Trina Solar (NYSE:TSL) has emerged from the solar shakeout as one of the strongest players in the market because of its enviable cash position and low manufacturing costs while its competitors such as Yingli Green Energy (NYSE:YGE) and Suntech Power (NYSE:STP) are laden with debt. The company has the lowest cost of manufacturing among polysilicon PV module producers, enabling it to compete more effectively in a low price environment. Additionally, its geographically diverse sales will help it market products in emerging countries like China, where we expect demand to pick up over the coming years.
We have a $10.24 price estimate fro Trina Solar, which is at a 10% premium to its current market price.
Low costs are key
The solar modules market has become commoditized to a large extent. With dropping subsidies, installers are mainly focused on returns over their investment. With little to differentiate on the product specification front, players have cut prices in order to survive the downturn. Most analysts predict that the low-price environment will prevail over the short-to-medium term as the industry battles with overcapacity. Trina’s low manufacturing costs are a key advantage through the shakeout as low costs help to undercut competitors while enabling it to maintain healthier margins.
Presently Trina enjoys the distinction of having the lowest cost of manufacturing panels per watt among Chinese polysilicon based crystalline PV module producers. Low polysilicon prices are further helping the company reduce the price difference between its products and thin cell modules which are considerably cheaper to manufacture. Polysilicon constitutes 25% of the cost of manufacturing PV modules and the downturn in the solar sector has sent prices spiraling downward. The PV module industry constitutes for 90% of the demand for polysilicon. Spot prices for the raw material have dropped from a peak of $476/KG in 2010 to $33/KG by late 2011. We expect the prices will continue to remain at these levels as the industry suffers from excess capacity. (See: LDK Solar Gets Caught in Polysilicon Glut)
A major portion of the module market is now concentrated in Europe, where governments helped kick start solar installations with generous subsidies. Facing budget shortfalls and debt downgrades, many European nations have already taken steps to curtail subsidy costs and more cuts and caps are on the anvil. In this respect, Trina’s sales are more diversified across different geographic markets than some of its rivals such as Yingli. With more subsidy cuts expected in Germany, growing markets such as the U.S., China and India will become more important for module suppliers. (See: German December Solar Installations Surge in Race to Beat Subsidy Cuts)
Low prices are acting as an incentive for new solar projects in emerging markets. Some reports suggest that China may look to add as much as 3-5 GW of solar power generation capacity in 2012.  In comparison, Germany, the global leader, added 7 GW of capacity in 2011. Growth from China will come as a major relief for the solar sector which has been battered by falling demand from European markets.
Strong cash position
Trina Solar also enjoys a strong balance sheet position which is a key advantage in the current environment. Many solar companies piled on debt in the past couple of years to finance their expansion plans. As demand started falling, some of them were unable to continue operations with the huge debt burden and filed for bankcruptcy. In the U.S. alone, three solar companies went bankcrupt in Q3 2011. The Chinese government stepped in to announce $20 billion in loan guarantees for struggling companies. Trina’s balance sheet position will help it remain in business longer than many other rivals if the shakeout continues in the future.
Trade wars and other risks
One of the impending risks facing Trina solar is the U.S. and the E.U. imposing tariffs on Chinese solar imports. A consortium of U.S. Solar companies has asked the U.S. Government to impose duties on Chinese solar imports because of the unfair government support enjoyed by Chinese solar manufacturers. Some industry participants are also looking to approach the E.U. trade body with a similar appeal. Imposition of tariffs could considerably weaken the price advantage enjoyed by Trina Solar and force it to shift production outside China. (See: Suntech, Trina May be Hit As U.S. Trade Panel Looks Into Import Tariffs)
Another risk for Trina solar is the expected entrance of Foxconn into the PV industry. Already suffering from excess capacity, PV manufacturers could be further hurt by the entrance of Taiwan based Foxconn, which has very successfully adapted its contract mobile manufacturing facilities to compete in a low margin business. (See: Foxconn Entrance Into Solar Could Pressure Solar Margins Further)Notes: