Trina Solar: Turnaround Story

| About: Trina Solar (TSL)

Summary

Strong financing capability and technology track record facilitate future project pipeline.

For international growth, Trina can take advantage of strong Japan demand and loosening EU solar protectionist measures.

Trina can cherry pick assets and expand capacity cheaply during industry-wide consolidation.

Long-term prospects of Trina should outweigh the immediate financial and industry risks.

High levels of pollution and urbanization trends have created a growing need and urgency for cleaner energy sources. With growing number of coal plant shutdowns, China will increasingly rely on less carbon intensive energy sources - including renewables, such as solar and wind. China is expected to install more photovoltaic capacity than all of Europe for 2014. The Chinese government is targeting up to 14GW of new solar capacity for 2014 (compared to 12GW, which comprised less than 12% of China's total added generation capacity in 2013).

Trina Solar (NYSE:TSL) is well suited to capitalize on this growth with strong financing capability, efficiency performance/track record and M&A consolidation industry trends. Moreover, it will also likely experience continued growth from exposure to other markets such as Japan and UK. Total module shipments for 2013 were 2.58GW, which was already a 62% increase from 2012; however, management expects this figure to rise another 43% to 3.6-3.8GW for 2014 based on robust demand from China and Japan.

For the fourth quarter of 2013, the company turned a positive net profit for the second consecutive quarter. Moreover, the company also produced a positive operating cash flow of US$46.5m in the latest quarter. If Trina is able to revert back to its 2010 income generating status, it would produce ~US$264m/year in operating cash flow alone and a net profit of over US$311m. The current market cap stands at only ~US$1.0bn, translating to a ~3.2x future P/E investment opportunity. This could reasonably happen within the next few years.

Strong future project development and existing financing capabilities

Trina has been able to yield a ~20% efficiency (recently as high as 24.4% - one of the highest among its peers) on its solar product offerings, making it ideal for its products to be used in solar projects. Below is some of the latest technological achievements for solar energy efficiency for Trina and its peers - with Trina leading the way:

Company

Reached efficiency

Trina

+22%

Canadian Solar

21.1%

First Solar

20.4%

China Sunergy

~20.3%

Suntech Power

20.3%

JA Solar

20%+

Yingli

~20%

Jinko Solar

~19.4%+

LDK

19%

Hanwha

18%+ (2014 goal)

Click to enlarge

Recently, Trina sold one of its 40MW projects to HK-listed energy producer, Huadian Fuxin. This marks Trina's ability to monetize projects by transferring to a clean energy producer. Due to increased investor interest in these projects, there is also the possibility for securitization of existing power generating projects to free up its balance sheet. These recent developments raise the possibility of further project development growth to absorb its manufacturing capacity.

Trina has a large amount of outstanding short-term debt, which however has historically demonstrated an ability to roll-over with new bank loans. There is financial risk posed for Trina in the midst of recent higher scrutiny applied to bank's lending. However, Trina still has debt headroom to draw down another US$157.9m of short-term bank facilities (as of 31 December 2013). Furthermore, Trina also manages to receive debt financing at only ~4.7% average pre-tax cost of debt for 2013, much lower compared to Yingli's ~6.6%. In fact, Trina has one of the lowest net debt/revenue ratios (based on latest 4Q2013 and FY2013 filings) among its listed Chinese peers (which technically excludes Canadian Solar and First Solar but have shown just for reference):

Company

Net debt/revenue

First Solar

-47%(net cash)

JA Solar

11%

Canadian Solar

15%

Trina

27%

Jinko Solar

34%

Hanwha Solar

73%

Yingli

89%

China Sunergy

113%

LDK

in default

Suntech Power

in default

Click to enlarge

International market growth

Besides Trina's positioning in China, Trina is likely to be better positioned to grow its net sales to the UK given recent rumors of European Commission lowering the minimum price that Chinese solar manufacturers can charge to EUR0.53/watt (from EUR0.56/watt). This would give Trina more flexibility in charging lower prices for its products. In addition, Japan has recently contributed 8.3% of Trina's 2013 net sales, representing a growth of 282% from 2012. This could be explained by recent power supply gaps since shutting down numerous nuclear plants post-Fukushima.

2014 opportunistic M&A plans in midst of industry consolidation

Based on the 2013 annual report, Trina expects to spend US$213m on capex to reach its manufacturing capacity guidance, previously announced during 4Q2013. This is good news as they will be reaching the capacity additions for a lower expected cost - previously announced during fourth quarter a capex range of US$230m-US$250m. Falling below this range could be attributable to recent M&A bargains in the solar manufacturing space; Trina can now pick up distressed assets to expand its capacity. Picking up capacity through acquisitions may be much more attractive in terms of speed and cost than organically growing.

There is potentially a very bright future for Trina Solar. However, there are a few potential risks including:

- inability to continue rolling over short-term loans as Trina historically has been able to do given its relationships with multiple banks and creditors and ability to borrow at relatively low interest rates on average

- inability to gain project orders; however, potential spinoff of project assets will help to improve bankability while continued improvements in technological efficiency and manufacturing costs will help to lower the levelized cost of energy, improving the potential project returns

- crimped demand from U.S. (one of its major markets, comprising 17% of 2013 net sales) as a result of ongoing China-US solar trade dispute - which has limited visibility as it's currently still under review

Trina is likely to capitalize on continued growth in renewables demand and has long-term prospects that will outweigh the immediate industry and financial risks.

Disclosure: I am long TSL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My position is subject to change without notice.