Further Thoughts on Trina Solar and the Solar Space 84 comments
an article to
-
Font Size:
-
Print
- TweetThis
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.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
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.