Trina Reports Q4, Positive Tones for 2013

Still, as with the prior quarter, there was a lot more to know about the company’s operating dynamic to fully appreciate cost for inventories and its damaging relationship to the income statement

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We held our collective breath before Trina Solar Limited’s (NYSE: TSL) release, since the last few times the company missed its shipments’ guidance, but this time around it was a nice surprise with the beat.  Revenue included 414.5MW of module shipments, which was a sequential increase from Q3 and the second-best quarter of the year.  Since some of the investors learned about Trina’s delivery patterns in Q4, based on customs data collected by Solarzoom, there was also a debate on how, if at all, guidance would be met.  We got this answer when Trina surprised positively as well, by extracting as much as 32% of revenues from China.

The good news did not end there. The non-poly costs were at $0.51, which was a decrease from $0.54 in Q3. Polysilicon was also at a record low of $0.10 per watt. Using 5.4 grams per watt, during a quarter Trina was buying poly at $18.51/kg on average, an improvement from $0.13 per watt or $24/kg in Q3. The tough business environment kept Trina’s capacity underutilized, in our estimates at 62% or so. If the company could move the level of production to 90% of the capacity, it would have further saved $0.03 to $0.04. This is the sole and critical reason why the target of under $0.50 per watt processing was not hit.

Still, as with the prior quarter, there was a lot more to know about the company’s operating dynamic to fully appreciate cost for inventories and its damaging relationship to the income statement.

Trina has recognized approximately $23M of non-module sales in its revenues , which contributed $21M into cost of goods sold (COGS).  Including this sale the company delivered an improved, but very restrained, 1.9% gross margin.  Removing those dollars, ASP for modules sold in the quarter averaged at $0.67 per watt. Finally, the gap between the $0.61 and the COGS at $0.66 was the inventory carrying cost.

Therefore, so-called margin expansion is seen to be distant only by the size of the future write downs and low utilization. Reading into the words of the CFO spoken during the conference, this gap will be reduced since raw materials bottomed out and ASP for modules is moving slightly up in different parts of the world. Therefore, frequency of adjustments will diminish and perhaps disappear entirely in the second half of 2013.  While further consolidation is continuing among the industry, Trina’s management was comfortable to speak about a return to profitability, perhaps as soon as Q3 or Q4 of 2013. GM for ASP of $0.67 versus COGS of $0.61 is around 9%, closer to the double-digit margin announced as things to come in the described timeline.

We learned a lot more about business in China, which has apparently 600MW of utility scale work for the next four years in Gansu, in addition to another 200MW of distributed generation projects. The company was dismissive about the Golden Sun Program. Since we have only seen around 10MW of projects in the second stage of this program awarded to Trina, the feeling on this was mutual. There are also plans for 100MW in PPA in the US and Puerto Rico, but official releases are still to come.

We also heard the guidance for Q1, and that one sounds rather optimistic when volume is considered. The company expects 420 to 440MW, which is more than any quarter of 2012, when bearing in mind the high end of the guidance.  We will be looking to see how deliveries in January have shaped up, when export data becomes available at the end of the month.  

Guidance for the whole of 2013 expects Trina to ship in the area of 2.0 to 2.1GW, which is a 25.5% to 31% increase in volume in comparison to last year. This is the third statement made by a Chinese company recently on full-year expectations.  JinkoSolar Holding Co., Ltd. (NYSE: JKS) predicts 30% growth, while the ever-expansive Yingli Green Energy Hold. Co. Ltd. (NYSE: YGE), having extended the new record for any solar company shipping 2.3GW of modules in a single year, now is setting targets at a 50% increase, in the mix of new efficiencies and yet-to-be-announced capital expenditures or maybe acquisitions.

Trina also offered relief to those who dread the impact of polysilicon tariffs soon to be announced in China. In the form of a real eye-opener, the company announced that modules destined for export will receive no impact through tariffs on imported polysilicon. Since the domestic market was identified as 25% of revenues in 2013, and having ample supply from GCL Poly, the only thing the company has to worry about is the EU tariff outcome. Trina left no stone unturned in the matter of tariffs in the US, when in early February it filed a case against the US federal government in the Court of International Trade, stipulating that data used by the DOT in the assessment of tariffs against the company was outdated.

When it comes to efficiency in order to secure margin expansion, Trina is looking at cell technology upgrades, which will lead conversions of mono cells to averages of 21.5% by the second half of 2013. The three-year development, in collaboration with SERIS (Solar Energy Research Institute of Singapore), dedicated to the development of all-back-contact cell (like SunPower) must have concluded with a successful commercial product.

Another area of focus and benefit to Trina’s aspiration is the n-type cell technology recently described in our interview with ECN Solar Energy. Trina, independently from the Dutch company, joined efforts years back with two Australian universities, Australian National University and Australian Centre for Advanced Photovoltaics of the University of New South Wales, to develop 20% efficient n-type cells,  to improve standard p-type cell to 19% and to further develop commercially practical and cost-effective n-type cells with over 22% efficiency. 

Trina also mentioned its active program with the Chinese Academy of Science in Shanghai to develop thin film amorphous silicon hetero junction solar cell – a structure, we suspect in the likening of Japanese Panasonic’s flagship solar cell and module, which is very popular in the home country of the conglomerate and coincidently, a 2013 destination choice for Trina’s foreign markets.

More improvements in cost could result in another 10% reduction in non-poly and contain expectations to hold satisfactory pricing in polysilicon. On one hand, lower poly intake per watt was mentioned on another improved yield, as we understood from reduced breakage (wafer, cell). Other objectives included advanced crystallization and wafer technologies, metallization, improved low light performance, reduced reflectivity, texturing, selective emitter and rear side passivation – pretty much anything and everything in the currently available solar innovation toolbox to create differentiation for a solar company. 

While R&D has always been a top priority for the company, a healthy balance sheet and financial condition are also areas for positive attention.

On the financial front, the company took on more short-term debt to improve working capital.  The cash increased by 30% to $918M, while debt increased by $165M to $1.3B or by 13%. Trina paid off some accounts payable of around $46M, reduced inventory by $48M, and cashed out $80M from accounts receivable, moving cash flow to positive $74.5M.

The company’s deferred tax asset allowance worth $22M was eliminated, reversing prior tax benefits into an actual tax expense of $11M. This increased the loss from $65M to $87M. There was also a provision of $14.5M included in operating expenses, for a doubtful accounts allowance. Otherwise, Opex would be in the area of $61M or $0.15 per watt.

While the quarter was an example of the bleeding characteristics of any other 2012 quarter, and it was the sixth consecutive period of loss, the light at the end of the tunnel has shined somewhat brighter than usual when listening to hopeful executives speaking about the second half of the year. Potentially higher ASPs, double-digit margins and as much as 20% revenue sourced from systems and projects seen by the company for the backend-loaded 2013 are going to lead to a fundamental shift from the setbacks of the last two years. Unfortunately, the first two quarters of the year are still in the process of becoming the seventh and eighth quarters of consecutive losses in the company’s history, requiring more patience from investors.