Trends Driving Our $15 Price Estimate For Trina Solar

Trina Solar (NYSE:TSL), China’s largest profitable solar manufacturer, has been doing reasonably well over the past year, posting strong growth in its panel shipments and expanding its presence in the downstream solar space. However, the company’s stock has remained rangebound through this year, trading at between $10 and $14, owing to some cost concerns and trade barriers in the U.S. market. In this note, we take a look at some of the factors driving our $15 price estimate for the company.

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Strong Shipment Growth: The global solar markets could see demand surge by over 25% this year, rising to as much as 52 gigawatts (GW), aided by lower prices, greater availability of financing and relatively stable incentives. ^[1] Trina Solar for its part expects its shipments to grow to between 3.6 GW to 3.8 GW this year, up from around 2.6 GW a year ago, translating to a growth rate of over 40%. Additionally, the company expects to ship between 1.06 GW to 1.12 GW of panels during Q3 2014, which could possibly make it the first solar company to ship upwards of a gigawatt in a single quarter. Despite the strong projections, the company’s CEO has mentioned that the company is still unable to fully meet demand as its factories are already running at full capacity.

Favorable Geographic Mix of Shipments: While Trina has traditionally counted on markets such as China, the United States and the E.U. for much of its shipments, the company has been gaining ground in Japan, which is the world’s second largest solar market. The company projects that Japan will account for about 22% of total shipments this year, up from around 7% a year ago.  ((Q2 2014 Supplemental Earnings Call Presentation, Trina Solar, August 2014)) The growing acceptance of Trina’s products in the Japanese market is a positive development given that Japanese customers tend to prefer panels that offer higher efficiencies, better technology and long-term reliability. The Japanese market is also less sensitive to pricing, with panel ASPs being among the highest in the world. This could potentially aid the company’s average selling prices and margins.

Push Into The Downstream Solar: Like most other large Chinese solar players, Trina Solar has been increasing its exposure to the downstream solar space, with plans to complete between 400 MW and 500 MW worth of projects for this year. Unlike the panel business, which has become largely commoditized, the projects business offers higher margins. Given that the project business is very capital intensive, Trina could have an edge over its Chinese peers given its stronger balance sheet and lower financial leverage. Earlier this year, the company raised close to $240 million through a convertible bond and  follow-on stock offering, and a part of this funding is likely to be used towards expanding the downstream solar business. Earlier this month, the company announced that it would be acquiring a 90% stake in solar project developer Yunnan Metallurgical New Energy Co, which is about to begin construction on a 300 MW project in China’s Yunnan province. The company has also been expanding the project business overseas, partnering with companies in markets such as Japan and the U.K. to gain access to project resources and obtain necessary certifications to build out projects.

Near Term Concerns

U.S. Tariffs On Chinese Solar Products: The United States closed a loophole that allowed Chinese solar companies to circumvent previously imposed duties on their solar panels by moving cell manufacturing to Taiwan. Although Trina Solar faces a lower duty compared to most of its peers (about 23%), it could nevertheless have an impact on the company since the U.S. accounts for about 28% of the company’s projected shipments for 2014. Trina has been looking for ways to work around the tariffs. For instance, the company has noted that it is seeking new sites for manufacturing overseas so that it can support its growth in the U.S. market.

Raw Material Price Escalation: Many of the cost reductions that Trina Solar has been able to achieve over the past two years have come from lower raw material costs and a tighter controls of the company’s supply chain. However, it is unlikely that the company will be able to replicate these cost reductions going forward, given that the solar industry has been swiftly transitioning out of the oversupply phase and demand for raw materials such as polysilicon has been increasing. During Q2, Trina saw its polysilicon costs (which account for about 20% of total manufacturing costs) rise from around $0.10 per watt to around $0.11 per watt for panels. If costs continue to rise, the company could see its gross margins squeezed.

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1. Solar Makers Set for Record 2014 Sales on Strong Demand, Bloomberg, August 2014 [↩]