Trina Solar Q2 Preview: Is The Chinese Market Slowing Down?

Trina Solar (NYSE:TSL) is expected to publish its Q2 2015 results on Tuesday, August 18. ^[1] While we expect earnings to improve on a sequential and year-over-year basis, on account of lower per-watt production costs and higher volumes, the key factor to watch will be the company’s performance in its home market. China reportedly saw slower than expected solar installations over Q2 and there have been renewed concerns about the economy, given the recent export slump and the Central Bank’s move to devalue the Yuan. Trina’s Chinese shipment numbers and guidance could provide investors a sense of where the market is headed, given that it is the largest Chinese solar manufacturer, with heavy exposure to the solar panel and systems markets.

Trefis has a $15 price estimate for Trina Solar, which represents a significant premium over the current market price. We will be revisiting our price estimate following the earnings release.

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Slower Installations In China

China is the world’s largest market for solar products. The country installed over 12 GW of photovoltaic capacity in 2014, and the government is targeting about 18 GW of new capacity this year, accounting for close to a third of projected global solar demand. However, there are some concerns as to whether the targets will be met. Per official figures from China’s National Energy Administration, the country installed only 7.7 GW of new solar capacity in the first half of 2015, well below half of its annual target. Since installations in Q1 stood at about 5.04 GW, this implies that the Q2 number was around 2.7 GW.

There could be multiple reasons for the slowdown. Firstly, the lack of grid capacity seems to be weighing on solar demand. Roughly 9% of solar capacity was unused during the first half of 2015, since the government halted power flows from solar projects due to grid congestion, according to the National Energy Administration.  The slowdown in the economy and the fall in the stock market have also set off some speculation that the government could shift resources from investment in renewable energy into other areas of the economy. The government has also reportedly been slow to pay feed-in tariffs and other incentives for solar projects, and this could worsen if the economy slows down further. ((Bears Pounce on China Solar Makers as Consumption Growth Slows, Bloomberg, August 2015))

Domestic Sales Account For About A Third Of Revenues For Top-Tier Manufacturers

Slower than expected installation growth could prove a big challenge for the domestic solar industry. China is the world’s largest solar panel producer, being home to 7 of the world’s top 10 panel manufacturers. Roughly a third of their production serves the Chinese market. A slowdown could adversely impact Trina Solar’s outlook as well: Trina’s Chinese business accounts for roughly a third of the company’s value by our estimates, and its Chinese shipments are expected to account for about 28% of the company’s total shipments this year. We currently estimate that the company will ship 1.26 GW of panels to China this year, with the number rising to about 1.8 GW by 2022. Moreover, Trina’s lucrative solar project development business is also levered towards the Chinese market. Any slowdown in the market could have a substantially negative impact on the company’s near-term earnings and valuation.

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