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We recommend avoiding a position in Trina Solar Ltd. (TSL). Our recommendation is based upon the anti-dumping policy of the U.S against Chinese solar manufacturers, the rising price of polysilicon, a decline in profit margins, rising inventory, and slow demand in Europe. Trina missed its second quarter earnings by $0.51 and declared Q2 EPS of $1.3. Its revenue fell by 40% YoY and it missed revenue estimates by $52 million. The company has cut its future guidance based upon demand constraints and a high level of inventory.

The company got a hit because of the 30%-250% U.S. tariffs that were imposed on Chinese solar imports in a bid to protect domestic producers. The impact was seen in the results for the last quarter, as the company's revenue from U.S. markets declined from 36.8% to 26.3%. The revenue mix from Germany increased up to 42.1% from 36.7% in the first quarter. But Trina Solar has faced poor demand from European markets due to snowy weather conditions and, most importantly, European markets are in their maturity stage.

Chinese policy makers are planning to help Chinese solar companies expand domestically. The policy makers will provide higher subsidies, which helps the companies achieve grid parity and enable them to strengthen their roots in China. But in our opinion, this will probably not work out, as providing the subsidy of 0.4 yuan-to-0.6 yuan for a single kilowatt per hour would be too expensive for the government. Moreover, we don't see any flexibility coming from the United States and European countries since they aim to protect their domestic players.

The company's gross margin fell to 7% in Q2 as compared to 17% for the same quarter last year, but rose by 5.8% when compared to Q1. Trina Solar's CAPEX was $11 million in the last quarter. The company has registered positive operating cash flows of $54 million in 1Q2012. The large amount of accounts receivables ($44 million) is a matter of concern for the company, and TSL needs to reconsider its credit policy. The 16% increase in accounts payable in the first quarter was witnessed due to the late payments received from customers. The company's long-term debt fell by 11% over the last quarter, whereas its short term debt increased by 46%.

Stock Price Movement:

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TSL is currently trading near its 52-week low of $4, down by 32% in the last six months. The continuous bearish trend is based upon contracting margins, the anti-dumping policy in the U.S., and sluggish growth in Europe. The stock's 52-week trading price lies $3.95-$12.19. The stock's 50-days and 200-days moving averages are $4.3 and $5.6, respectively. In our opinion, the stock price will further witness a downward trend until it will find relaxation from the United States' solar imports regulations.

Valuation:

Comp Sheet:

Trina Solar

Suntech Power (STP)

Yingli Green Energy (YGE)

P/S (TTM):

0.19x

0.06x

0.13x

EV/EBITDA

-8.4x

-16.64x

17.7x

EV/REVENUE

0.59x

0.73x

0.86x

The stock is currently trading at P/S of 0.19x, at a premium when compared to its peers STP's and YGE's P/S of 0.06x and 0.13x, respectively. According to analyst estimates, the company's earnings will decrease by 37% by 2013. We recommend that investors avoid TSL.

Disclaimer: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

Source: Trina Solar: Not The Way To Play A Solar Rebound