Trina Solar (NYSE:TSL) recently reported a strong set of third quarter numbers, aided by surging shipments as well as lower manufacturing costs and stabilizing panel prices. The outlook for the company also looks relatively bright given the growing demand from emerging solar markets, a possibility of consolidation within the relatively fragmented Chinese solar sector, and also due to the company’s increasing focus on the utility-scale solar market. Considering the improving conditions and outlook, we have revised our price estimate for Trina Solar from around $8.50 to about $14.50. In this note, we provide an overview of some of the key changes to the drivers for our valuation model and the resulting impact on the Trefis price estimate for Trina Solar.
Increased Shipments To China
Shipments of photovoltaic (PV) products have been rising through the year owing to a combination of attractive pricing, government incentives and rising demand from emerging solar markets such as China. For the third quarter, global end-market solar demand grew by nearly 20% year-over-year. This growth is likely to continue into next year as well, with solar installations expected to surge to between 45 gigawatts (GW) to 55 GW.
China is going to be a key driver of growth in the near term; the Chinese government recently increased its solar installation target for 2014 by around 2 GW to 12 GW, meaning that the country will account for close to a quarter of new global solar installations next year. Trina Solar is one of the country’s largest panel manufacturers, deriving more than 25% of its revenues from the Chinese market, and we believe that it could be well poised to improve its shipments as the market expands. We have increased our estimates for Trina’s shipments to the Chinese market to around 1.95 GW by 2020 versus our previous estimate of around 1.70 GW. We have also revised our forecasts for the company’s other geographic segments in line with current trends, increasing total shipments to about 5.4 GW, up from our previous estimate of around 4.9 GW.
Pricing Will Improve On Supply-Demand Balance, Utility Solar
Solar panel prices have declined by over 60% over the last few years due to sluggish demand as well as a rapid expansion of manufacturing capacity by Chinese manufacturers, which resulted in a glut of solar panels. As of 2012, China alone was estimated to have had close to 50 GW of manufacturing capacity while global demand was less than 35 GW.  However, supply-demand rationalization could be imminent. Solar demand has been growing rapidly of late, and demand for 2014 could touch as much as 55 GW according to NPD Solarbuzz.  Things could also improve on the supply side, as there have been signs of consolidation within the Chinese solar industry, with some large and over-leveraged companies selling or idling their underutilized capacity. Accordingly, we expect price realizations for stand-alone module sales to largely stabilize going forward.
Trina Solar has been focusing on developing its utility-scale solar business, building large-scale solar power plants. This business is more lucrative for solar companies, as it allows them to capture additional value by providing solar panels along with other balance of systems equipment and the related engineering, procurement and construction services. While this business is still relatively small when compared to the company’s panels business, we believe that it could grow substantially over the long run. The company is estimated to have a development pipeline of over 500 megawatts (MW) currently, most of which is located in China.  Since the company does not break out the financials for the projects business and historical data is relatively limited, we are factoring in the projected growth in project revenues by revising its price realizations per watt upwards to account for the additional value associated with systems sales. Assuming that the projects business grows to around 1 GW (accounting for close to 20% of total MW sold by the company) by the end of the Trefis forecast period with an average price per watt of around $1.60 for project sales, we believe that this could help to increase the company’s overall price realization per watt to around $0.82 per watt (considering both standalone panel sales as well as project sales).
Better Cost Controls, Systems Business Should Help Margins
Trina Solar has taken some significant strides in reducing its cost base over the last few quarters. The company’s manufacturing costs have been improving on a per-watt basis due to higher capacity utilization rates, which improves the allocation of fixed production overhead, as well as increasing conversion efficiencies for panels, which reduce the quantity of raw materials and consumables required to manufacture each watt of panels. Considering the improving trends in the company’s manufacturing costs as well as the company’s push into the higher-margins solar projects business, we have increased our gross margin forecasts (adjusted for depreciation and other non-cash items) to around 27.5% by the end of the Trefis forecast period.
Our revised price estimate for Trina Solar stands at about $14.50, up from around $8.50 previously. Breaking up the price impacts of our driver changes, the revised gross margins forecasts increased the price estimate by roughly $2 per share while the higher shipment forecasts raised the price estimate by around $2.50 per share. The higher average selling prices impacted the price estimate by roughly +$2 while the change in the company’s net debt position negatively impacted the price estimate by around $0.50 per share, resulting in a net $6.00 increase to our price estimate.
Disclosure: No positions