Trina Solar Q2 Preview: Weaker Gross Margin Q-O-Q In The Absence Of Project Sales

| About: Trina Solar (TSL)


TSL does not expect project sales in Q2.

We estimate lower ASP compared to Q1.

No change in the cost on per watt basis despite silicon price pressure.

In Q1'14 Trina Solar (NYSE:TSL) announced strong financial results - 71% y-o-y growth in net revenues to $444 million and gross margin of 20.6% compared to 1.7% in Q1'13 and 15.1% in Q4'13. The company earned $0.37 per diluted ADS in the first quarter compared to a loss of $0.9 per diluted ADS a year earlier and net profit of $0.13 per diluted ADS in the previous quarter.

Management cited the sale of the 50 MW downstream project in Wuwei, Gansu province, the decreased costs on a per watt basis and the stable ASP attributable to greater sales to relatively higher priced markets as the main drivers behind the better than expected Q1 results.

As can be seen from the chart below, higher priced markets such as Japan and US accounted for more than 60% of the total shipments in Q1'14. In Q4'13 the Chinese market dominated company's sales.

Source: Trina Solar

In order to have a proper estimate of the ASP in Q2'14, we have made some calculations under certain assumptions.

Trina's management said that it has sold the 50 MW Wuwei project with gross margin in the 'high teens'. During the Q3'13 conference call Company's CFO Terry Wang explained that the project has attracted a 'number of buyers' at 10% IRR in which case the gross profit margin for Trina would be 'more than 20%'.

Our calculations show that at 10% IRR the project would cost the buyer approximately 10 RMB/Watt, or 1.63 $/watt (assumptions: 1600 kwh/m2 annual irradiation; FiT = 1 RMB/kwh; O&M = 1% of total project costs annually; project life = 25 years; annual degradation rate of 1% and capacity factor of 80%).

Thus, in order to generate the 20% gross profit margin for TSL, the 50 MW Gansu project most probably would have cost Trina $1.3 per watt (0.8*1.63). Building the actual realized gross margin in the 'high teens' of, say, 17% upon this figure, equates to selling project price of 1.57 $/watt. As a result, we estimate that the company generated $78.5 million from the sale of its downstream 50 MW project in the first quarter.

If we subtract the project's estimated revenues from the total revenues ($444.8 million) we would get $366.3 million in sales that remain for the company's third-party shipments (other than the shipments to its project business). The latter amounted to 534.2 MW, which equates to average selling price of 0.69 $/watt in Q1.

Another look at the chart above spots that the management of Trina Solar expects no major difference between the shipments in FY 2013 and the ones in FY 2014, except that the Japanese market would catch up mainly at the expense of the European market.

Overall, absent general market price movement, the ASP in 2014 would most probably be the same or slightly above the 0.64 $/watt ASP in 2013. Thus, we linearly extrapolate the estimated ASP of 0.69 $/w in Q1'14 to the expected ASP for the whole year of 0.64 $/w and put average selling price of 0.67 $/w in Q2'14.

Trina Solar guided Q2 2014 shipments in the range of 800-840 MW. The middle point of this guidance yields $550 million revenues. The company's management hinted not to expect revenues from project sales in Q2 (at the Q1 conference call).

Turning to the cost side, the total in-house $/watt costs in Q1 were 0.53, comprising of silicon costs at $0.1 per watt and blended non-silicon cost per watt at $0.43. There is an upward price pressure on the poly-silicon market but, as the management has suggested before, there is a room to further decrease the non-silicon costs. So we put in our model no change in the total in-house $/watt costs and add certain other costs of $0.038 per watt to come to estimated total cost of sales of $467.3 million, gross profit of $82 million and gross margin of 14.9%. This is against Q1 GM of 20.6% and Q2'13 GM of 11.6%.

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