from manufacturing process optimizations and improvements. On the other hand, as much as 75% of the cost decline came from lower polysilicon prices and tighter controls on the company’s supply chain. The lower raw material costs were largely attributable to the nearly three-year long oversupply situation in the solar market, and we believe that such improvements may be difficult to replicate presently as the global solar industry has been swiftly transitioning out of the oversupply phase. For instance, polysilicon prices grew by about 8% sequentially during Q1 2014 and are expected to rise further. [1] Considering the possibly higher cost base and less favorable sales mix, the company has guided mid-teens gross margins for Q2, compared to the 20%+ margin it reported during Q1.

Status of Solar Projects Business

Trina Solar has been gradually increasing its exposure to the downstream solar business, and for this year the company expects to complete roughly 400 MW to 500 MW worth of projects. [2]  As the projects business grows, it should help to expand gross margins and reduce the company’s dependence on the volatile panels business. Presently, over three-fourths of the company’s project pipeline is located in China. Trina sold its first large-scale solar project in China – a 50 megawatt (MW) Solar Power Plant in Wuwei- during the first quarter. The company is currently working on a 1 gigawatt (GW) ground-mounted solar project in the Xinjiang region in western China.  While the plant will take a total of 4 years to build, the construction of the first phase of the project with capacity of about 90 MW is expected to have commenced during Q2. Trina has also been expanding its projects business overseas, having completed close to 24 MW of projects outside of China during Q1. We will be interested to hear of the company’s progress in building out its Xinjiang project and also its progress in expanding its projects pipeline overseas.

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Notes:
  1. Fastest Quarterly Growth in Polysilicon Prices Since 2010, Greentech Solar, April 2014 []
  2. Trina Solar’s (TSL) CEO Jifan Gao on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2014 []