Trina Solar’s Q2 Results, Outlook Indicate That Fears Of Chinese Solar Slowdown Could Be Overstated

Trina Solar (NYSE:TSL), China’s largest solar panel manufacturer, posted a solid set of Q2 numbers, driven by strong global solar demand, relatively stable pricing and some manufacturing cost improvements. ^[1] Trina’s performance in the Chinese market was particularly commendable, with the firm not only posting its best ever quarterly shipments to the country, but also upping its 2015 shipment guidance (detailed below). These results are very encouraging, considering that China has been contending with slowing economic growth and weaker exports, while its solar installations were also lower than expected during Q2. In this note we will focus on the company’s performance in China and explain why the fears of headwinds might be overdone.

We have a $13.50 price estimate for Trina Solar, which represents a premium of about 30% over the current market price.

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Structural And Policy Concerns In China’s Solar Market

China is the world’s largest market for solar products by far. Targeted installations for 2015 stand at 17.8 GW, accounting for close to a third of global solar demand. However, solar installations fell to 2.7 GW in Q2 versus over 5 GW in Q1, stoking concerns that structural issues such as weak grid capacity, coupled with the slowing electricity demand could hurt solar installations. Moreover, the Chinese solar industry has been propped up by the government on both the supply and demand side. The government spent a massive $83.3 billion on green energy subsidies last year (over 3% of the government budget), per the United Nations Environment Program, and there have been concerns that the government could shift resources from investments in renewable energy into more pressing areas of the economy, resulting in slower solar capacity growth.

Trina’s Solid Chinese Performance And Guidance

However, Trina’s Q2 results and outlook for 2015 seem to indicate that these fears may have been overstated. Trina shipped roughly 37% of its total of 1 GW in external shipments to the Chinese market this quarter (its best ever quarter in China), while also announcing that it had signed a 50 MW project in the Yunnan province. ((Q2 2015 Supplemental Earnings Call Presentation, Trina Solar, August 2015)) Trina also seems confident that the country will meet its installation target for this year, noting that much of the additional 500 MW of shipments guidance provided for 2015 was going to come from the Chinese market. This is a sign that demand for Trina’s panels remains strong in China. The company says that it now expects China to account for about 31% of its total external shipments for FY’15.

Long-Term Outlook Remains Strong

While there could be some near-term headwinds, particularly for smaller solar companies, we believe that the long-term potential of China’s solar market remains largely intact, considering the environmental crisis and the landmark climate deal China signed with the United States last November. Under the deal, China has agreed to reduce its carbon emissions beginning from 2030 or earlier, while increasing energy use from zero-emission sources to 20% by 2030. This is likely to help maintain the urgency for clean energy investments, pushing the government to stand by its renewable targets and the underlying policy mechanisms.

Currency Devaluation, Lower Commodity Prices A Net Positive For Trina

The Chinese Central Bank’s recent move to devalue the Yuan is likely to prove a net positive for Trina Solar. The company incurs a substantial portion of its costs in Yuan, while roughly two-thirds of its revenues and contracts are denominated in foreign currencies. This should effectively improve margins, while making the company’s products more competitive in export markets. While the firm’s domestic sales –  projected at roughly 31% this year – will be lower in dollar terms, the cost benefits should more than offset this from a bottom line standpoint. There is speculation that the government may be intent on a deeper devaluation of the Yuan to shore up China’s plunging exports, and this should improve the outlook for Trina and most other tier-1 Chinese manufacturers. Trina should also benefit from the lower commodity pricing environment, since solar panel manufacturing is quite dependent on raw materials such as polysilicon. The company indicated that the price of polysilicon and other commodities fell by roughly 10% over Q2. ^[2]

Overview of Q2 Results

• Net revenues grew 39% y-o-y to $722.9 million, while net income rose to $43 million from $10 million in the year ago quarter.
• Gross margins rose to 20% from about 15.4% in the year ago quarter.
• 1.23 GW in total module shipments – about 1 GW of  external shipments and 231 MW to captive downstream projects.
• In-house per-watt manufacturing costs fell by over 16% during H1, driven by lower raw material costs and better economies of scale.
• Blended module costs stood at $0.48/watt for Q2 owing to manufacturing capacity constraints, which have caused the company to increasing outsourcing.
• Annualized module manufacturing capacity to rise from 4.4 GW to 4.8 GW  by the end of the year.

FY 2015 Guidance

• FY’15 shipments guidance raised from 4.4 to 4.6 GW, to 4.9 to 5.1 GW, of which 700 to 800 MW will be shipped to the company’s downstream projects.
• 700 MW-750 MW of downstream projects to be connected to the grid.

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1. Trina Solar Earnings Press Release [↩]
2. Trina Solar’s (TSL) CEO Jifan Gao Discusses Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 2015 [↩]