- Trina Solar seems to be ahead of local competition in efficiency department.
- Pricing advantage also lies with Trina Solar, in comparison to local competitor, due to anti dumping tariffs levied by the U.S.
- Acquisition of Yunnan Metallurgical New Energy will help downstream buildup that will positively affect bottom line of the company going forward.
- Trina is undervalued on forward earnings basis, and hence it is set to soar.
Trina Solar (NYSE:TSL) is a technology company that belongs to the industry of specialized semiconductors. Trina is an integrated solar power product manufacturer that manufactures ingots, wafers, solar cells and solar modules. Module manufacturing capacity of Trina Solar is expected to rise to 3.8 GW by the end of 2014.
(click to enlarge)Source: Earnings Presentation
The company is primarily involved in manufacturing and selling of solar modules as module sales accounted for 93.8% of the total revenue during year-ended 2013. Trina Solar is, however, making efforts to increase its downstream solar contribution, which is relatively a high-margin business as compared to module selling.
The company offers monocrystalline and polycrystalline solar modules. Monocrystalline products of Trina include Honey ultra modules, which recently set a new world record for p-type monocrystalline silicon modules. Polycrystalline modules of the company include universal, utility and dual glass modules. Each of these has different efficiencies and is designed for a different use case.
(click to enlarge)*Actual peak power can be less than 326W as these results are achieved during pilot production, which may not translate into mass production.
** Author's estimate
Source: Data sheets of respective products
As mentioned above, the company generates most of its revenue from module sales. However, it is also trying to get more downstream going forward (details later). Geographically, Trina is generating most of its business from North America and China. The company is expected to ship 28% of its modules to the U.S. while shipments to China will make up around 30% of total module shipments during 2014. However, I believe, revenue from the U.S. will be greater than China amid higher average selling price for U.S. customers. Despite anti dumping duties and tariffs imposed on Chinese manufacturers, Trina is growing its U.S. revenue base. Details are discussed later in this report.
(click to enlarge)
Source: Earnings presentation
Customers of Trina include established players like SolarCity (NASDAQ:SCTY). Top five customers accounted for 18.7% of the total sales in 2013. Largest customer's revenue contribution was around 4.9% in 2013. Direct competitors of the company, among others, are Yingli Solar (NYSE:YGE), JinkoSolar (NYSE:JKS), and Canadian Solar (NASDAQ:CSIQ).
As far as corporate overview is concerned, Trina Solar has 20 offices with around 13,700 employees worldwide. The company made it to the list of top ten innovative companies in China (2013). It shipped more than 8 GW of modules globally since 2007.
Thesis and Catalysts
Solar industry is set to grow. There is no need for inking pages in reference to the growth prospects of the industry. Trina is well positioned to capitalize on industry growth because of its technology advantage over local peers. It also holds cost advantage globally. Anti dumping duties are deterring the growth of Chinese players in general, but they strengthened the competitive position of Trina Solar. Focus on downstream is also a plus from Trina's perspective. Investment metrics like PE also paint a positive picture vis-à-vis valuation. Detailed analysis follows:
Trina has several advantages when it comes to solar technology. It is leading the pack (local players) with cell efficiency of around 24.4% for its monocrystalline cells. Interdigitated Back Contact ("IBC") technology enabled the company to achieve higher efficiency as compared to its counterparts. According to Professor Andrew Blakers, director of the centre for sustainable energy systems at the ANU Research School of Engineering:
The back contact cell structure enables the end user to gain more electricity per unit area and a more favorable appearance.
Moreover, Trina Solar recently achieved anti-PID (potential-induced degradation) ability following the optimization of the company's manufacturing technology. This ability can reduce loss in power output that results from conditions like induced degradation, high voltage, severe salt mist, and high humidity. As a result, the company offers solar panels with power degradation as low as just 0.5% over the period of 30 years. See the table below to gain perspective on competitive positioning of Trina as compared to one of its competitor.
Monocrystalline 60 cells:
Modular efficiency (current products)
Cell efficiency 2015
Poly crystalline 72 cells:
Modular efficiency (current products)
The table clearly indicates Trina's superiority over Yingli Solar; the largest producer of solar panels in China. Trina holds an efficiency edge over its competitors. It is utilizing fancy technologies like IBC, and anti-PID to maintain leading position in quality department.
Cost and pricing advantage
Trina Solar also holds a cost advantage over its competitors. The advantage is evident from the fact that the company is profitable for several quarters now while Yingli, despite being the largest producer of PV panels, couldn't manage to do that. Some other Chinese manufacturers are posting profits, but Trina is still better positioned. Why? Because of the recent anti dumping tariffs imposed by the U.S. 18.6% duty was levied on Trina previously but, in July, it was increased to around 30%. Trina Solar claims that anti dumping margin for the company is around 26.33%. ReneSola (NYSE:SOL) and JinkoSolar received preliminary dumping margin of 58.87%. 42 other exporters were charged a rate of 42.33%. Furthermore, remember the efficiency lead discussed above. Well, that can result in overall BOS cost saving. $0.10 per watt can be saved for every point of efficiency gained. Trina's lead in efficiency will also help lower the costs. Now, U.S. importers will prefer Trina over other Chinese manufacturers as Trina may be able to offer lower selling price as compared to its local counterparts. Some argue that U.S. importers will use panels from manufacturers other than from China and Taiwan. Recent quarter result of Trina Solar points to the contrary. Revenue grew by 69.1% on sequential basis in second quarter of 2014. Moreover, shipment share of the U.S. is expected to rise to 28% as compared to 17% last year. This is an indication that Trina is not hit severely by tariffs; the tariffs are rather furnishing Trina with pricing advantage over local competitors. Trina Solar's management acknowledges the situation and notes the following in a press release:
Trina Solar believes that because of its competitive cost structure, in house manufacturing capacities, global strategies, strong brand image and quality products, it will continue to grow its business in the United States and to play an important role in the U.S. market.
Trina has started to focus on downstream solar business for some time now. Revenue contribution from module sales is declining slightly for the past few years or so.
(click to enlarge)
Source: SEC filings
Downstream solar is a high margin business, and its increasing share will improve bottom line of Trina Solar going forward. In the current year, revenue share from module sales is expected to come down to 86% by my estimates. The company is expected to complete 400MW-500MW of downstream projects during 2014.
A major development in this regard was Trina acquiring 90% of Yunnan Metallurgical New Energy Co. from Yunnan Metallurgical Group Co. Ltd. Yunnan Metallurgical New Energy develops downstream solar projects, and it has a 300 MW project under development. Yunnan is also actively seeking new downstream projects. I believe that revenue share of Trina from downstream can touch 20% as a result of this acquisition. Gross and net margin is expected to improve as a result.
Investment value and final thoughts
Trina is priced quite cheaply on forward earnings basis. Forward PE of the company is around 10.18, and we all know that even a company that belongs to a mature industry normally trades around 12-15. Solar industry, on the other hand, is a growing industry. Lux research recently predicted that annual solar installation will increase 75% by 2019. PEG of Trina stands at just 0.10 indicating healthy growth prospects of Trina in comparison to the price investors are willing to pay for $1 of earnings. Analysts' are estimating industry earnings growth of around 25% during the next five years. The point is that forward PE of 10 is at discount to what Trina can actually attract. Assuming a PEG of 1, a multiplier of 25 is justified for an established solar player. A discount should be applied to this multiplier in order to reflect challenges faced by Trina from international players, thanks to anti dumping tariffs. So, following a prudent approach, a multiplier of 15 is used to calculate the price target for Trina Solar.
Focus Equity estimates
The price target reveals an upside of around 50% in the next two years or so. The price target is quite realistic as Trina holds an efficiency lead and pricing advantage over its competitors. All in all, Trina is set to capitalize on the growth prospects of the solar industry. Trina Solar is certainly a buy. It is the best pick of the Chinese solar industry based on its technological lead and pricing advantage over local competition. Downstream growth also strengthens the buy thesis. PE metric also validates a buy rating for Trina Solar.