Further Thoughts on Trina Solar and the Solar Space 84 comments
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This past Friday, I wrote an article updating my thoughts on the leading companies in the solar space. Since I submitted the article just an hour after the Trina Solar (TSL) conference call ended, I was unable to comment extensively on information given during the TSL conference call. I am now able to give further thoughts on TSL—which will also help us to understand key facts pertaining to all companies in the solar space.
I found the TSL conference call very interesting—not only because of its relevance to Trina’s prospects, but because I believe the conference calls reinforced many of the themes and arguments I have presented in various articles on these virtual pages over the past several months (I should note that Trader Mark also wrote an article on Trina over the weekend, an article you should also read if interested in TSL).
Let me summarize what I found so interesting in the TSL conference call, and discuss how this information is useful even to investors who do not hold any TSL:
1) TSL re-affirmed 2008 revenues guidance to between $770 million and $808 million. I believe their sales will be at the upper end of that range (but I do not expect sales to exceed $810 million) because their 2008 production is almost fully (95%) booked, and because demand in Europe not only remains very strong but may well be increasing as new markets open up (more on that below). Keep in mind that oil’s return to the upper $130’s in the past three trading days will only serve to focus greater attention on alternative energy going forward, and should help boost the solar stocks as well as their sales prospects.
2) More importantly, TSL’s operating margin guidance was also re-affirmed for this year—at 15-17%. Although many did not believe it when TSL guided to those levels in March of this year, the fact that TSL achieved operating margin of 16.7% in Q1 would suggest that 15-17% for all of 2008 is a very reasonable range. Taking the midpoint on sales and margins guidance ($789 million times 16%) yields operating income for this year of $126 million. Annualizing the same interest cost and exchange losses as just reported equals a currency exchange-and-interest expense of about $24 million and taxes at 4.92% (announced on the call) adds up to $6 million, yielding earnings in 2008 of $96 million. This translates to$3.79/sh, yielding a PE of under 11 against TSL’s price in the $41 range as I write this.
However, because I think TSL’s revenues will actually be $800 to $810 million (not $789 million), I am projecting EPS of about $3.90/share this year. Please note that to arrive at these numbers, I have assumed that currency losses reported for the first time this quarter will continue at the same amount ($4 million per quarter) for the rest of 2008 even though on the conference call, TSL mgt indicated they expected that Q2’s currency loss will be about $3 million.
I believe that the analysts will go through the same math I have just done and that earnings estimates for both 2008 and 2009 will be increased by at least 10-15% (to over $3.50) in the next few days.
Therefore, to me, TSL at $41 is a strong buy, not a sell. This does not mean, of course, that TSL may not be able to be bought at $40 or even less. I do not have a crystal ball, and can’t say if TSL will drop further to $40 or even less. What I can say is that TSL has very good support at $40-41, so I think downside risk from there is pretty limited (but anything is possible in the solar space).
But if the analysts do what I expect them to do and upgrade this stock based on increasing 2008 estimates, TSL is far more likely to go up than down from $41.
3) Some parts of the conference call were far more interesting than the above, and have relevance to the whole solar space, not just TSL. For example, TSL told us that their non-silicon panel costs were $1.17/watt this quarter (down from $1.28 last quarter), and that they expect to exit 2008 at $1.05. Please note that in this cost per watt, TSL, as an integrated manufacturer includes ingot, cell and panel-making. Thus, if a non-integrated competitor of TSL has lower per-watt panel costs, it may be that they are only including panel-making because they are buying their ingots and/or cells.
4) It is interesting to note that unlike any of its competitors, TSL’s panel production is now fully integrated—ie, they make the ingots and cells for all the panels they build and sell. This partially explains TSL’s industry-leading margins among poly-based producers. I believe that as TSL increases production capacity from 200 MW (where it is right now) to somewhere around 300 MW’s at exit of 2008, it plans to continue to be fully integrated, which, of course, will help TSL maintain the highest margins in this business.
5) More interesting, TSL’s silicon costs were $1.76/watt in Q1. Combined with another fact—that TSL is using 7.5 grams of silicon per watt—we can work out that TSL’s silicon cost this quarter was 176 cents/7.5=23.4 cents per gram, or $234 per kilo, which seems substantially lower than TSL’s competitors.This, by the way, also explains TSL’s superior profit margins (for example, TSL’s operating margin this quarter was 16.7% versus about 13% for Canadian Solar (CSIQ) (going by memory)—a humongous difference). While spot price for poly this year has been north of $400, TSL paid under $250 for its poly in Q1, and expects to pay under $200/kilo in 2009.
Many people do not know why TSL has better profit margins than its competitors, and a key reason has been that it uses a substantial amount of recycled silicon which it obtains at a discount to virgin poly.What I did not know until this call was that from the customer’s point of view, TSL’s panels which are made with recycled/virgin poly mix are essentially indistinguishable from other manufacturers’ panels made from virgin poly, and carry the same 25-year warranty that every panel must essentially carry in order to be marketable in the US (and some other countries as well).
6) In keeping with the other solars that have reported (although in most cases, you had to read between the lines on the conf call to get this point), I believe poly prices will be coming down substantially in 2009. In fact, TSL stated they expect a decrease in poly cost of 15% in 2009, although I believe that by exit of 2009, poly costs will drop by more than 20%.An interesting fact relating to this was TSL’s statement that prepayments for poly are now in the single digits, and I got the sense that TSL has deliberately not contracted for all of its poly in 2009 because it believes it will do better in the spot market for poly in 2009 than contracting for it now. I think TSL is correct on this point (assuming my read was correct).
7) ASP guidance was also very interesting. TSL guided to about a 10-cent drop in the latter half of 2008 ($3.95 this quarter to $3.85/watt later this year), with only maybe another 10-cent drop in the first half of 2009. When TSL was probed about this, it turned out that most (95%) of its 2008 production has been sold, and that 60% of either first-half 2009, or all of 2009 (it wasn’t clear which) has ALSO been sold. Because they have pre-sold so much product, I consider the ASP guidance especially reliable.
8) The above paragraphs, taken together, explain why TSL’s margin (gross and operating) are expected to remain so strong—while ASPs will only drop a few percent in the next 12 months, poly costs will drop by 15% and non-poly panel costs will drop by 10% ($1.17 to $1.05).
Therefore, margins will not only remain stable but actually expand from 2007’s margins. It seems likely that margins will remain strong in 2009.
9) What I also found interesting is the number of countries in which TSL has already begun to sell product in addition to Germany and Spain—Belgium, Italy (where it has 26% of the market; interestingly, some people believe that Italy could become as large a market as Spain has traditionally been), France, Korea, the Netherlands and Australia.This shows much more geographic diversity for TSL than most of its competitors, something that I think will serve TSL well going forward.
10) Although the market clearly does not appreciate the significance of this, TSL obtained (in March, 2008) certification to sell its panels in the US, and already has contracts in the US that will begin to ship next month (TSL’s entry into the US could possibly explain why it decided to go to the dollar as its functional currency). I think this could potentially be very significant because I think it is likely that the US market will become a leading solar PV market in the next year or two. Most of TSL’s competitors do not have a position in the US market and I think TSL is entering the US at precisely the right time.
A discussion of why I believe the US solar market is on the verge of taking off would take too much space to get into here, but, very briefly, I believe we are at a tipping point in the US—very close, I believe, to finally recognizing as a country that we MUST embrace alternative energy in a BIG way. In addition, as I have recently opined on these virtual pages, I believe that if we take ALL costs into account—including environmental costs and the fact that coal and nat gas prices have doubled in the past year—we are at grid parity right now. As this fact becomes more recognized in the very near future, it will be a MAJOR kick in the pants to solar energy in this country.
It’s not my intent to brag, but much of the above supports some theses I have propounded in my previous articles, including these:
- For 2008 and 2009, poly costs will drop faster than ASPs, allowing solar panel makers (not just TSL) to maintain (and possibly even expand) gross and operating margins. The reason for this is that (as I opined in late 2007 and since), global demand for PV panels is going to grow faster than many industry experts believed. This will largely be due to the recognition that if we take CO2 and other environmental costs (as well as increasing coal and nat gas, and nuclear plant construction and insurance costs) into account, solar PV has reached grid parity in the places with excellent solar resources (eg, Calif, Arizona, Nevada, Colorado, etc).
- I believe that First Solar (FSLR) will progressively lose its pricing advantage over poly-based panels because while FSLR’s panel costs will be going UP (aluminum, glass, CdTe costs, etc), TSL’s (and other poly-based manufacturers’) panel costs will go DOWN.
Let’s do some back-of-the-napkin calcs:
- First Solar indicated cost per watt in Q1 to be $1.14 (FSLR cost per watt has been steady the last 3 quarters; may decrease with Malaysia fabs, but materials inputs may go up)
- TSL’s costs--$1.17 (all-except-poly) + $1.76 (poly) in Q1
- TSL’s projected costs at 2008 exit--$1.05 (non-poly) + $1.50 (poly 15% less)
So, at the end of this year, TSL will be at $2.55 versus $1.14 for FSLR.
If you add $1 of profit to each, you are at $2.14 and $3.55.
But, you need TWO FSLR panels to make the same electricity as ONE TSL panel, so installation costs will add an extra dollar per watt for extra racking, wire, and installation labor cost in the FSLR installation.
This makes INSTALLED costs much closer—say, $5.14 for the FSLR installation (assume $3/watt for balance-of-system and installation labor) versus $5.55/watt for the poly installation.
And if land or roof space must be leased to accommodate double the number of panels, the extra lease costs might be enough to completely eliminate the price differences. Even if the installation-cost differential is only 50 cents, the point is, once poly gets to $150/kilo (which I expect to occur in less than 24 months), the price advantage which FSLR now enjoys may be gone.
Of course, it may well be that by late 2009 or 2010, disruptive technologies offering PV panels with ASPs (not costs to produce, but actual sales prices) of $1.00 to $1.50/watt will constitute new and serious competition to poly-based panels, but we’re not there yet.
In summary, I think TSL offers compelling value at a stock price of $41 (I also think CSIQ in the upper $30’s is a good buy). However, as Trader Mark and others have noted, some aspects of TSL’s management at this stage are disappointing. They initially stated their earnings would be reported the week of May 19—after EVERY other solar company reported earnings.
They missed that. Then they said they would report earnings either in late May or early June. They barely made that, releasing earnings on the very last day of the first week in June. And on the day they released earnings, they only released them a minute or two before the conference call was due to begin. I am sure there are reasons for that, but whatever the reasons are, reporting earnings two minutes before the conference call begins is simply unacceptable.
And finally, TSL management surprised everyone with their “currency accounting change” beginning this quarter that converted what would have been a stellar quarter of 67 cents in earnings into a so-so headline number of 51 cents. While CSIQ and several other solars boosted their Q1 earnings with currency GAINS obtained from selling most of their product in Europe, TSL’s management succeeded in LOWERING their earnings by 25% despite selling the same product in precisely the same markets.
Again, maybe there are valid reasons for this change, but assuming this was the right decision (which I cannot evaluate because I still don’t know why the decision was made), a heads up on this issue at some point in the quarter would have been wise, in my opinion.
Even failing that, a better explanation in the earnings release of why this change was made and what impact it might have on the rest of this year and in 2009, would have been extremely helpful.For good or for bad, if you are a public company, you can run the business well but if you fail in your communications with the investing community, that good work can fail to be reflected in the stock price.
That is what I believed happened this quarter. The operational aspects of this company have hit on all cylinders in the past two quarters, validating management’s approach in the solar space, but there are some frankly inexcusable gaffes that remind me more of a student taking his first MBA class than of professionals running a billion-dollar-plus company.
If TSL management can do as well on their communications as they have done on the operational side of the business, this company will cease to trade at a PE discount, providing significant upside with some real value to be unlocked here. Since the gaffes are so easy to fix, I have confidence that management can and will do so. They can begin by clarifying the reasons for changing TSL’s “functional currency.”
I think the market may be wondering—If everyone in the world is running away from the US dollar, why did TSL decide to run to the dollar as its “functional currency”? If there are good reasons for this decision, investors want to know what they are, as well as what impact this will have on 2008 and 2009 earnings, to the extent that is knowable. TSL would also do well to NOW set an aggressively EARLY earnings release date for Q2 (TSL management--how about being the FIRST to report Q2, rather than last?), showing they have gotten their act together on that score. And once they set that date, they need to make sure they keep it at all costs, and release the earnings report hours, not minutes, before the conference call begins.If anyone is wondering, yes, I have sent a copy of this article to TSL management.
In summary, I believe TSL offers compelling value at $41, with a realistic 2008 forward PE of 11. If TSL starts garnering more respect from the investing community and its PE expands to a very modest 15, and as 2009 earnings in the $5+ range become more visible after next quarter’s report, I think that a $70-80 stock price is well within reach well before the end of this year.
Disclosure: I own a large position in TSL, plus some TSL options bought when TSL was $41-$44 recently. I am not short or long any other stock, but also hold a large position in PWE, which will be the subject of a future article.
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This article has 84 comments:
Please explain in detail this:
disruptive technologies offering PV panels with ASPs (not costs to produce, but actual sales prices) of $1.00 to $1.50/watt
The rest is fantastic and you did a very good job, keep it up!
Why would the majority of tsl's business be in usd if they are selling almost exclusively to EU nations? In fact peers such as yge, solf, and csiq do their business with EU countries in euros, not dollars. This is evident by their asp increases in Q1, over Q4, which ranged in line with the euro appreciation vs the usd during that period. yge's asps went from 3.86 to 4.11/watt. csiq's asps went from 3.85 to around 4.15/watt. solf's asps went from 3.85 to 4.07/watt. If their contracts were based in euros, then the asps that they ultimately receive when converted back to usd, is increased by the degree the euro appreciated vs the usd. In contrast, tsl's asps stayed stable at 3.95/watt, up only .01/watt over Q4. tsl also noted that they are using long term fixed priced contracts, apparently based more on the usd, if not exclusively to the usd. This is why they have very good asp guidances for 2008 and even 2009, and it is also why, because if their contracts are in usd, they did not see any asp rise for Q1.
Now many would argue why on earth would tsl want to make such a move when everyone is so negative on the usd and believes that it can only go down further against all other currencies. Maybe it's because tsl believes the usd has bottomed, I don't know, but this isn't likely the case. It's more likely that they wanted to keep their asp visibility stable by using the usd, instead of the euro which would have to be converted back to usd for reporting purposes, causing asps to bounce around wildly from quarter to quarter. In essense, I believe tsl removed any asp risks, as well as rewards. If the euro continues to appreciate vs the usd, tsl will not see any benefits, as they did not in Q1. If the euro declines vs the usd, tsl will not see their reported asps decline either, while peers still basing revenues in euros will could see their future asps decline by the degree the usd appreciates vs the euro. Unfortunately for them, Q1 was an unusual quarter where the dollar tanked 8% vs the euro. You could have argued that they should have made this change in functional currency at the start of Q2, but it's probably more logical to do so at the start of a fiscal year instead of in the middle of one.
Thus I also believe most of their currency exchange loss is more tied to the relation of the rmb vs the usd. Their bank loan liabilities are based in rmb, and logically, if the usd declines vs the rmb, their liabilities, in usd, would increase, causing charges. Unfortunately again, the rmb went up 4% vs the usd in Q1, much higher than the usual 1-2% of late.
In the end, while the impact of this change was relatively large in Q1, as revenues continue to increase to much higher levels, the currency exchange risks on revenues will be much higher than the currency exchange risks on their liabilities, which cannot increase much more on an absolute value basis. So from a longer term business prospect, this move makes a lot of sense, although it can have negative effects in the near term. Without access to their books, this is the best rationalization I can come up with.
Finally, I did not say I believed their operating margins will expand in 2009 from the 16-17% in 2008 to some bigger number. That is certainly possible, but too much can happen to ASP's and poly for me to want to make that prediction at this time. I did say that as TSL has previously guided, 2008 margins are higher than 2007.
To investinghobo,
Reasonable and plausible explanation--just imagine how much better the market and analysts would have received it if TSL explained that they believed the pro's of this decision in 2008 exceeded the con's?
I think their move into the US might have also prompted this change--I doubt American resellers and other companies would have wanted to deal with anything OTHER than USD. Regardless of the reason, TSL should have known that this $4 million hit would have raised a lot of eyebrows, and they should have explained it better both in their release and on the conference call (they never really got into it on the call).
Jack
Again, the drawback is it puts their liabilities in terms of rmb denominated bank loans at risk, since now those obligations have to be readjusted to the usd every quarter. The majority of any currency exchange gains or losses tsl might see in the future, should be tied to this, and not the euro. While the rmb will most likely continue to appreciate vs the usd, it's most likely going to do so at a 1-2% quarterly clip, as seen in the past. Q1's rmb 4% rise over the usd was unusually high, and thus, the magnitude in absolute dollar amounts for tsl's Q1 currency exchange loss, is probably near it's limit.
tsl's move to the usd will most likely be seen as a smart move or not, will ultimately depend on how the usd reacts vs the euro. usd/euro exchange rates reached extreme levels at the end of Q1, and so far the usd has rallied 2% vs the euro in Q2. If the dollar can rally back to year end 2007 levels at some point in the future, tsl would then command the highest asps after peers translate their euro revenues back to usd. In addition, tsl would not be subject to any forex risks, while peers in the case I just mentioned, would most likely report forex losses on their euro amounts sitting in banks or in accounts receivables.
In my opinion, while tsl's move is considered beneficial or harmful to earnings after currency exchange translations, is up in the air right now, what they did do was increase visibility and eliminate risks by many folds over their euro denominated peers. The extent on tsl's currency exchange losses in future quarters is most likely limited to the levels seen in Q1, unless the rmb appreciates more than 4% vs the usd on any given quarter. However, the currency exchange risks that their peers face as revenues increase much higher, will be a lot more. Of course, peers could always hedge currency risks to the value of their revenues, at added costs. In terms of the stock price, perhaps part of the reaction was due to the over all markets as well.
Sadly about 90% of investors would never go to this length to dissect anything - if Reuters says its a 3 cent beat, well then its a disappointment! The fact some of these companies are now making 20-33% of their "profits" from currency is not something that "investors" can be bothered with - they just clap like seals and say "they beat they beat! BUY BUY BUY!" Trina performed far better operationally than most of these now "high fliers". But this is the sophistication of the market - the longer you are around it, the more you realize it is a very much "keep it simple stupid" market even with all those MBAs running around moving trillions of dollars.
I think one key point was this one
"TSL told us that their non-silicon panel costs were $1.17/watt this quarter (down from $1.28 last quarter), and that they expect to exit 2008 at $1.05. Please note that in this cost per watt, TSL, as an integrated manufacturer includes ingot, cell and panel-making."
So you cannot compare apples to apples with MOST of the others. Interestingly the 2 most integrated co's (YGE being the other) hav e been taken to the woodshed the hardest the past 3 sessions. Any thoughts on the horrendous action in YGE? I am just always fascinated by the relative outperformance of these stocks versus one another.
Now at this point I have to guess how high their OPEX charges will be next quarter since they will have a big 10 year anniversary party and their annual bonuses. Why not disclose their estimate for the charges? Like a Non 1st year MBA student. Same old, same old.
"During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency."
Heck of a great time to buy!
By the way, I think you focus too mutch on TSL.
I prefer YGE or JASO !
Why ?
Better margins (20-25%) and a lot of cash available in the bank.
Why do you ignore YGE and JASO over and over again ???
When new technologies came up, and Fed raise tax. All TSL investors will be in BIG TROUBLE. That's why I sold all my shares recently.
patience can reward you
I will buy at $30-$35 an initial position
The two 'spectacular' solar stories of 2007 were FSLR and Upgraded Metallurgical Silicon: Timminco's share (TSX:TIM) price went from about 30 cents to 30 $, and its up there for a reason. Mr. Market simply expects a brilliant future for solar panels made with UMS.
Now Canadian Solar (CSIQ) is the first horse in this race as they will present the specs on their 'e-panel' shortly at the Munich Intersolar 2008.
Based on info released by both companies i estimate 12.5 gram Si/watt and 75-82 $ cents/watt. This would bring total cost/watt to about $1.95 (for 40 MW in 2008) This should improve margins for CSIQ.
In fact i think it is also the reason why CSIQ poly-based margins were much lower than Trina's: they have concentrated on UMS in coop with TIM from the start.
The 5000 mt ton UMS (already ordered) for 2009 and 2010 means an extra 400 MW online, which started in april 2008 and as i have heard is being well received here in Europe.
But it even gets better when one considers the fact that both production of UMS (a modular 1200 mt ton line) and CSIQ can be increased relatively easily.
The situation with respect to the purification of silicon has many parallels to the introduction of steel mass production of the second half of the 19 th century.
they can focus on general market conditions, sector conditions, size of companies. financial strength, p/e, growth, cash flow etc...
since theyall play in the market we must take all into account. if we are daytraders we need to focus on the momentum of the stock and the sector while using technicals to make our entry/exit decisions.
if we swing or invest we must make deeper considerations. we need to understand that we will not enter at the exact lows or exit at the highs.
regarding TSL, it looks like the company is giving great operationsl results but they get discounted for many of the reasons you guys are talking about here.
they get size discount, blur disclosure discount, missing the whisper number discount(the 0.51 that they reported), they also have low growth prospects for 5 year view whcih is kind of silly since 5 years is eternity in growth sectors but it is what it is, they also get the award for making material decisions every quarter (open new plant, not open new plant, new accounting hange etc...)
all that said and done as an investor/swing trader i view this as buying opp. i also like SOL, CSIQ, SOLF, LDK here. (CSIQ,SOLF are very much alike.
very good articles from jack and tmark and great comments from hob and the rest.
Incidentally, TSL did NOT discuss the currency issue much at all on the CC, only that we should expect $3 million in Q2.
Having said that, I appreciate your comments but we need to hear it from TSL in more than one sentence.
I also agree with you that operating margins this year will be 15-17%, and I do not beliieve their 10-year party or anything else is going to affect that. I believe my modeling 16% for this year is reasonable.
To TraderMark, nothing sad about how the market reacts--that is the market, most of which is composed of ingoramuses. But don't fight it, Mark, because that is how we make big money. Volatility can help us more than it hurts. I keep loading up the boat--pretty soon, I'm gonna own TSL (LOL).
Bought today at a PE less than 10 for a company that will substantially more than double earnings this year. I'll do that every day, including Sunday.
To Shabazz, have you read my nearly dozen articles in the past 6 months, on solar and energy? I have written on FAR MORE than TSL. TSL is the focus here because (1) it announced on Fri, and (2) it is the best deal in the solar space, IMO.
If you believe YGE or JASO are better--write an article and tell us why. Your just saying so doesn't make it so.
To Aqua--yes, FSLR was the story of 2007, but it ain't 2007 anymore. I think FSLR is a terrible investment, as I have stated in many of my articles. If you think otherwise, write an article.
As to UMG silicon favored by CSIQ--read my two articles at the beginning of this year calling CSIQ the best value of the solar space. CSIQ is my second-favorite stock after TSL. CSIQ is also following TSL's model by integrating more of its production, but TSL is far ahead of CSIQ in that regard--yet CSIQ is at a higher PE.
Further thoughts later.
Jack
Do keep
Sincerely,
A graduate from "up north"
;)
That said, I still like growth at value so to complement the TSL I am probably now returning to CSIQ - I like the UMG factor and the 2nd lowest valuation and frankly it has 1 thing you cannot measure - sentiment - on its side - chart is holding up very well. SOLF is the 3rd choice - might do both as complements and reduce TSL. I believe now looking at all the information there could be an uncertainty overhang to TSL similar to SOLF in spring/summer/fall 2007... people uncertain about management, uncertain about secondary, knowing another 3M currency loss is coming, and knowing an OPEX spike is coming because their annual bonuses are due. That is a lot of uncertainty - that does not mean they cannot beat their number but they will hand away 15-16 cents or so due to currency once again next Q) So even if they beat they lose a lot of upside they would otherwise have. Then the quarter AFTER that might be their quarter to finally (one can hope) shine but that is nearly 6 months away. In the meantime the next time solar runs CSIQ and SOLF will probably trounce it (along with every other major name even with higher valuations) You know in the short run 1 thing matters - sentiment. TSL does not have it -they COULD of had it very easily if they just sat on their hands with this darn currency thing.
p.s. I also believe as we move closer to Nov 08 election solar will see a large move simply due to talk of alternative energy... especially if Obama looks to win - so you can have a big sector move from that. That said McCain will look like a tree hugging greenie compared to the current crew plus he is anti corn ethanol. Things are looking a lot more stable for the next 12-15 months than I earlier feared (thought ASPs would be dropping hard by 2nd half 2008/early 2009 - doesnt appear so) and polysilicon should be stable to falling. Can't predict out more than a year with all the moving parts, but next 12-15 months should be more stable than I anticipated.
TSL will probably make its move late in the calendar year, we have another 90 days of hand wringing now.
I will pick up another 10,000 shares (and some more call options) if TSL hits upper $35 or even $36 range (I was out of the office today and so did not make that trade. Given the recent chart, I may well have an opportunity to do so tomorrow).
Mark, your comments are all well and good--but as you pointed out, we can't measure sentiment, and we can even less determine where it's going to be next week, much less next month. Sure, CSIQ has the sentiment now, but it didn't when I recommended it at $18.56. Indeed, there were very few positive comments I received on my articles, but hell, that didn't matter to me. It was trading at about an 11 PE against 2008 consensus earnings, and based on my own earnings estimates at the time, the PE was closer to 9.
That is PRECISELY where I am today with TSL--using consensus, it's trading at about 11.5 PE, using mine, we're at about 9. I'll take that trade any day. I was fully margined when I was holding CSIQ, so my percent return on that trade was in the thousands of percent (because most of my CSIQ position was obtained using margin dollars). I've got a lot of margin capacity right now and plan to load up on more TSL.
As to sentiment--if CSIQ has a currency LOSS next quarter because the dollar has firmed up against the Euro (admittedly, unlikely given recent ECB action, and recent probs here), it might lose that sentiment. On the other hand, I just don't see much downside potential for TSL (yeah, I said that at $45, and again at $40; one of these days, I'll be right [LOL]).
So if I find it difficult to trade on sentiment, what am I down to? Fundamentals, and yes, "value" investing, buying at a 10 (or less) PE a company that without a doubt will double earnings this year (and probably go up closer to 150%) as well as increase earnings 40% next year.
In summary--"This too shall pass"--this ridiculous valuation--and significant money will be made on this stock. The greater the discount now, the more I'm gonna make. Let it go to $30 for all I care--it's like a "half-off" sale at Home depot.
Finally, I think TSL can EASILY fix the problems it has created. It is damn hard for TSL's competitors to achieve 16.7% operating margins, or to enter a half-dozen new markets, but fixing the communications problems should be easy to do.
I assume some of the management people get options as compensation. If nothing else, if they want those options to be worth something, they will get their act together.
Jack
U of M is a fine school, and I love Ann Arbor. Haven't been in the Midwest in ages, though.
Jack
Another excellent article. Really not much too add to it. As you pointed out in your last post it is not hard to increase the level of communication (though it does appear to be a problem for TSL), it is harder to penetrate so many many markets as TSL has done....
By 2020 Europe wants to achieve that 20% energy output comes from renewable sources...That means the countries that started the green revolution in the EU (GER, ESP) will slower their incentive structure since they are already producing quiet a lot of renewable power (not saying that those markets are dead....but the growth rates are going to come down sharply in the two above mentioned markets....On the other hand we have those countries who have not done too much (Italy, France, Greece, Belgium) and these countries, and many more, will increase their incentive structure in order to reach the target of 20%....Because this target is not up for debate in the EU at all...Also it has the backing of the public....
That being said Trinas position in Italy seems quiet important to me, as you also pointed out above, that market is probably going to go on a tear....If I understood correctly, during the CC, Trina already possesses a market share of 25% in Italy and concerning second half shipments Italy is Trinas biggest market with 25% of shipments to Italy(20% GER 17% ESP and I heard something about the US was it 4 MW or 14 MW got a question mark in my notes could anybody clear that up?would be very much appreciated)...This will probably further increase Trinas market share....
So Trina is actually better positioned in the Italian market than SPWR which bought a company in Italy just for a better positioning and more visibility in the market...and SPWR management knows what they are doing!!!big fan of them(currently hold no positon in SPWR)...Showing that Trina is doing quiet the job in Italy and other developing markets(Greece, Belgium, Korea)...IMO Italy and Greece being the most important for the near future due to the location on the map concerning sun hours and lack of renewables currently in place in those countries and them having to play catch up....
I currently hold 1,500 Trina shares, with 500 being bought yesterday, I intend to double that position to 3000....I will buy another thousand somewhere in the low 35's and then I will take it from their...As all Trina holders I am disappointed with the move the stock made but one can not look in Trina in isolation because solar stocks move in herds and if the sentiment towards them wasnt so bad at the moment the Shorts would have had a much harder time with TSL...So why not let us take advantage of the market overreaction...at the latest next Q the stock will turn sharply....
But reporting at the end of the cycle is never good for the TSL stock, as we saw, I can only agree with Jack when he said how about being first to report for once with much more disclosure and the numbers coming out 2 minutes before the call it was just hectic...They really have to treat their investors better....That is all I have to add since the article already mentioned pretty much everything and the comments are great....With kind regards from Germany CW
Long ABX, CSIQ, STP, TSL
PS Jack so have you been watching some Euro Cup....making it tough for me to trade at night nowadays:)
I think FSLR will turn out to become a curiousity, a lone, rare star in the solar space, to use Mark Anthony's analogies, or at least a temporary diversion from the main silicon path.
I'm just saying si supply issues dominated 2007 again.
I did reread your articles on Canadian solar (whats in a name right?) which makes it even harder for me to understand your solar investment strategies.
On the other hand Trina's cancellation of the polyplant speaks for management, and i'm sure you will get above water.
But I do think UMG is the future (eg. take a look at (LON:GLBM) the recent deal with BP Solar) and the e-panel will be a good solid workhorse for CSIQ.
Being the first horse in the race might not always be the best horse of course and at some point they may be overtaken by Q-cells (FRA:QCE) which contracted 400 metric tons UMG for 2008, 3000 mt tons 2009 and 6000 mt for 2010 and beyond for Malaysia, the first phase 160 MW scheduled Q1 2009.
I recently sold off positions in AMG (TIM is subsidiary) and have been looking for a good entry point in CSIQ as i'll switch from si commodities and solar ovens etc. to those who will use them.
I have also gotten into ENER (amorphous silicon thin film) @ 48 $ as high brow European architects are starting to like BIPV and i hold a bit of YGE with an average of 23$ (ouch) but Yingly, well its a love affair, i like the website, the quality of the panels, management etc. etc.
To Amateur Economist,
Yeah, I really only own two stocks, and very large positions in each, plus I trade in and out of the options (I buy call options at what I perceive is a low and sell call options when I think we are at a peak).
My whole stock account only constitutes a small percentage of my net worth, and a tiny percentage of my income, so I could lose it all, and it really would not affect me or my family. Therefore, I do extensive research, pick one or two horses, and ride them.
It is difficult for me to be expert in many stocks and areas, so by concentrating in just very few sectors and very few stocks, I can do better than by diversifying. It's a high-risk, high reward approach but has worked very well for me.
As to CSIQ--I like that stock very much, and I agree that UMG is significant, but I think TSL's advantages (higher margins due to use of recycled silicon and being more integrated than CSIQ, got its panels certified in US 3 months ago, big position in Italy, geographic diversity, etc) at least equal CSIQ's advantages--and TSL will make close to $4 this year while I'm modeling $2.80 for CSIQ.
Thus, at price parity (which is where they are right now), I like TSL better.
To dicki--I think several countries in Europe will far exceed the 20-by-20 (20% renewable by 2020) targets. My guess is that Germany will probably exceed them this year or next year, and I believe Spain already produces substantially more than 20% of its electricity renewably.
Also, one country that is never mentioned (except in my articles) that I think is going to be huge is China itself. I predict that shortly before the Olympics, you will read about a major push in China toward renewables, and given that China is building a powerplant per week, that could create huge demand.
Jack
They only made $18M so $8M came from others net - don't tell me that is the currency adjustment; if so that means 44% of their profit came from currency. Which makes me even more peeved at TSL :)
re: China
The sad thing is not only is the US behind W Europe and Japan, it has a good chance of falling behind China very soon in solar. We have leadership attaching windfall taxes for big oil on top of renewable act - pure stupidity. Our leadership is a complete failure.
Really sad to see some of the things happening here - all victories must come from the bottom up since the "top down" solution is not an option in America anymore.
But could you, or anybody else, clear up for me how much they(TSL) are planning on selling to the US I still have that question mark in my notes....Concerning China, and India actually, the greatest opportunity is in the rural areas but I think that will take a couple years to develop demand their....though the "global" cities Shanghai, Beijing etc. could certainly use some energies that are not so polluting if you take the air pollution into consideration it is like constantly smoking a cigarette...without the nicotine;)With kind regards CW
Dickie, I was talking about all renewables, not just solar. I'm pretty sure that Spain is already over 20% if you include all renewables, but maybe I'm wrong.
As to grid parity--we're ONLY there if (1) ALL costs are included, and (2) ONLY in very sunny climes (eg, Germany would not qualify) and (3) most countries are NOT yet taking all costs into account. So it is not correct to quote me as saying we are at grid parity without these qualifications.
To all,
I have founded a think tank that will be heavily involved in energy issues probably beginning in 2009. One of the reasons I am writing here is to get name recognition. I plan to address these issues in a scientific, non-political but very impactful way (writing well-documented white papers, op-ed articles, TV appearances, do something like Al Gore [Inconvenient Truth, etc]) to push our elected officials to do what we all know they MUST DO.
Don't despair quite yet. Courtesy of $135 oil, Amercians are finally realizing what Europeans and many others around the globe have always known--energy is precious and expensive. Once we are pushed in that direction, we will embrace it.
Jack
we have higher margins, higher 5 yr. growth estimates and almost equal p/e for 2009. it's in favor of SOL.
makes me think SOL is better overall value and not taking into account the management advantage, regarding the investors community.
regarding CSIQ i di believe most of the 8M is for currency gains which translates to lower net profit of about 6 M, net of taxes. it gives us around 0.42$ per share if we take the whole number.
CSIQ and FSLR are the only two solars that could stay above 200-day MAVG.
(2) During the recovery phase of solars from March to mid-May:
CSIQ, FSLR, and JASO are the only three solars that could take out Dec. 07 high.
(3) During current sharp sell-off of solars since mid-May to now:
CSIQ is the only solar that can stay above its 50-day MAVG.
Discussion: Of the three periods considered, CSIQ is the only solar that appears in ALL three.
There may be something special about CSIQ that the Market sees and many of us don't.
bigcharts.marketwatch....=
As to the comments by User 182177--interesting observation. But keep in mind a fair bit of this might have been due to currency gains rather than operational advantages, whereas TSL had a currency negative, meaning their operational earnings were even stronger than reported.
Jack
Q1 2008 CSIQ 'other' net income estimating from euro appreciation: about half is currency gain the other half structural: services, silicon sales, tolling business etc.
Technical support almost certainly from UMG expectations.
e-panels offered at 15% discount in U.S. and Europe.
Intersolar Munich:
june 12, engineering data and field test results e-modules using 100 % UMG.
june 13, e-modules: R&D roadmap
it is also good holding in case the shortage won't ease, since in this case ASP will still hold and the market will absorb every expansion in the capacity produced.
in the long run it is clear to everyone that the giants will step in, like we saw little giant Bosch last week and with the likes of GE at the corner waiting. it is too hard to predict what will the industry look like within 5 years, but the direction is clear - expansion, capital reqiurements, competition will bring consolidation and new big entrants that will change the game field.
for me it looks like good entry point for SOL for fundametal and technical resasons, but also holding TSL, CSIQ, LDK, SOLF.
one thing i have to mention is that the company is selling more shares now as it announced 2 weeks ago which will dilute the earnings around 15% or little less. on the other hand the cloud od when it will have to raise more and how much is out of the way.
regarding UMG - this is future possibility and it might become major or fail to become one. there are many other technologies and the big winners are still out there to be declared. it will be foolish on my part to see things that are still not there. i give CSIQ premium for having the possibility of being early bird in good field, but sure can't make bigger bets while things aren't really sure.
snyway investing is simple - risk and reward. when we go for pure value we lower rsik drastically and the reward will go down accordingly. we can use historiacl volatility or implied volatility as it is derived from the options and calculate the range of return that we are playing for with the accumulated risk for playing it.
when we enter a play like TSL/SOL we go for a skew (at least the way we view it) and we hope that over time the market will correct it and that our assumptions were correct and that no new data will crash these assumptions. we also take into account few non economic factors like how investors feel about a company and i think that SOL management is doing great job about managing expectations and good disclosure unlike TSL management, which is doing almost all they can to destroy the good operational work they do.
sorry for the length of this post and will keep it much shorter in the future, it's just hard to say one thing and not explain why i think what i think and why i interprate it the way i do.
this is all my views only and can be wrong since the amount of research i did may be big, but still is only a drop in this huge industry.
The Fed is going to increase interest rate, that will kill the stocks.
Ok after taking notes on several conference call listenings, I made some slight deductions and estimates on 2008. This is not for everyone, so if you are not a long term investor in tsl, you can just skip this post since I will make no stock price prediction especially for the short term. First I want to make a few comments on what was said on the earnings release and the conference call.
1) One of the main differences between tsl and its direct peers is that tsl decided to sign long term contracts with customers, and apparently not as weighted in euro dollar payments. Because of this, they did not benefit from any asp rise in Q1, nor will they for any further rises this year. The advantage is, their asp visibility, in their reported usd, is the most clear, thus allowing them to give very narrow ranges for this year. In addition, they also have good visibility into 2009, with asp ranges not significantly lower than 2008 - something that I'm sure is very shocking for many analysts predicting massive 25% asp drops next year. Obviously, their visiblity makes calculating their business for this year much easier. The ability for us to predict tsl's asp range for the rest of 2008 is extremely important, because it is one of two very unpredictable variables. The other is being silicon.
2) At 7.5g/watt, tsl's blended silicon cost for Q1 was 235/kg, up from 195/kg the prior quarter. By being able to drop silicon usage from 8g/watt to 7.5g/watt sequentially, they were able to reduce the silicon cost rise from 15% down to 12%. In addition, I noted in earlier posts that I believed tsl was very conservative on many parts of their guidance during their Q4 2007 quarter. tsl guided for an average of 7.8g/watt silicon usage for all of 2008. They are already at 7.5g/watt during Q1, and guided Q2 to be at 7g/watt, a remarkable improvement in their operating efficiencies. Well it's remarkable to what they guided to, as you can see, was as conservative as you can get. However, if you listened to ldk and sol, you'd know that eventually tsl would be able to achieve these results. Luckily, they did so in under two quarters. Thus as a result, even if silicon costs rise by 10% sequentially, silicon cost would only rise to 1.81/watt in Q2, from 1.76/watt in Q1. This along with what they guided for Q2 asps, should allow them to achieve 25% gross margins.
4) They did a great job on getting operating costs in line, as they have stressed for two straight quarters. Operating expenses as a percentage of revenues dropped from 12%, to 11.2%, to 9% during the last 3 quarters, below the 9.5% guidance the prior quarter. Once again, they have been conservative on this operating metric. For tsl to keep 2008 total operating expenses to 8% of revenues, that would have to imply that Q3 and Q4 operating expense levels would have to be 8% or lower. I used 9% for Q2, 8% for Q3, and 7.5% for Q4, which as a whole still added up to over their 8% target, but should work for the sake of being conservative. Note that peers have these figures at 6-7%, so it's not like tsl is cutting corners, and thus probably have more upside to cut expenses on in the future.
7) I don't expect analyst estimates will be anywhere near as high as I have mine. The reason is I am deducing their silicon cost reduction for the second half, based on what tsl has said. I think analyst will most likely use midpoint figures for tsl's guidance, they should get eps estimates very close to $3.75-4.00 for 2008. Top end solar analyst like Stone who already had his estimate above $4.00 before the Q1 report might possibly raise his numbers, if he makes the same deductions based on comments tsl made on their recent conference calls. The reasons why is based on his estimates, which implied lower operational metrics than tsl showed in Q1. Although the huge non-operational expenses totally threw off numbers, their level of operations should give confidence that they can be carried for the remainder of the year, when non-operational expenses, although perhaps larger, won't much as great of an impact on overall eps numbers. Also if anyone really applies simply logic, they could easily estimate that tsl's 2008 gross margin guidance of 23-25% for the entire year is impossibly low, even on the high end, when Q1 gross margins already stood at 25.8%, Q2 won't be too much lower, and Q3-Q4 would see relatively stable asps but much less silicon costs as well as higher operational efficiencies. It's harder to see unless you look at their business in terms of individual cost components, such as I've broken out below. For example, an additional .10/watt processing cost reduction from the 1.17/watt they saw in Q1 would add at least 2.5% of gross margins alone.
I know because of what happened in Q1, many of you might think my estimates for tsl are crazy. I believe them to be entirely achievable and in line with what tsl has said. If you actually spent the time to read my logic, and do the numbers yourself, you would know that even some figures I use, are possibly conservative, such as my 200/kg silicon cost for Q4 of this year, when their 50% long term contracted virgin silicon prices could take it much lower. In fact, prior to seeing csiq's Q1 results, leading me to write my summary on what would happen if tsl's asps also trended like csiq (and subsequently yge and solf), I actually was only predicting .55 eps for tsl in Q1. And this is excluding knowledge of the huge non-operational line item expenses. In fact, some of you were saying my estimates were too low because they reported .61 eps in the prior quarter *chuckle*. Even the day prior to their Q1 earnings, I noted that if asps did not trend with peers, I saw their gross margins would drop to 24-25% with eps around .55-.60. Anyways here are my estimates for the rest of the year:
Q2:
asp: 3.93/watt; shipment: 44mw; revenue: 173m
silicon cost: 1.81/watt; silicon price: 259/kg; processing cost: 1.14/watt;
product cost: 2.95/watt; gross margin: 25%
operating expenses: 15.5m; non-operating expenses: 6.5m; tax: 1.25m
net income: 20m; eps: .80 (excluding poly plant charge)
Q3:
asp: 3.90/watt; shipment: 60mw; revenue: 234m
silicon cost: 1.60/watt; silicon price 229/kg; processing cost: 1.10/watt
product cost: 2.70/watt; gross margin: 30.75%
operating expenses: 18.75m; non-operating expenses: 7.5m; tax: 2.5m
net income: 43.25m; eps: 1.72
Q4:
asp: 3.90/watt; shipment: 70mw; revenue: 273m
silicon cost: 1.40/watt; silicon price: 200/kg; processing cost: 1.05/watt
product cost: 2.45/watt; gross margin: 37.2%
operating expenses: 20.5m; non-operating expenses: 8.5m; tax: 3.8m
net income: 68.2m; eps: 2.72
So Jack, according to this !!conservative!! projection from hobo, TSL can make EPS 5$ + 2008. 2009 is booked 60% with fixed ASP's in USD. PSi is contracted to fix prices, and remaining PSi will just drop in price. That said, and a ramp from 2008 to 2009 also hobo inidcated EPS 10$ for 2009. All essential figours are out and +/- 20% sure. Going for EPS 5$ 2009 is just a mistake IMHO - better not to mention EPS 2009 at all once you find it unclear.
The rest of your comments are great, keep it up!
the one big/huge problem here is the si cost you assume. it reminds me of last year when everyone was talking about how si prices will drop, but in reality they went up. if this will be the case here or even if it will just stay where it is than all the calculations will be way of the mark.
still, as a stock holder i love the analysis :)
I was wondering if you could point to any links or sources regarding the FSLR comparison of installation costs vs. TSL (the two 150 watt panels vs one 300 watt panel thing).
I always enjoy reading your commentary and wished you had time to look into a few other areas of the market.
However I am not sure how picking solar stocks relate to your think tank idea? Or will it be a stock analyst think tank?
a U Michigan grad
Thanks for posting hobo's carefully-thought-out analysis. I still disagree with him regarding his $5 estimate for 2008.
Here is what I heard guided:
1) Revenues of $770 to 808 million in 2008. Hobo's revenues add up to over $900 million. Of course, anything is possible, but I would hardly bank on $900 million+.
I am now projecting $800 to $810 million, which could certainly go up after Q2 announcement. But recall that they guided to 28-30MW this quarter and they produced 29.5. TSL has been conservative in their guidance, but not by this margin.
2) TSL guided to $3.85 ASP's in the second half. Hobo used $3.90. Since the whole 5 cent difference drops to the EPS line, that is significant.
3) TSL guided to a 12-15% drop in poly costs in 2009, putting poly at a bit over $200/kilo in 2009. Hobo is using the 2009 guided poly costs in 4Q08. I think that is not conservative.
4) Hobo is using processing cost of $1.05 in Q4, but TSL guided to that number at year exit.
5) I do not believe operating costs will drop as much as Hobo used, primarily because TSL is beginning new operations in half-a-dozen countries right now. That is not cheap, especially in countries like the US where Sunpower and FSLR are based and will not let TSL very easily.
6) Hobo's analysis results in gross margins of 31% and 37% in Q3 and Q4. TSL has guided to about 25-27%. 100-200 basis points of gtross margin is usually considered significant. Do you really think TSL will guide to margins that are 1000 basis points off? They would be the laughinstock of all analysts (myself included) if they did that.
So, Larson, regardless of what you say, this is NOT by ANY stretch of the imagination a "conservative" assessment of TSL likely 2008 earnings. I think the $3.90 number I modeled is much more likely to be on target than $5.00.
Could TSL make $5 in 2008? Sure, anything is possible.
What chance do I give that? 5%.
I'd say with at least 80% confidence that TSL will make between $3.60 and $4.20 this year (with $3.90 being the midpoint). The reason the range is so wide is because I am still not clear on the functional currency issue.
More later.
Jack
1) If you add up my revenue estimates, they add up to 800m, not 900m+.
2) In tsl's conference call, they guided for 3.85-3.95 asps for second half 2008. Excluding Spain, they guided for 3.75-3.85 for second half 2009. These are extremely strong visibility and asp guidances for 2009, which apparently are based on their long term contracts.
"Initiated deliveries to customers on a long-term contract basis to increase visibility on 2009 business such as Phoenix (Germany), Proinso (Spain), Pirelli (Italy) and Clipsol (France)"
3) tsl has actually not guided for second half 2008 silicon costs. My estimates are assumptions based on what they have told us relating to silicon costs, which are:
a) 50% of their silicon will come from long term contracts
b) virgin silicon coming from long term contracts will be "lower than reclaimables today" (I corrected this to mean as of middle of Q1 2008 silicon costs vs Q4 2007, since tsl made this statement on Mar 4 2008, implying their reclaimable silicon costs were lower than 235/kg)
Not until the second half of 2008, tsl has been getting silicon from short and medium term contracts fixed at a ratio of current silicon prices. tsl is not paying spot prices, but they are affected by spot pricing. Based on their 235/kg silicon costs in Q1 using a 80/20 reclaimable/virgin blend, this suggest their virgin silicon costs above 300/kg while reclaimable silicon costs a little below 235/kg. Based on what other industry players have said regarding long term contracts, I estimate tsl's long term contracted virgin silicon costs to be 150/kg or below. Thus what tsl might see sometime in the second half are virgin silicon costs actually below reclaimable silicon costs, which are still based on short and medium term contracts fixed at a ratio of still very high spot prices. If you want to be conservative then you can delay my quarterly silicon costs by one quarter, taking into account fifo silicon costs.
4) I agree, 1.05/watt processing costs for Q4 is still in debate. I still believe there is much room for tsl to improve, based on metrics other industry players have proven. tsl's move into multicrystalline capacity will help, as they did not have this capacity last year. yge's 100% multicrystalline integrated capacity yields them .80/watt total processing costs. Also I believe tsl has generally been conservative on their operational metrics. A good example is their 7.8g/watt silicon usage guidance for 2008, made just a quarter prior. They then stated actual usage for Q1 was 7.5g/watt, and for Q2 it was reduced further to 7g/watt.
5) I am just using the operating costs they guided for in 2008. I guess to many, they still doubt tsl will achieve this, perhaps because of what happened in Q3 of 2007.
6) My gross margin estimates are just reflections of other metrics. While they might see crazy compared to tsl's guidance, if namely asps for the second half are at the midpoint of what tsl guided, and silicon costs drop by as much as I, perhaps aggressively, estimate, then those gross margins can be achieved. To give you an example on long term silicon pricing, here is what a large cell producer said lately.
"E-ton Solar Tech, seeing a big boost in material sufficiency as a new polysilicon contract with M.Setek comes into effect from April, will see its overall material costs slashed by 40-45% in the second quarter of 2008, implying a powerful catalyst to company profitability."
stp for example, said their silicon costs could drop by 10-20% in the second half of 2008, because a larger percentage of long term contracts will initiate starting Q3. For stp to even say this is aggressive, since over a third of their silicon cost structure is still based on short and medium term contracts fixed at a ratio to spot pricing. If you compare tsl's silicon cost structure during the past four quarters, you can conclude tsl has done perhaps the best job managing their silicon costs. I'm just an outsider looking in, so I could be as wrong as anyone.
In both cases revenues and expenses are converted at the average exchange rate for the period so these items should not be effected by the change.
Using all current most balance sheet items are reported at the end of period exchange rate whereas using temporal balance sheet items are reported at historical cost (local currency costs * historical exchange rate at time of purchase/investment). Given that TSL's operations are almost entirely in China this means that balance sheet items will be recorded at their cost in terms of historical exchange rates. Assuming the RMB continues to rise this means that Assets and Liabilities will be lower than they otherwise would be using the All Current Method.
Using the temporal method currency exchange losses are expensed to the income statement immediately whereas using the All Current method currency gains and losses are accrued to the balance sheet as an equity item.
I would have to look at the financial statements in more depth to appropriately judge the implications for TSL and its competitors but hopefully that helps some.
1) Mea culpa on my math mistake--$800 million is the gross revenues used by Hobo, not $900.
2) I still don't believe TSL would guide to net margins of 15-17% if the true net margins would be over 20%, which is about where Hobo is.
3) I think ASP of $3.85 in second half-2008 and $3.75 first half of 2009 is a good bet.
I believe poly costs will be between $230 and $200/kg in the rest of 2008, and below $200 in 2009. If TSL beats the 7 grams/watt number before end of 2008 (either by cutting wafer thickness or improving efficiency of conversion, or most likely both), there is some upside from my number. There is also upside if they can sell more than $800 million.
Although both are possible, I am not going to model those.
To be conservative (but not overly so), I remain at $3.90. I won't make 2009 predictions because there are too many unknown variables.
Jack
Quote | Chart | News | Profile
[TSL 36.32 -1.63 (-4.3%) ]: Wind is the new solar, as far as Cramer is concerned. He’s staying away from “dangerous” solar names like Trina.
Energy Conversion Devices ENERGY CONVERSION DEVICESENER
66.34 2.10 +3.27% NASDAQ
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[ENER 66.34 2.10 (+3.27%) ]: This is one good alternative energy play, Cramer said.
CRAMER IS AN IDIOT, AT LEAST AS TO HIS COMMENTS ON SOLAR STOCKS, BUT HE IS INFLUENTIAL, AS ONE CAN SEE.
PERSONALLY, I THINK ENER IS WAY OVERPRICED, AND TSL IS A SCREAMING BUY, BUT CRAMER THINKS THE OPPOSITE.
In market influence, he wins, unfortunately.
Jack
"Never underestimate the power of stupid people in large groups" Somebody said that.
Yeah he admittedly hates anything coming out of china.
Let me use one example, based on what you actually stated you expect.
"I think ASP of $3.85 in second half-2008"
"I believe poly costs will be between $230 and $200/kg in the rest of 2008"
Both of these are actually perhaps conservative statements, since from your eps estimate of 3.90, you want to stay on the conservative side. However, using those asps, and just the mid-point of your silicon costs, you are actually saying the following, assuming processing costs do not improve any further from 1.17/watt.
silicon costs per watt = 215/kg / 1000g/kg x 7g/watt = 1.505/watt
unit cost = 1.505 + 1.17 = 2.675/watt
gross margins = (3.85 - 2.675) / 3.85 = 30.5%
Which also implies over 20% operating margins.
Again, I don't want to debate numbers we don't actually know, since both of us can be right or wrong, but just based on what tsl said about asps, they said the overall range for second half is 3.85-3.95/watt, of which for the US will see slightly lower ranges of 3.75-3.85/watt, and US shipments will only be 6-8mw. According to tsl, these are at long term contracted prices, in usd, and since tsl uses usd as its functional currency, it will not be affected by forex changes (one of the benefits of their change as I noted in one of my above posts). So, just based on what tsl has said, I think it's very safe to say what you think asps will be like in the second half is, on the conservative side.
Regarding silicon, this is really all guess work, so I won't discuss it any further. I still stick to my estimates, which I believe to be in line with what tsl has said, and from what other industry players have said. Just using the example above, we are only assuming silicon prices go to 215/kg.
And again, if tsl can improve processing costs further, as they have guided, that will add at least 2.5% more in gross margins.
CSIQ: 39.00 - TSL: 38.99
Its a neck-and-neck race Jack.
Have a great weekend.
www.greenergycapital.c...
Which apparently translates to:
The Group GreenergyCapital, investment company specializes in making investments in the fields of renewable energy and energy conservation, has concluded with Trina Solar, international group active in the production of photovoltaic modules listed on the New York Stock Exchange, an important contract for the sale of panels to produce electricity.
The agreement signed by Ergyca Power, a company wholly owned by GreenergyCapital, lasts three years (2008-2010) and provides that Trina Solar provides the Group GreenergyCapital photovoltaic modules with technology mono and poly-crystalline for a value of 158 million dollars. The agreement is part of the development programme of Group companies GreenergyCapital in the field of photovoltaics, the purchase of the panels in fact follows the establishment of four special purpose vehicle, created with the objective to identify and develop initiatives in the field of energy generation photovoltaics.
In addition to investment operations, the Group has initiated activities realization of photovoltaic installations with the recent agreement with KME Group, which provides for the establishment of a plant on the establishment of Serravalle Scrivia, with an installed capacity of around 4.5 MWp plant, which will be installed photovoltaic modules produced by Trina Solar.
"After the contract signed in April with Pramac, we continue successfully in the development project of GreenergyCapital in photovoltaics," says Luca d'Agnes, CEO of GreenergyCapital SpA "The agreement with Trina Solar, in fact, represents a second important element in the realization of our project, because it contributes substantially to the availability for the Group of a strategic component for the realization of photovoltaic systems."
and
in.reuters.com/article...
they are manefacturersof equipment to both PV and thin film, so it is a play that has footing no matter which of tese technologies win. it has around 100m$ market cap and it's not profitable yet but might become one this quarter or next. there is only one analyst covering the company.
it announced a new product - a 25mw combined cell and module line that makes it easier for companies that want to integrate.
anyway it's just a suggestion and you can all make your own dew dil...
i for one think it's a greatway to play the solar world for the next 6-24 months.
for technitians it had a bullish divergence on the RSI which is usualy a good buy signal for the short term.
06-13-08 close.
CSIQ: 39.00 - TSL: 38.99
Its a neck-and-neck race Jack.
Have a great weekend.
======================
A bit of history here:
73.06: Was TSL's all-time-high (before the sharp sell-off of solars early this year.)
31.44: Was CSIQ's previous (12-26-2007) all-time-high (before the sharp sell-off of solars early this year.)
It WAS NOT a neck-and-neck, but it is now.
Now, place your bets which horse will pull ahead 6 months or a year from today.
TSL chart:
bigcharts.marketwatch....=
CSIQ chart:
bigcharts.marketwatch....=
youtube.com/watch?v=pV...
youtube.com/watch?v=2A...
Second, TSL management, during the Q1 earnings conf call, spoke about their 2008 and 2009 capex plans being $250-300 million and that ‘when the time is right’ they would seek to fund this via equity or equity related financing. This too is likely, until it is concluded, to act as a headwind for the stock price – especially because that the dilution effect is likely to be fairly large given the relatively small size of TSL’s shareholders equity and balance sheet. Additionally, seeing as such funding should ideally have to occur before the end of 2008, it would seem prudent to incorporate some dilution effect into EPS projections for latter part/s of 2008.
Keep up the good work.
You gotta keep poly prices and panel ASP's somewhat (though not totally) separate in your mind. It has been my thesis for nearly a year now that poly prices will drop sooner and stronger than ASP's, primarily because I believed that demand for panels would keep ASP's relatively high.
This was an unpopular opinion in 2007, but support for my thesis is now gathering steam. TSL made this point EXPLICIT when they said on their conference call that poly cost will drop more than ASP's. They should know because they have contracted for a fair bit of poly in 2009, and they have sold quite a bit of their 2009 panel production. So they have DATA to back up their statement.
As to a secondary, I agree there is a good chance it will come, but I would NOT be surprised if it gets announced along with upgraded guidance from the company indicating, for example, that they expect sales to be at the upper end of the range of $770 to $808 million, or to move the whole band up (say, $790 to $830 million), or to indicate that gross margins will exceed previous guidance by 100 or 200 basis points, or both.
If they do a reasonable size secondary and announce upgraded guidance at the same time, TSL might even rally--all depending on how much dilution versus how much improved the guidance is.
Jack
You cannot logically have a dump of silicon on the market that lowers silicon input prices that doesn't lower selling prices for companies such as TSL. They are two side to the same equation give or take a short period.
Also, forgive me pointing this out but it is inconsistent to speak of giving conservative estimates on the one hand whilst on the other hand choosing to ignore the dilutive effect of an equity or equity related debt offering that has been already discussed by management.
I agree that TSL may be a buy, very probably is, but the thrust with my questions is to get to clean information not guess what may occur if and when management occasionally spin positive events as no doubt they and all other do from time to time. I'm striving to look beyond that. Surely the main purpose of good research and exchanges of data is to get beyond spin and look at best underlying information. An equity offering, or equity related offering, is more than probable for TSL. Seeing a you consider this major event to be a probablility why have you excluded it from 'conservative' EPS calculations in what was a long discourse about prospects and earnings for TSL. I feel I will probably buy TSL, but not until I get a better feel for their true prospects and EPS.
Best.
Then how do you explain TSL's explicit statement that poly prices are going down much more (circa 15%) versus ASP's (5%)?
As to dilutive effect--it all depends on (1) whether the secondary is done, (2) if so, how much, (3) whether the extra money will be deployed in an accretive way that prevents "dilution" (ie, income generated off the extra cash will exceed degree of dilution). Since no announcement has been made, we are all speculating to some degree, arent' we?
Which brings me to my third point--when have lots of "clean" information, but EPS projections, degree of potential dilution, etc, is NOT in the category of "clean" information.
Incidentally, I am not talking about spin, but rather about increasing margins that the CFO discussed last Fri (and which Hobo tried to quantify in great detail above)--in the same report where he also discussed a potential secondary. Thus, my linkage of the two was not my invention but rather based on an interview last Fri with TSL's CFO.
Finally, let us assume a dilution of 20% (that would be over $200 million in cash at today's closing price, and I doubt they will even do a secondary THAT large). What would happen to the PE assuming NO INCREASE in EPS? Well, the PE would increase 20% from 10 to 12--still the best bargain in this space.
My article was already very long, and I simply cannot discuss each and every item in my articles, but even with this large a secondary, it does not change my conclusion that TSL is the best bargain in this space.
It may take until next earnings call for the market to see this (assuming I am right, of course).
Jack
His statement, and I quote:
"It seems to me that with such a lot of extra product hitting the market that selling prices across the board for solar companies are in danger of softening as we get into 2009 and a growing awareness of this should act as a headwind for most solar stocks in later 2008."
======================...
For solar industry to parallel the rise of the semiconductor industry since early 1970s, the ASP of PV cells/modules/panels must continue to decline, the conversion efficiency (light to electricity) must keep improving, and the cost of making PV products must steadily reducing - either through the improvement of manufacturing efficiency or via economy of scale.
The market's size is not static, it responds dramatically to the ASP. As ASP declines, the market size (or demand for PV products) could experience an exponential rise - creating some big winners in the solar sector (similar to that during the rise of the semiconductor sector spanning 2 to 3 decades created dozens of 100- or more baggers.).
While 'Atticvs Research' considered that the decline in ASP as a "headwind" -- I, for one, happen to consider that to be the "tailwind" for solars.
Here comes the inherent problem with the fundamental analysis: When two people look at the same facts and same data, and agreed on both - and, yet reach two completely opposite conclusions. To me, for solar sector is to have any future, the ASP must decline.
Good or bad, when the ASP does decline? For a young industry, in the early stage of its mega-trend (like solar), the ASP decline is good -- because there is far more room for the market size to expand and far more room for manufacturing efficiency to improve. But, for a matured industry, in the late stage of its long life (like semiconductor), the ASP decline is bad -- because there is only a limited room for the market size to expand and only a very limited room for manufacturing efficiency to improve.
Conclusion:
The ASP's decline, if it is occurring in the early stage and continues to occur during its long-term rapidly growing phase of a new megatrend is GOOD -- it is this perfect condition of the incubator that many big-winners are born and then nurtured.
The ASP's decline, if it is occurring in the late stage and continues to occur during its aging life with limited growth prospects ahead is BAD -- it is exactly this condition that caused many once-great
stocks to go nowhere, or worse, suffered significant losses in their stock values.
For fundamental analysis, different people look at the identical fact and identical data, and agree on them -- yet, can reach entirely opposite conclusions. This is the problem inherent therein.
======================...
Footnote: About the neck-and-neck race between CSIQ and TSL, I would say that one-day's change is insignificant, because the next day the role could be reversed. In the early going, conceivably, they may very well take turns to take the lead. However, over a somewhat longer time span, like 6 months to a year, the divergence in their performances should become apparent.
The early adopters are paying more money now; once the costs and ASP's are down by 20-30% each (2010), demand will increase even more.
Jack
If tsl didn't need the money, and if tsl were to raise capital and have it sit idle, then yes, it would be a horrible move and thus the stock price would go down to reflect so. But this wouldn't be the case. tsl's business is booming, and they have tried their best to prevent dilution by using short term bank leverage instead. However, I'm going to argue right now, that it would have been better, if tsl actually did a secondary late last year, for example.
Let's imagine if tsl raised 180m on 4m shares late last year, or roughly using a stock price in the mid to high 40s. Their share count would be 29m in this case. Obviously if earnings did not go up as a result, it would be dilutive, but now it's look at how earnings might have been impacted in Q1. With 180m, they could have eliminated their short term bank liabilities for all of Q1, since they have 165m in cash and restricted cash that is used to open those short term bank lines. In fact, they would have had about a 100m bank balance instead of over 100m in net bank liabilities during Q1. In Q1, tsl posted a net 2.2m in interest payments. This would have been wiped out, if not turned positive to a small degree, but for the sake of keeping things conservative and simple, let's assume there is no net positive for their interest income. Secondly, tsl posted a 4m in forex loses on their rmb bank liabilities, as the rmb rose 4% vs the usd during Q1. If they had no rmb based bank liabilities during Q1, they would have had no forex losses, and in fact, if they had rmb bank assets, which might have been the case if they raised money, they would have had forex gains. But again, to be conservative and to keep it simple, let's say forex issues are nil. What this means is, their net income would have been 2.2m + 4m HIGHER. Thus, their net income for Q1 would have been 12.9m + 6.2m, or 19.1m. Resulting from this, their Q1 eps would have been $19.1m / 29m, or .66 eps, HIGHER than the .51 eps they posted, even despite 'dilutive' shares.
This is just a simple example, and it gets more complex looking forward, but raising capital to fuel booming growth has never been viewed as a negative. Any short term stock declines resulting from capital funding is usually very short lived, as evident if you look at recent solar stocks and how they performed after they raised capital. You could have argued tsl should have raised capital earlier, and I am arguing today tsl needs to raise capital asap. I would view any capital raising event tsl takes as a huge positive, and I hope the cfo was forthcoming in indicating it's coming very soon. Cleaning the balance sheet would be a huge boon on forward visibility.
I don't necessarily agree with Hobo's math because they would not be doing the secondary to clean up the balance sheet but rather, to accelerate/enhance capex.
But his overall idea is right.
Jack
it will need to boost guidance significantly to cancel the secondary.
btw SPIR is moving nicely, might be the new product.
I enjoyed your column. Also read your bio; former ER Doc. I'm a nephrologist but I'm still looking to stay in it awhile longer:)
Regarding TSL, I've run the numbers and reviewed the CC transcript. It's an intruiging story. But for me, the REAL bottom line in valuing a company like this is not so much the PE. The most important number seems to be the gross profit: the amount left over after your cost of sales has been subtracted. (I'm using gross profit from the most recent quarter X 4 as a kind of back of the envelope gross run rate).
Company Gross Profit X 4 Market Cap MK/GP
TSL 124 1.2 Billion 9.7
STP 384 6.4 16.6
SPWR 272 3.3 12.1
FSLR 452 22 48.6
Obviously FSLR's valuation is just off the charts here as it is with virtually every other metric.
TSL is cheap but there are several questions about it in my mind. First of all their sales estimate of $770 to $810 seems aggressive. Their most recent quarter, they had $120 million sales so for the year they are talking almost double the sales run rate. Even if they havea lot of the orderss in place, they want to expand from 150MW last year to 250 to 350 MW 2008 to 600MW 2009. In order to do this they need to add $250-300 million pear year in cap ex. They already have $171 million debt. If you make that $400 million by the years end (assuming they don't raise equity through share selling) and they pay slightly north of 7% (per this CC) your talking $28 million per year interest by years end I'm not even saying that they can't accomplish this kind of growth but it does seem like they are operating on the razors edge a bit.
I don't think I would touch FSLR, but isn't there something to be said for giving up a little valuation and potential for a company like STP or SPWR with a little more heft to it?
BTW, the thing that you mentioned that stood out over everything was the notion that silicon would drop from around $250/ton to several dozen over the next few years. This could completely alter the balence of power in this space and give company's like TSL a fighting chance. Is this level of silicon depreciation widely held among those that follow the industy closely?
Andy
Any thoughts on the TSL downgrade to sell today from Goldman? Goldman suggested the company has a fairly week balance sheet which could cause a great deal of downside risk from possible capital raises or dilution. Thoughts?
In April, Cheryl Tang, the solar sector analyst of GS, said that she prefers solar companies with high quality sales/supply contracts, diversified client base.
This time, she says the winner will be those cautious on cash burning and can generate good cash flow.
It is understandable that sell side analyst 's job is to sell story but Cheryl Tang is obviously not good at selling stories if her purpose is to promote STP, which always has a "buy" rating.
Just look at TSL's polysilicon supply. TSL has supply contracts from China, Russia, Korea, and Germany. Almost all the other solar companies purchase from same suppliers that supply polysilicon to TSL. How can you say suppliers of TSL are not committed?
Look at its client base, Jack has already provided detail description of it. TSL's management explains that why they started to have decreasing percentage of total revenue in Spain is because of the possible policy change in that country. And Cheryl Tang used the decreasing revenue percentage in Spain as one of the reasons that TSL can not sustain its growth! How ridiculous!
Finally, let's look at TSL and another hot pick, CSIQ.
CSIQ started to have positive netincome in 1Q2008 and the change is stunning $22 milliion from last quarter's $0.2 million.
Let's look at CSIQ's account receivable, it increased 370.81% in 1Q3008. This probably explains that why CSIQ got great Net Income but still poor cash flow from operations.
But look TSL, they have very stable and reasonable account receivable and net income growth. A/R as percentage of Revenue has been very consistent in the past 3 years.
TSL also has pretty decent cash collection cycle, which is very critical to manufacturing business and much better debt/equity ratio than CSIQ.
Finally, Cheryl Tang said that TSL has very aggressive expansion plan. But if we listen to YGE and TSL's earning calls carefully, we found actually they have very similar expansion plan. Considering almost 90% debt/equity ratio of YGE, I just found Cheryl Tang's argument of TSL' tight debt capacity and negative Free Cash flow not convincing at all.
The main arguments of GS are 1) the rising capex requirements and raw material prepayment and 2) growing difficulty in capital raising due to tough equity market. If TSL went down the path to build the poly plant, the capex would be definitely a concern. But as we all know, it was abandoned. That leaves only raw material prepayment. How much would that be a factor? GS says that 2Q2008 would be affected most because the much of prepayment for the year would settle in this quarter. In the recent press release of TSL foreign exchange derivatives, the updated numbers extracted from annual report show a narrow range of ‘cost of revenues’ in net revenues from 72% to 81% in the last five quarters with the 1Q2008 being 74%. If costs are concentrated in 2Q2008, we could see a large increase of this percentage and a huge drop of gross profit. But in the same paragraph, the GS analyst says that GS expects an operating profit of $25m for 2Q2008. From the annual report, the income from continuous operation for 1Q2008 is only $20m. So $25m for 2Q2008 does NOT seem too bad, especially if the foreign exchange loss is not as large as the last time, which could translate into higher net income.
Like others, I would like to know what you think about the GS report.
GS report link:
messages.finance.yahoo...
Given the solar support cut-backs in Spain and the general economic slowdown across Europe, not to mention the huge expansion plans that most solar companies have embarked upon, I think in the next couple of years it will be very important for solar companies to have strong balance sheets and very competitive technology. Whilst I consider TSL to be potentially excellent short-term trade right now at $28, a medium or longer term investment decision for me would have to incorporate information with regard to their road-map (and of course significant efforts to strengthen their balance sheet).
Appreciate if anyone can give me a link to TSL's road map, or perhaps some on-line investors presentation where I may access the main details. thks.