Trina Solar Beats Expectations On Strong Shipments And Margins

Trina Solar (NYSE:TSL), the largest solar panel manufacturer, posted a strong set of Q1 2015 numbers, beating market expectations on both revenues and earnings. Quarterly revenues came in at $558 million, up by 25.5% year-over-year, driven by stronger panel shipments, although they fell by 20.8% on a sequential basis due to seasonally lower sales in China. Gross margins improved by 2.3% sequentially to 18%, aided by a more favorable sales mix and lower manufacturing costs. ^[1] The outlook for the global solar industry remains positive as concerns of excess supply have largely abated and installations are expected to grow by over 20% this year. Trina Solar could be one of the biggest beneficiaries of the boom, owing to its growing manufacturing capacity and its exposure to the burgeoning Chinese market. The company reiterated its full year guidance of 4.4 GW to 4.6 GW of panel shipments (which represents 23% year-over-year growth) while guiding for 1.1 to 1.14 GW of shipments for Q1. Here’s a quick review of the company’s performance and what to expect going forward.

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

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Sales Decline Sequentially On Seasonality In China

Trina Solar’s total shipments for Q1 stood at around 1.03 MW, consisting of 891.7 MW of external shipments and 134.5 MW of shipments to its downstream power projects (which are not recognized in revenue). This compares to external shipments of 1.07 GW in Q4 2014 and 534 MW in Q1 2014. The sequential decline in external shipments was primarily due to the seasonal slowdown in demand from China, which typically sees lower installations over the Chinese New Year period. However, this was partially offset by an increase in demand from Europe and Japan. Chinese shipments stood at just about 170 MW, down from 511 MW in the previous quarter, while shipments to Japan grew to 223 MW from 147 MW. Shipments to the United States remained almost flat sequentially. Going forward, China and the United States are likely to be the two most important markets for the company. The Chinese government recently upped its 2015 installation target to 17.8 GW from 15 GW and Trina is likely to be the biggest beneficiary of this since it is the largest Chinese manufacturer. The U.S. market is also likely to see installation growth accelerate prior to cuts in the U.S. solar investment tax credit, slated for the end of 2016. Trina could outperform its Chinese peers in the U.S. market, given its lower tariff burden and its plans to add potentially tariff-free capacity overseas.

Gross Margins Improve On Sales Mix, Lower Per-Watt Costs

Trina’s gross margins rose by 2.3% sequentially to 18.0%. This was due to three reasons. Firstly, it saw lower costs per watt, which helped to more than offset a decline in average selling prices. The company has been benefiting from better utilization levels, economies of scale, higher levels of automation and technological improvements, allowing it to lower its manufacturing costs. Secondly, the sales mix for the quarter was also more favorable, reflecting higher shipments to the U.S., Japan and Europe, where the company realizes relatively higher ASPs. Additionally, Trina has been seeing stronger sales of higher value products. The company had previously noted that premium and high efficiency products – such as Double Glass, Trinasmart and Honey Plus modules – had been seeing a good uptake in markets such as the E.U., the U.S. and Japan. While Trina has stopped providing quarterly gross margins guidance, we believe the metric could expand over the rest of this year as the effects of higher shipments to China (which have lower ASP and margins) in the coming quarters are more than offset by higher sales to the United States and higher project related revenues. Given the growth prospects and competition in the solar industry, vendors often tend to compromise on margins in favor of volumes and market share. It will be important for Trina Solar to maintain a balance going forward.

Downstream Business And Capacity Expansion

Trina grid connected a total of about 55 MW downstream projects during Q1, including a 49.99 MW project in the United Kingdom and 5 MW DG projects in China. While the company entered into an agreement to sell the 49.99 MW project, it was unable to recognize revenues during Q1 as the closing conditions for the project were not met. The company intends to grid connect a total of 700 MW to 750 MW of projects this year. However, we will not see the full impact of these project completions on the financials, since 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.

Separately, the company intends to increase module manufacturing capacity from 4 GW to about 4.8 GW this year, while increasing cell capacity from 3 GW to 3.5 GW. The company has also been scaling up its international capacity in markets such as Malaysia and recently announced that it would be investing about $160 million in a new facility in Thailand, capable of producing 500 MW of solar panels and 700 MW of solar cells annually. The facility could help the company circumvent anti-dumping duties it faces in the E.U. and the U.S. on its Chinese-made solar products.

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1. Trina Solar Q1 2015 Earnings Press Release [↩]