Trina Solar: Will 2009 Be a Breakout Year?
Trina Solar (TSL) continues to post negative "1x" hits that cloud operational strength. We'll get into operations next, but let's start with the 1x hits. First is their venture into changing from Chinese RMB to USD as their functional currency. This came unannounced (i.e. "surprise!) last quarter and ruined to the tune of $4M what was an otherwise exceptional earnings report. [Jun 6: Stellar Trina Solar Earnings Masked by Currency Adjustment] So $0.67 EPS turned into $0.51 EPS (vs analysts $0.48).
Now here is the kicker, it reported very late in the earnings season and it was in the 10th week of a 13 week quarter ... so if the company's internal controls had any... well let me refrain from speaking my mind. Let's just say 10 weeks into the quarter you should have a pretty darn good idea of how your quarter will end up. Trina guided to a $3M forex loss in this quarter. What did it end up with? Double - $6M. How you can miss by a magnitude of 100% that late into a quarter is beyond my comprehension.
So that has wiped out $0.24 of EPS. On top of that, a polysilicon plant project, which I just shook my head when announced (again as a surprise in 2007) and then was canceled within 2 quarters, was another $0.08 EPS hit this quarter for charges related to cancellation. While that is over and above my expectation, I at least know that is a 1x hit. The forex issues are beyond me at this point and the "management credibility" multiple persists.
With all that said, despite a sagging gross margins, which we expected for this quarter - their operations were excellent and they increased future guidance. I am hoping this offsets the sting of the 1x hits and while the magnitude of the forex hit was huge, at least we knew "some bad news" was coming this time around, as opposed to last quarter when the company sprung the change out of the blue. I'll be blunt, if this stock was not so cheap I'd be out of this name - this company reminds me of Zoltek (ZOLT) management, which is a "sexy" wind power play but in the years I've followed it management constantly springs surprises on investors and also has a major credibility gap. And a stock price to show for it.
I don't know what to say anymore about this company or its internal controls and decision making. At least the operations guys seem to do their thing... one can only hope the earnings prowess in 2009 (low share count) will finally push Trina to an area in stock price it should be, but we might have another long detour. Again, the operations continue to accelerate and with the low share share, earnings PER share should explode in 09. I am just hoping the market gives this management team a PE multiple somewhere higher than the current 50% discount to peers. But let's just say management has "earned" its multiple with the constant blindsiding of analysts and investors with new and innovative surprises the past 5 quarters.
On the positive side, the expectations of this company are extremely low and instead of trading in the low $50s as it did heading into last quarter, its trading in the low $30s. At some point the earnings power for 09 (ex forex machinations) has to drive the stock up. Consensus analysts estimates of $198M revenue and $0.81 EPS.
- Trina Solar's net revenues in the second quarter of 2008 were $204.2 million, an increase of 69.2% sequentially and 171.1% year-over-year. Total shipments in the second quarter of 2008 increased to 47.57 MW, up from 29.49 MW in the first quarter of 2008 and 20.33 MW in the second quarter of 2007. Average sales price ("ASP") was $4.03 in the second quarter of 2008, compared to $3.95 in the first quarter of 2008 and $3.70 in the second quarter of 2007.
- Gross profit in the second quarter of 2008 was $47.4 million, an increase of 52.4% sequentially and 233.3% year-over-year. Gross margin was 23.2% in the second quarter of 2008, a decrease from 25.8% in the first quarter of 2008 and an increase from 18.9% in the second quarter of 2007. The sequential decrease in gross margin was predominantly due to higher cost of silicon raw materials while the year-over-year increase was primarily due to higher module ASP and cost efficiencies from an increased degree of vertical integration, including in-house cell production.
- Operating expenses in the second quarter of 2008 were $18.2 million, or 8.9% of net revenues, representing the third straight quarterly improvement as a net revenue percentage. Operating expenses in the second quarter of 2008 included approximately $1.0 million of share-based compensation expenses and a one-time loss of $2.0 million associated with the discontinuance of the Lianyungang polysilicon project.
- Operating income in the second quarter of 2008 was $29.1 million, an increase of 44.2% sequentially and 260.2% year-over-year.
- Operating margin, including the one-time loss of $2.0 million, was 14.3% in the second quarter of 2008, compared to 16.7% in the first quarter of 2008 and 10.7% in the second quarter of 2007. The sequential decline was due to lower gross margin related to the higher cost of silicon raw materials while the year-over-year increase was due to greater degree of vertical integration. (If you exclude the 1x poly plant discontinuation it was a 15.2% operating margin.)
- Net income was $17.1 million in the second quarter of 2008, compared to $12.9 million in the first quarter of 2008 and $7.4 million a year ago. Net income of $17.1 million includes the one-time loss of $2.0 million associated with the discontinuance of the Lianyungang polysilicon project announced in April 2008. Net income also includes a foreign currency exchange loss of $6.1 million.
- Net margin was 8.4% in the second quarter of 2008, compared to 10.7% in the first quarter of 2008 and 9.8% in the second quarter of 2007. The effect of the second quarter foreign currency exchange losses and the one-time loss due to the Lianyungang project discontinuance, net of tax effect, were approximately $0.24 and $0.08, respectively, per fully diluted ADS. (well at least they spelled it out in clear detail)
Foreign Currency Loss
- Foreign currency exchange loss was $6.1 million in the second quarter of 2008. This was primarily due to the appreciation of the Renminbi against the U.S. dollar which resulted in a loss upon the remeasurement at the end of the quarter of short term borrowings partially offset by a gain from remeasurement of raw material prepayments.
Business Conditions Outlook - Continues to be Excellent
- The Company has contracted 90% of its targeted module production for the second half of 2008, or approximately 95% of its 2008 targeted module production.
- The Company currently has sales in twelve countries, including the Czech Republic, South Korea, Mongolia, China, and Australia.
- Based on anticipated lower polysilicon feedstock cost secured through long-term supply contracts, the Company expects that its 2009 gross margins should increase from that in the second quarter of 2008, despite an anticipated decline in module average selling prices. Improved cell efficiencies and lower manufacturing costs are also expected to contribute to the Company's gross margin improvements in 2009. (I should hope so, second half gross margins are 23-25% so that's an open ended statement; I am hoping for something in the upper 20%s for 09)
Financial Outlook - Q3
- For the third quarter of 2008, the Company expects to ship between 62 MW and 66 MW of PV modules and has expectations of total net revenues in the range of $250 million to $265 million. The Company believes gross margin for the second quarter will likely be between 23% and 25% and estimates operating margin to range between 15% and 17% of total net revenues. (Analysts are in at $225M so this is a nice bump; hopefully operating margin is closer to 17% than 15%.)
Financial Outlook - Full Year
- Total net revenues to be in the range of $850 million to $900 million, compared to previous guidance of $770 million to $808 million (analysts in at $795M).
- Total PV module shipments between 210 MW to 220 MW, compared to previous guidance of 200 MW to 210 MW.
- The Company believes gross margin to be in the range of 23% and 25% for the year and estimates operating margin will likely be in the range of 15% to 17% of total net revenues. The gross margin and operating margin estimates remain unchanged from previous guidance.
Again, operations continue to be more than solid. Backing out both the plant cancellation cost and the currency costs, which cost 32 cents combined, the company would of done a $1.00 EPS vs analysts $0.81; and vs its 'official' $0.68. So it beat this quarter handily (ex-items) just like it did last quarter. Hopefully expectations are so low for this company that people will look past the constant "promise one thing, deliver another" in non operations, and the full year guidance should also help as the new revenue should help offset the additional dilution from their recent offering.
The company trades at a massive discount to peers so even with a large appreciation from here, it would only be valued at "similar" to peers... so we can still hold out hope for that. I still contend 2009 will be a breakout year for this name, but 2007 and 2008 has been utterly painful.
Trina Solar continues to be a riddle wrapped in an enigma. Triple digit growth - sub 10 PE ratio; and management who has more jokers up their sleeves than one can shake a stick at.
Long Trina Solar in fund and personal account
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This article has 16 comments:
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dicki31785
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73 Comments
Aug 18 11:21 AMThough their were a couple very good things in the call and in general the call certainly wasn't bad at all...so the stock IMO can't go much lower might touch the 29 and then turn but certainly very had to predict....
A couple sentences certainly stuck out from Trina's management "Margins could increase in 09 if ASP's decline only by 6-8%"....And to be honest I am very bullish on ASP for next year....I think the decline will go along those lines....which means TSL will expand margins next year....Furthermore I like that they decreased the use of grams per watt from 7.5 to 7.2 (though they were aiming for 7 g/watt as I am looking through my notes from Q1) but I guess that will be reached next Q.....
They also said in the call that they basically cannot keep up with demand(as others said as well such as CSIQ, ESLR, FSLR etc. etc.)....Which also speaks for my theory that ASP's won't come down as much as expected...
And their exposure to Spain is really coming down a lot....from 45-50% in Q 2 to about 18% in the second half of 2008....(I do tend to think that Spain won't introduce such a drastic cap as expected but it is still positive to see the limited exposure to the market....And as I told Jack couple Q's ago Italy is going to be quiet strong....and indeed it is!And Trinas positioning in the Italian market is marvelous and actually other firms would love to have such strong positioning in such a rapidly growing market...
Lastly Poly prices are coming down for Trina by 15% due to long term contracts....(which is about the number you hear from most companies)but still a positive number, I think 2009 will going to be an excellent year...And if Trinas management actually manages to create a positive 1x time surprise next Q this year could be very strong because the valuation is actually quiet ridiculous...but thats what you get for the constant flip-flopping...With kind regards from Germany CW
Long ABX, AUY, CSIQ, ESLR,SSL, TSL
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dicki31785
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73 Comments
Aug 18 11:42 AMSince on June 1st the dollar was worth about 6.95 RMB and now we are at 6.875(sadly enough) but the dollar is seemingly gaining some strength...certainly enough to appreciate vs the Euro, thanks to poor economic data in the EU zone....but can if it can manage to gain vs the RMB is a total different question...with kind regards CW
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mr clark
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18 Comments
Aug 18 11:58 AMSuntech is solar bulls best hope this week
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User 226214
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30 Comments
Aug 18 01:42 PM-
Frankfurt/Hessen
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12 Comments
Aug 18 02:40 PMDJIA at 7500 before December 2008,then you can decide if it is worth to spent so much intellect on a story when market offers opportunities every single day.Every single day.
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rana
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66 Comments
Aug 18 03:01 PMlike mark mentioned, they totaly got the exchange loss wrong. worst than that, they are very wrong about margins.
the only good thing is that the solar market is strong for now, so operations are holding the company from going to zero.
unfortunate for me i'm long this crap. i assumed that earnings will be around 0.85$ and as such we will be able to cross 40$ easily.
as always with TSL they like to surprise us, but it seems they know onky one direction with the surprises.
at 30$ this stock is very cheap, but i guess it deserves this "cheapness" and we also deserve the surprises as we keep liking the negative management premium, which is increasing each quarter.
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rana
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66 Comments
Aug 18 03:04 PMthey might even give TSL a push, hopefuly :)
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Ricard
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172 Comments
Aug 18 09:03 PM-
Jack Yetiv
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442 Comments
Aug 19 11:24 AM1) Revenues Q1--$120 million, Q2--$204 million, Q3--$265 million (upper end of guidance, which they will meet or exceed).
2) EPS--ex 1X items--for these three quarters was about 60 cents in Q1 (going from memory), $1.00 this quarter, and I'm guessing about $1.25 next quarter.
3) They announced on the call that they do NOT need any further cash for the rest of 2008, so that takes care of one issue for TSL. By the way, the same applies to CSIQ and SOL, so so much for the guy who was writing on SA a few months ago telling us all these Chinese solars had one foot in bankruptcy court.
4) I don't care what your complaints are about management (and I thought they did a nice conference call this quarter) a company that is growing sales and operational profits at a rate of 25-50% SEQUENTIALLY does NOT deserve a forward PE of SIX (against 2009 earnings that will undoubtedly exceed $5/sh on an operational basis, and may well exceed $5 even taking 1X events into account).
5) As to management's competence, I disagree with the author and above commenters. We all knew that canceling the fab was going to hit Q2 earnings, and frankly, just a $2 million (8-cent) hit is not bad at all. I would have expected twice that.
Second, we all "knew" that forex was going to be a $3 million (12-cent) hit. Therefore, assuming $4 million hit for closing the poly fab and $3 million on forex, you could have reasonably modeled $7 million in one-time hits, versus the actually-announced $8 million (32 cents in total 1X hits).
6) Because we know that closing the fab is over, that hit isn't coming back. As to forex, I still don't understand it well enough to know whether TSL mgt had a choice in going to the US dollar as a functional currency, so I can't either criticize or exonerate management on this issue. But we do know the dollar has shown a lot of strength so far this quarter (I'm not sure if the strength was just against the Euro or also a little against the RMB, although one commenter above suggests the strength is only against the Euro).
In addition, TSL mgt indicated that they are working on diversifying their capital structure to minimize short-term RMB-denominated debt, which will therefore REDUCE the volatility caused by the forex issue. The appreciation of the dollar and the efforts to reduce RMB-denominated debt suggest to me that going forward, the forex losses should be less, and if we have a quarter where the forex losses zero out or become gains, TSL could report a 100% surprise quarter.
7) The forex issue--because it is so large relative to operational earnings--does make it extremely difficult to project earnings for TSL, but even if you take this quarter's $1.00 and subtract the 24 cents of forex, and even if you assume that TSL does not grow EITHER revenues nor earnings for the next 3 quarters, that would give you $3.04 in earnings (76 cents X 4).
Of course, if you make a more realistic (but still very conservative) earnings progression of 86, 96 cents, $1.06 and $1.16, you get $4.04 in earnings in the next 12 months.
Of course, if revenues increase $60 million next quarter, and forex stays the same as this quarter ($6.1 million), I expect that TSL will make close to $1.00--not 86 cents--in Q3. But even taking the progression starting with 86 cents, $4.04 in the next 12 months means that TSL, a company that will undoubtedly double earnings in 2008 versus 2007, and probably go up another 30-40% in 2009, is trading at a forward PE today of LESS THAN 7.5.
Gimme a break. That's absurd, regardless of what you think of management.
And I, for one, think they did fine this quarter (of course, the market is telling me I'm the only one in the world that feels this way, but hey, I'm right and the market is wrong! LOL).
Jack
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Wayfarer
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39 Comments
Aug 19 02:00 PMI have been checking back for two days in hopes you would post. Your work always has simple math backing up your statements. I get so tired of the posters that just make assertions. I don't own TSL now but I think I will get some after earnings season.
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User 226214
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30 Comments
Aug 19 07:25 PMAlso I want to correct Jack ("They announced on the call that they do NOT need any further cash for the rest of 2008}), That is totally wrong, TSL will need additional money for it's 2009 expansion. Please do yourself a favor and listen to the conference call !
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West1
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25 Comments
Aug 19 08:12 PM"That is totally wrong, TSL will need additional money for it's 2009 expansion"
2008
2009
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Jack Yetiv
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442 Comments
Aug 19 11:24 PMI don't usually get my facts wrong. I didn't this time, either. Quote from the CC, which is kindly posted on Seeking Alpha:
In respect to long-term financing for our strategic expansion, on July 24th we successfully concluded our convertible bond offering, which can provide for our remaining 2008 funding requirements, in addition to anticipate positive operational cash flows in the second half.
Always good to check the facts very carefully before you criticize someone else.
Jack
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mr clark
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18 Comments
Aug 20 09:05 PMseems they were indeed the catalyst, booked nice gains, but again, cash position decreased dramatically, from $1billion to $600million, while debt stayed steady at $1.5billion
SOLF debt 4x cash, and going parabolic on hope of "record earnings" and newsletter hype... look closely at the balance sheet on these as some will get squeezed hard when ASP's drop
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Garry
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18 Comments
Aug 21 09:44 PMSeems like many/most of the solars are making numbers and forecasting great qtrs ahead. Seems like something funny that everyone's doing that well. Can the future really be that good?
Maybe in the short term.
What company can grow 50-100% annually, producing their own product, and not need capital? Shouldn't it be expected that companies will take on more debt? Need more infrastructure? The worry for CSIQ and TSL seems to be their '09 debt needs. Let's hope they need more debt...
Can someone offer a reason why STP reports and the whole segment rallys? CSIQ, TSL and others report excellent qtrs and sag afterward.
Confidence in pricing going forward?
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Jack Yetiv
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442 Comments
Aug 21 10:44 PM1) Solars are not going to grow 50-100% PER YEAR--I think 2008 for many solars will be 100%+ better than 2007, but CAGR's will slow to 30-40% in 2009 to 2010.
2) Yes, the future CAN really be that good. Look at MSFT's growth 20 years ago, Dell's 10 years ago, AAPL's in the past 5 years. Solar is more compelling than all of those because the product it makes--electricity--is far more essential than Ipods, and current means of producing it--coal, nat gas, even nuclear--are all fraught with problems, not the least of which is markedly increasing costs.
Solar offers NONE of those problems--and will DECREASE in cost going forward--probably by at least 10-15% next year and an equal amount in 2010.
In Calif, as you can tell from the Southern Calif Edison and PG & E announcements, we are essentially at grid parity. The growing recognition of that fact will boost demand tremendously.
3) They all need capital--either in the form of selling shares, or borrowing money. But in 2009, these companies are going to be making tens of millions of dollars in profit per quarter--and some will hit quarterly earnings of $100 million before the end of next year. That will generate lots of cash for growth.
Also, keep in mind that as their stock prices appreciate, they can get much more cash for selling 5 million shares than when their stock prices are lower.
I'll explain in a future post why I believe the market ran yesterday and today after STP earnings. It had little to do with STP's earnings.
Jack