Trina Solar Earnings: Margins Rise On Better Shipment Mix, Project Sales

Trina Solar (NYSE:TSL), the largest profitable Chinese solar company, reported a mixed set of Q3 2014 numbers and cut its full year shipments guidance as it cancelled a planned utility-scale project in China. The company’s revenues grew by around 12.5% year-over-year to $616.8 million driven by higher shipments to markets such as Japan and China, while operating income grew to $35.6 million from around $6 million the same quarter a year ago. The company’s EPS came in at $0.14, missing consensus estimates, due to a $16 million foreign exchange loss that the company recorded to account for depreciation of the Euro and Japanese Yen against the U.S. dollar. ^[1] The company shipped a total of 1,063 MW of modules during Q3, including 127 MW of shipments to its own downstream projects. In this note, we take a look at some of the key drivers of the company’s earnings.

Trefis has a $13.50 price estimate for Trina Solar, which is about 30% ahead of the current market price.

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Trina Solar’s gross margins rose to 16.7% from 15.2% last year, despite the fact that average selling prices for modules declined to about $0.62 per watt.  The margin expansion was aided by several factors. Firstly, the company saw a better shipment mix to higher value markets. For instance, Japan accounted for 23% of quarterly shipments, compared to just about 7% of shipments during the last year. The company sold a lower mix of modules to the United States – a market where it has been facing anti dumping and countervailing duties – which has helped to bring down costs. The company also saw manufacturing costs for its in-house operations decline, owing to economies of scale and higher operating efficiencies. The sale of a 10.6 MW solar project in the UK during the quarter was also significantly margin accretive.

Solar Projects Business

Unlike the panel business, which has become increasingly commoditized, the projects business offers higher margins and scope to capture greater downstream value. Over Q3, Trina Solar made reasonably good progress in its utility scale business as it began began construction of a 49.9 MW power plant in the UK and completed the construction of a 120 MW project in the Jiangsu province in China. The company also expanded its development footprint into southern China by working with a strategic partner in the Yunnan province. However, the company reduced its projects guidance for the year, as it cancelled a 130 MW utility project that it planned to construct in Inner Mongolia due to concerns about the project’s projected rate of return. The company now expects to complete a total of between 330 MW to 360 MW of projects through 2014, down from its previous estimate of 400 MW to 500 MW worth of projects. The company currently has about 260 MW of projects under construction and about 357 MW of projects under development. ^[2]

Guidance Highlights

• The company expects to ship 1,045- 1,095 MW of photovoltaic modules during Q4, of which 40-60 MW will be shipped to its downstream PV projects and will not see revenue recognition under U.S. GAAP.
• Blended gross margins for Q4 are projected to come in between 14.5% and 15.5%.
• The company now expects to ship a total of 3.61-3.66 GW for FY 2014, compared to a previous full year guidance of 3.6-3.8 GW.

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1. Trina Solar Q3 2014 Earnings Press Release [↩]
2. Trina Solar Q3 2014 Supplemental Earnings Call Presentation [↩]