For over three quarters of 2011, leading U.S. listed Chinese solar companies held onto previously issued annual shipment targets, despite a clear over supply situation which sent spot market pricing tumbling since early May. Even for companies like Trina Solar (TSL), which had an excellent past track record of under promising and over delivering, succumbed to the overall negative industry macro-dynamics. Trina Solar not only warned for both the first and second quarters of this year, but issued yet another negative earnings guidance for the third quarter.
However, Trina Solar wasn’t alone. As the decline in average selling prices (“ASP”) across all crystalline photovoltaic (PV) verticals broke operating models for many companies, capacity closures and inventory liquidations snowballed in a chain reaction which left even the most competitive companies in the sector at a loss. Direct solar module manufacturing peers such as Yingli Green Energy (YGE), Suntech Power (STP), Canadian Solar (CSIQ), and China Synergy (CSUN) also announced third quarter updates, which implied lower metrics in one form or another.
Canadian Solar (CSIQ):
Canadian Solar kicked off the warnings parade with its third quarter revision issued last month. While CSIQ kept its quarterly shipments inline with its prior forecast of 350-360MW, it reduced gross margin targets from 9-12% to just 2-5%. Unlike peers which specified inventory provisions, Canadian Solar did not give specifics other than lower ASPs. To be sure, CSIQ’s original guidance did imply module ASPs at the high end range relative to its peers. With ASPs closer to the lower end range and more in-line with peers, a lower margin revision was not a total surprise.
As a result of Canadian Solar’s revised forecast, I have to revise my prior estimate since it was based solely on the company’s prior guidance. Assuming CSIQ did not take an inventory provision, I now expect revenues to be around $515m with gross margin around 5%. This estimate assumes only lower module ASPs, while other revenues such as CSIQ’s system businesses remain in-line with prior statements. Lower than expected revenue recognition with the company’s solar power plants would severely impact this revenue estimate while halving my revised gross margin estimate of 5%.
Lower gross margin should cause CSIQ to report an operating loss of approximately $23m. Fortunately for the company, first half foreign exchange losses due to hedging should reverse assuming a static currency hedging strategy. With an 8% decline in the euro vs. the USD, Canadian Solar should record a net foreign currency gain of $16m for the quarter. Given the company was operating at a loss in the third quarter and assuming a zero tax rate, CSIQ’s Q3 net should be in the range of a $7m loss, or -0.16 in earnings per share (EPS) on a U.S. GAAP basis. As stated with my original estimates, these figures assume no additional unannounced gains or charges that may result from non-operating activities.
Trina Solar (TSL):
In contrast, Trina Solar’s third earnings warning for 2011 was much more severe. While downward revisions to gross margin due to lower than expected module ASPs would be more understandable given the current industry environment, Trina’s shortfall also included a dramatic lowering of shipment expectations. For the third quarter, TSL now expects shipments to range between 372-375MW down from a prior guidance of 480-520MW. In addition, gross margin would also be negatively impacted by a $19m inventory provision. Overall, gross margin is now expected to range between 10-11%, down from the company’s prior mid/high teens percentage guidance.
Similar with CSIQ, my prior third quarter earnings estimate for Trina Solar will have to be revised since it was based solely on the company’s prior guidance. Since TSL’s warning is much more severe due to a significant shipment shortfall, new estimates will show a dramatic earnings reversal. I now expect Trina Solar to post revenue in the range of $470m with gross margin excluding the inventory provision around 14.8%. Module ASPs should be in the mid 1.20s/watt range. Including the inventory provision of $19m, TSL should post a consolidated gross margin of 10.7%.
As a result of both lower shipment volume and gross margin, Trina Solar should post an operating loss for the third quarter of approximately $25m. This operating loss assumes a zero tax rate and no retroactive reversals of the company’s first half tax rate. Similar to Canadian Solar, Trina maintained a significant hedge against the euro-- and as a result should reverse much of its first half currency related losses. With exact currency rates at the end of the quarter known, I expect TSL to record a net $32m currency gain due to the company’s hedging exposure. Overall U.S. GAAP net income for Q3 should be approximately $7m or 0.10 in EPS. A retroactive reversal lowering of TSL’s first half tax rate could yield a refund of approximately $6m and increase the U.S. GAAP earnings to 0.18 per share.
More significantly, Trina Solar also threw in the towel on its full year 2011 shipment targets. The company had continually reiterated its prior 1.75-1.80GW of annual shipments in prior earnings releases. Now Trina expects full year volume to reach only 1.40GW, which implies fourth quarter shipments to be around 310MW or down sequentially by almost 20%. The fourth quarter is typically the strongest volume quarter for most solar companies, thus TSL’s revised shipment guidance suggests a very unusual weak fourth quarter. Although pricing and margin guidance was not issued, Trina’s fourth quarter shipment expectations implies another quarter of operational losses.
Yingli Green Energy (YGE):
Given Yingli Green Energy is very similar in structure to Trina Solar, it is not surprising its third quarter updated guidance parallels Trina in several aspects. The main difference with YGE’s revision is that it is not as severe as TSL’s warning. For the third quarter, Yingli projects shipments to increase in the low 20s percentile vs. a prior guidance of high 20s percentage. From a shipment perspective, YGE held up much better than TSL, which indicated a sequential decline in volume. Overall gross margin is expected to range between 10-11% due to a $40m inventory provision. Once again, Yingli’s metrics are very similar to Trina Solar.
As a result of Yingli’s guidance revision, adjustments to my previous third quarter estimate must also be altered since it was only a reflection of the company’s prior statements. Based on YGE’s new guidance, I now estimate third quarter revenues to come in around $665m, which represents shipment volume of approximately 510MW and ASPs in the upper 1.20s/watt range. Gross profit should be approximately $70m for the third quarter, which should cause Yingli to post an operating loss of around $20m excluding any minority payouts and assuming a zero tax rate.
Unlike Trina Solar, Yingli Green Energy did not hedge its currency exposure in prior quarters. As a result, it should post a significant net foreign exchange loss in the third quarter. If YGE kept its currency hedging strategy constant to previous quarters, I estimate the company could post a net foreign exchange loss of $15m or greater. The combined effect should cause Yingli to post a U.S. GAAP loss of $35m or greater. On an EPS basis, YGE should post a loss of 0.22 per share excluding additional unannounced gains or charges.
Suntech Power (STP):
Of course, being the largest silicon based solar module manufacturer in the world would not make Suntech Power immune to the current industry environment-- or would it? STP also recently announced preliminary results for the third quarter, but unlike Trina Solar or Yingli Green Energy, STP’s preannouncement was actually not a warning. From an operational standpoint, the company expects shipments to increase greater than 15% on a sequential basis, in-line or above its prior guidance of 15% quarterly growth. In addition, gross margin is expected to be at the higher end of the previous 11-13% range. Overall revenues are expected to be above $800m.
Relative to other U.S. listed Chinese solar peers, Suntech did exceptionally well in the third quarter. Shipments may have been insulated by the company’s strong sales channel, one with a longer track record than any other peer. Since Suntech also has a developed systems segment, it may also have been less vulnerable to external demand. However, the company did announced a couple negatives which are more non-operational in nature. In an effort to reduce ongoing operational costs, STP expects to take a $10m charge in severance expenses. In addition-- and perhaps, not too surprising-- the company also expects a higher than stated net foreign currency loss for the third quarter.
Once again since my quarterly estimates only reflect information given by the company, Suntech’s preliminary revision will require a revision in my prior third quarter estimates. In general, overall U.S. GAAP figures should not deviate greatly from my prior estimate. Better execution on the operational side should generate a buffer for the non-operational charges the company plans to incur during the quarter.
Given the overall negative environment for the entire industry, I will not revise STP’s revenues much above my prior estimate of $795m. I now expect the company to post $800m in revenues, although higher numbers could result from segments outside of its core module business. Suntech still has high overhead expenses and as a result, I expect the company to post an operational loss of $15m, which assumes a zero tax rate. An additional severance charge of $10m should take the company’s quarterly loss to $25m.
Finally, based on the company’s previous and very detailed account of its foreign exchange exposure, STP should have recorded a $2.5m currency loss in the third quarter. With its updated guidance of “significantly larger than expected non-cash foreign exchange translation loss,” it is uncertain what STP losses implies. Had the company just kept a constant hedging strategy, most of its first half currency losses would have been reversed. However, as I noted in my prior Suntech articles, the company has had a horrid track record of doing exactly the wrong thing as far as its foreign currency exposure was concerned, managing to lose money on currency translations in each quarter since the start of 2010, regardless of whether key currencies in question move up or down.
Excluding whatever losses Suntech incurred on net foreign exchange translations, I expect Suntech to post a third quarter loss of $25m as indicated above. This translates to a loss of 0.14 in EPS. Each $10m additional foreign exchange loss would translate to an additional 0.06 in EPS loss.
The general current environment for the solar industry is extremely negative. The cascading effect of less competitive peers shutting down capacity or going out of business completely has created a flood of component availability which is clearly represented by current spot market trends. Since the start of the fourth quarter alone, upstream vertical pricing such as polysilicon, silicon wafers, and solar cells have declined further by 20% or greater. In contrast, downstream solar module pricing has only declined by 5-10%.
While it is clear that leading solar module producers such as STP, YGE, TSL, and CSIQ are most certainly affected by spot market pricing, it should also be clear none of these companies sold at spot market levels. The ASPs each company implied with recent third quarter guidance revisions suggests top tier manufacturers sold modules at approximately 10% greater than spot market levels. At least in these instances, brand and bankability played a role in maintaining a pricing premium.
However, with greater supply of solar modules available at lower prices, it is also clear shipment volumes were impacted most notably at Trina Solar. Most likely, each of the leading manufacturers could have maintained prior shipment guidance for the quarter and the year but opted to preserve not only margins but also branding by not reducing ASPs to the current distressed levels. Until the current cycle of inventory liquidation has been completely played out, most likely all industry participants will continue to experience extreme pricing and/or volume pressure. If industry inventory levels are comparable to those at leading manufacturers discussed above, inventory liquidations may continue for another quarter or two before depletion.