Trina Solar Posts Solid Revenue Growth, Sales Mix And Costs Weigh On Earnings

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Trina Solar

Trina Solar (NYSE:TSL) published its Q4 2014 results on March 4, reporting a reasonably good set of numbers that beat consensus estimates on revenues, while meeting expectations on earnings. The company’s revenues grew by around 34% year-over-year to $705 million on the back of strong module shipments, which exceeded 1 GW for the quarter. ((Trina Solar Press Release)) However, net income attributable to the company declined by 31% year-over-year to $10.6 million owing to higher general and administrative expenses and a foreign exchange related loss. The company also made good progress on the project development front, grid-connecting two power plants in China and selling one plant in the United Kingdom. Trina Solar also indicated that it plans to have an IPO for its power plant business, joining a growing list of solar companies who have been seeking cheaper avenues for funding projects. Here is a brief overview of the company’s results and our thoughts on a publicly listed project entity.

Trefis has a $13.50 price estimate for Trina Solar, which represents a 15% premium to the current market price. We are currently updating our model to account for the earnings release.

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Higher Module Shipments To China Hurt Gross Margins

Trina Solar’s gross margins for Q4 stood at 15.7%, marking a slight year-over-year improvement. However, the number was 1% lower on a sequential basis, owing to a less favorable geographic sales mix. Nearly 48% of the company’s panel shipments for the quarter were directed towards the low ASP Chinese market, up from just about 35% during the previous quarter. However, the company made some progress on the manufacturing cost front, owing to better utilization levels, economies of scale and higher levels of automation. The company noted that its in-house manufacturing costs had declined from $0.56 per watt during Q3 2013 to $0.46 per watt during Q4 2014. [1] Trina is also looking to bring down costs further by setting up manufacturing plants outside China – potentially in markets such as Southeast Asia, India and South America. This move should also allow the company to counter tariffs in regions such as the United States. Trina has provided a strong outlook for its modules business for 2015, indicating that it expects shipments to grow 20% to 26% to 4.4 GW to 4.6 GW.

Project Business IPO Could Be Promising

Although Trina was a relatively late entrant into the utility-scale solar space, the company has been expanding its project business relatively quickly. The company completed construction of over 337 MW of projects during 2014 and noted that it intends to connect 700 MW to 750 MW worth of projects to the grid during 2015. While Trina has been selling most of its overseas projects upon completion, the company has adopted a strategy of holding several projects  – particularly in China – on its balance sheet while choosing to sell electricity and generate long term cash flows from these projects. During Q4, the company said that it had grid-connected a 90 MW solar power plant in Toksun, Xinjiang Province and 120 MW utility project in Jiangsu Province. The 90 MW project has been granted a 20-year feed-in-tariff of roughly $0.15 per KWh.

The company intends to eventually spin off its downstream business through an IPO once it has a critical mass of projects on its books. While a specific timeframe wasn’t provided, the company indicated that shares could be listed in the US, Hong Kong or in mainland China. The trend of spinning off projects into public entities has been gaining momentum in the solar industry as investors have been warming up to solar generation as an asset class, while project developers have been looking for cheaper funding sources. Transferring assets into a publicly traded entity helps to single out the cash flows generated by the generation assets without giving investors exposure to other aspects of the parent company’s business. The greater liquidity and lower risks of these assets typically translates into lower cost of equity capital. Last week First Solar and SunPower, the two largest solar companies in the United States, indicated that they are considering launching a joint yieldco, which would see the two companies pool in projects into a company that would eventually be taken public.

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Notes:
  1. Trina Solar’s (TSL) CEO Jifan Gao on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, March 2015 []