Trina Solar Q3 Preview: Shipments Mix, Better Costs, Projects Business Could Drive Earnings

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Trina Solar (NYSE:TSL), the largest profitable Chinese solar manufacturer, is expected to publish its Q3 2014 results on Monday, November 24.  We expect the company’s earnings to improve on a sequential basis, driven by higher project sales, a possibly more favorable geographic shipment mix for panels and slightly lower polysilicon costs. During the previous quarter, the company’s revenues grew by around 16.7% sequentially to $519 million driven by higher panel shipments, although net income fell by around 60% sequentially to $10.7 million due to a weaker contribution from the projects business. Q3 is traditionally one of the strongest quarters in terms of volumes, and the company has guided for shipments of around 1,060 megawatts (MW) to 1,120 MW for the quarter, with gross margins expected to come in the low to mid-teens. Here are some of the key factors that are likely to drive the company’s earnings.

Trefis has a $14.50 price estimate for Trina Solar, which is about 40% ahead of the current market price.

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More Favorable Shipment Mix Could Aid ASP

While Trina Solar derived about 65% of its FY2013 shipments from the low value/high volumes Chinese market and the challenged European market, its shipments mix this year has tilted towards more high-value markets such as Japan. The company expects China to account for just about 30% of annual shipment this year, while the U.S. and Japan will account for about half the company’s total annual volumes, up from just 24% a year ago. This could bode well for the company, since markets like Japan tend to have higher prices and are ideal markets for high-end solar products such as the company’s new dual glass modules and high-efficiency “Honey” panels. This favorable shipment mix could potentially aid Trina’s average selling prices and gross margins.

Projects Development Business Should Do Better On Chinese Projects

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 increasingly commoditized, the projects business offers higher margins.  The project business is very capital intensive and Trina could have an edge over its Chinese peers, given its stronger balance sheet. The results of Trina Solar’s downstream business can sometimes be volatile, since they are dependent on achieving certain revenue recognition criteria for projects. During the previous quarter, the company saw revenues and earnings from the projects business fall despite the fact that it shipped over 148 MW of modules and began construction on a 90 MW solar power plant in the Xinjiang province, while also working on a 120 MW utility scale solar project in the Jiangsu province. Since both of these projects are expected to be completed this year, we believe that they could aid the company’s earnings for Q3. The company is also expected to have started work on a 50 MW project in the United Kingdom during Q3. [1]

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Notes:
  1. Trina Solar Supplemental Earnings Presentation, Trina Solar, August 2014 []