Trina Solar (NYSE:TSL), one of China's largest solar panel manufacturers, reported a good set of Q4 2013 earnings on March 4. The results were driven by solid growth in panel shipments to markets such as China and Japan, better manufacturing and operating costs as well as marginally better panel prices. While quarterly revenues grew by around 73% year-over-year to around $525 million, operating income rose to about $14 million compared to a loss of about $70 million a year ago. Here are some key takeaways from the company's earnings release and what to expect going forward.
Trefis will be revisiting its $14.50 price estimate for Trina Solar to account for the earnings data.
Shipments: Trina Solar's panel shipments for the quarter stood at around 770 megawatts (MW), which is an 85% increase over the last year. While much of the sales growth has come from China (which now accounts for 40% of revenues), other markets such as Japan and the United Kingdom also saw healthy growth. China is expected to be the key driver for the company's growth in 2014 as well, given the government's target of adding a total of 14 GW of solar power this year. The company's guidance for 2014 looks promising, with shipments expected to rise by over 40% to between 3.6 gigawatts (GW) and 3.8 GW.
Average Selling Prices: Average selling prices increased to $0.66 per watt from around $0.64 per watt in the previous quarter, due to higher pricing in China and Europe. This is an encouraging trend since price realizations in the Chinese market - which now accounts for the bulk of Trina's sales - have historically been slightly below the global average. However, for this year, the company largely expects pricing to remain stable.
New Manufacturing Capacity: Trina had been running its module and cell manufacturing facilities at well above their rated capacity of 2.4 GW per annum through much of 2013. However, the company is taking steps to increase its cell and module capacity to about 3 GW and 3.8 GW, respectively, by the end of 2014, through some strategic agreements. Since much of the additional capacity will come from existing manufacturers, Trina should be able to quickly scale up its operations without spending time and effort in constructing new factories.
Manufacturing and Operating Cost Controls: Through 2013, Trina made a lot of progress with respect to its manufacturing and operating costs. Panel manufacturing costs (per watt) have fallen by around 22% year-over-year owing to higher utilization levels and improving panel conversion efficiencies. Operating expenses have declined from around $76 million (about 13% of sales) in Q4 2012 to around $65 million (25% of sales), aided by the company's FY 2012 restructuring plan which included some headcount reductions. For 2014, the company has guided for gross margins in the mid-teens, which we believe could be slightly better than the Q4 number of 15%. Operating margins could also rise as the company's revenues grow at a faster rate compared to selling, general and administrative expenses.
Solar Projects Business: Despite all the positive developments, Trina Solar's panel manufacturing business remains largely commoditized and offers very thin operating margins (less than 5%). We believe that the company will need to bolster its presence in the lucrative solar projects space in order to drive its long term earnings growth. For this year, the company intends to ramp up this business significantly, anticipating panel shipments of around 400 MW and 500 MW to downstream projects that it will be constructing. While China will continue to be the key market for its projects business, the company is looking to expand its project pipeline globally. Management indicated that as much as 20 to 30% of the company's projects business (in terms of MW) for 2014 could come from overseas. (Trina Solar Q4 Earnings Call Transcripts, Seeking Alpha, March 2014)
Gigawatt Scale Project project in Xinjiang : During the fourth quarter, the company signed a strategic framework agreement to build a 1 GW project in Xinjiang, in western China. The project, which would be constructed within a 4 year time frame, is expected to see its first two phases complete by the end of this year, after approvals are received from the local government and the State Grid. Executing on a project of this magnitude could provide a solid foundation for Trina to grow its systems business. We believe that company's progress in executing this project will be a key factor to watch in the near term.
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