Last week in this forum I flagged up two Chinese solar stocks which were, for all intents and purposes, worthless as investments. A kind reader alerted me to a third company in the same boat which looks like a stock to short with a price target of more or less nothing. I refer to Trina Solar (NYSE:TSL), which at $4.51, is capitalised at $318.76 million.
I will not rehash the arguments why I am uber skeptical about China, its slumping economy or about the macro-reasons why the oversupply of solar panels is bound to continue. Nothing has changed in that respect since last Thursday and so you can read them in full in my analysis of why LDK Solar (NYSE:LDK) and JA Solar (NASDAQ:JASO) were (and are) stocks to short down to virtually nothing.
Trina Solar is in exactly the same camp. Headquartered in China, the company was founded in 1997 and is an integrated solar-power products manufacturer, engaged in the design, development, manufacture, and sale of photovoltaic (PV) modules worldwide. Needless to say analysts are, on balance, bullish. Seven have it as a buy, 19 are neutral and only 2 rate it as a sell. The average price target is $6.98. How this is justified by the fundamentals is beyond me but I guess that I am not clever enough to be an analyst.
The most recent financials should tell you enough but there is one historic aspect of Trina worth noting and that is its dismal track record of turning profits (when it booked them) into cash. Back in 2009 a net profit of $96.226 million equated to a cash outflow from operations of $156.377 million. Calendar 2010 saw a bumper profit of $311.453 million ( as this cyclical industry saw a mammoth upswing in demand and prices and before new capacity came onstream) yet the cash generated was a mere $102.852 million. By calendar 2011 new capacity in slipping demand meant that the company reported a loss after tax of $37.82 million but that equated to a staggering cash outflow of $402.525 million. The old saying is that "profit is a matter of opinion, cash is fact." And this company has never exactly been a cash cow.
Move forward to 2012 and life has got a lot worse. The results for the three months to June 30th were released on August 21st. Shipments of panels actually increased by 10.2% over the first quarter, to 419 Mega Watts. But that equated to a 1.1% fall in revenues, compared to the first quarter, to just $346 million. That says it all. In order to keep factories open, producers have to accept that they have no price setting power. Consequently the gross profit for Q2 was just $29 million (up from $20 million in Q1) but still poor.
As we move down the P&L it gets worse. The operating loss for Q2 was $78.6 million versus $39.9 million in Q1, although Q2 numbers were hit with a $44.1 provision against accounts receivable. Even ignoring that one off (and i doubt it will be a one off as I shall explain below) we still see a company reporting an operating loss of $34.5 million. The net loss for the quarter was $92.1 million versus 29.8 million.
The accompanying trading statement was predictably dire. "Industry overcapacity and demand constraints in newer and traditional PV markets contributed to deflationary pricing pressures in the second quarter, which adversely affected our operating margins and profitability" commented chairman and CEO Jifan Gao. Has that macro picture improved since then?
Er...no. If anything it has got worse. And sorry to be a corporate governance bore, but having a chairman who is also CEO is not usually a plus point and I note that Trina is also changing its auditors which, for a company in a spot of trading bother is never a good sign.
I am not finished. If the P&L is a horror story the balance sheet is worse. The company boasts that at the end of Q2 it had cash of $841 million and working capital of $545 million. Well up to a point. Of that cash $180 million is in restricted bank accounts - I assume advance payments from customers. The point is that it is restricted and so in a push comes to shove situation it cannot be used. Moreover the company had quarter end debt of $1.1993 billion of which only $465 million is repayable in more than a year. As for the working capital? That includes inventories of $463 million (an increase from $351 million as at March 31st 2012 and from $226 million as at June 30th 2011). Such a build looks a trifle worrying in that it is not seasonal and given what is happening to global demand.
Meanwhile I note that accounts receivable as at June 30th were $531 million. That is marginally lower than the $555 million of March 31st but still a number that equates to just under 5 months sales. At the end of 2010 the accounts receivable equated to sub 3 months sales. Given that there have already had to be some provisions made against accounts receivable ( so the Q2 2012 number is struck after a write-down) would you really bet against there being further write downs - something that would hit the P&L and shrink that working capital number - as of course will the ongoing operating losses?
And so what is Trina worth? In the best case scenario it is hard to see how this company can book a profit for several quarters. It only needs its new auditors KPMG to insist on a few writedowns in the inventory book and accounts receivable and the working capital is almost down to nothing. Meanwhile, unrestricted cash at the end of June was $660 million while debts repayable within a year were $734 million. As each day goes by the ongoing operating losses will make those numbers look ever more unfavourable.
And so what is this worth? It seems pretty clear that Trina needs its banks to roll its short term debt over in order to survive since it is not generating cash (au contraire) and its short term borrowings already exceeded net free cash as at 30th June. Going forward a company that burns its way through cash at a prodigious rate on a quarter by quarter basis seems in a week position to actually repay that debt. In a logical world this would be a candidate for a debt/equity swap with shareholders losing virtually everything. That seems the best case scenario. Target price is cents.