Trina Solar and Goldman’s Solar Shock

We featured an article today discussing Goldman Sachs’ surprising take on the solar stocks. Here we reflect some more, and some update on a solar stock we have been following here, Trina Solar (TSL).

We noted already this morning that we find Goldman’s reasoning quite curious. Their main points is their expectation that tax incentives will be significantly reduced and they mentioned a possibility of oversupply.

This is a curious argument. At present, some of the biggest markets, Spain and Germany have applied some moderations to their incentives. But other European countries are quite keen to follow the footsteps of these countries, and Europe is a country with policies in place which binds governments to environmental goals.

There are many big, relatively untapped markets for solar energy to be explored. As we mentioned, the US just extended their incentives for the next 8 years, for instance.

Although we do not know Goldman used the following argument (we don’t have their report), but it’s often said that the present scarcity of silicon will subside, and that will remove an important barrier to entry, hence people fear an oversupply.

However, there are a couple of arguments that can counter that:

  1. The timing of that easing is still quite unsure
  2. It is unlikely that most of the new players will have the distribution channels, production experience, brand recognition, etc. to compete on equal footing with established names from the outset
  3. Lower polisilicon prices will lower production cost for established players in significant way, and it enables lower panel prices which will stimulate demand as well
  4. Startups might find it harder anyway in the present climate, as IPO’s and credit are both significantly more difficult and less lucrative. On the other hand, venture capital sources still seem available
  5. Solar energy is really concentrated in only a few markets, there remains a wealth of untapped market opportunities, like China and India, and the US now that these important tax brakes have been extended for eight years

We turn to Trina Solar, which seems to bare the brunt of the brutal sell-off.

A couple of facts:

  • Trina says it has now secured about 70% of its 2009 production target of 450 MW. 40% of that has been secured at predetermined prices.
  • ‘We are also pleased with the outcome of our recent convertible bond offering, which can provide funding for our remaining 2008 capacity expansion requirements, in addition to our long-term debt facilities under examination,’ he [Jifan Gao, Chairman and CEO] said.
  • Trina has seen analysts hike earnings forecasts for this year and next. For the 2008 full year, estimates jumped 15 cents to $3.37 per share from $3.22 over the past 60 trading days. For the following year, Wall Street has earnings pegged at $4.37 per share, up from the two months-ago level of $4.16. Additionally, Wall Street is projecting year-over-year earnings per share growth of 131% for 2008. [Zacks]

So, how much of an impact will any oversupply have if you have already secured 70% of your planned production target (which is much larger for 2009 than for 2008), and you have a year to fill up the remaining 30%..

A bit more problematic is the second remark, the financing (see below for details) does provide sources for 2008 capacity expansion, but for 2009? One could argue that with the very rapid expansion, they must have reached, or be close to reaching, a sufficient scale to finance most of their capex expenditures from cashflow.

However, the last conference call provided just a little bit more on that:

  • 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. We are also developing long-term debt facilities to meet our target capital structure.
  • Turning to the balance sheet as of June 30, 2008, the company had $59.5 million in cash and cash equivalents, which excludes the company’s restricted cash balance of $125.6 million. The restricted cash comprises deposits pledged to banks for secure bank borrowings and letter of credit facilities. We anticipate that in the third quarter, a significant portion of such deposits will be released as a result of the convertible bond received in our repayment of short-term loans.
  • Our capacity expenditure for the second quarter was approximately $54.1 million, linked primarily to expansion of manufacturing capacity of approximately 50 megawatts in the second quarter
  • For the year, CapEx we’ve been spending about, roughly about $100 million already, up to June 30th. For the remainder of the year, we will spend the other 100 — between $100 million for this year CapEx but also we will spend about roughly less than $80 million preparation orders and to book the equipment, as the prepayment for next year.
  • CapEx for the year is a little over $200 million but additional, on a cash basis, we will pay less than $80 million for next year prepayment equipment orders.
  • Cheryl Tang – Goldman Sachs: Thanks for taking my questions. First is on CapEx — Terry, what is the planned CapEx for ’09?
  • Terry Wang: You know, we still are targeted the capacity expansion up to 600 megawatts by the end of next year, so from this year, 350 and gradually up to quarter by quarter, we will reach the capital expenditure throughout next year of about $250 million.

So, we can say that they will need an additional $250M for next year’s capex spending. But the need might be considerably smaller because they expect positive operational cash flow in the second half of this year.

Because they’re ramping up production capacity at triple digit rate, scale effects will be significant and it’s reasonable to assume the operational cash flow will therefore increase significantly during next year.

One could also argue that if there is indeed some oversupply coming, than it wouldn’t hurt a whole lot to pace the expansion plans just a little bit.

Nevertheless, there seems to be a funding problem of some magnitude, in the order of $150-200M. This seems solvable, considering the solid business they have but it’s not a walk in the park under present conditions.

They have expressed their desire to reduce their exposure to the renminbi (Chinese currency), and hence borrow in US dollars, but they might have to renege on that wish. That’s not a disaster either, as the Chinese authorities are no longer seeking to increase the value of the renminbi (which would produce currency losses), and it’s not unreasonable to assume that credit is significantly easier to get in China compared to the US.

What would not be good at this juncture is issuing more shares. The price has fallen significantly below even the IPO price of two years ago ($18.50), and for a solid profit producing company that is five-six times the size compared to then this seems quite ridiculous.

While acknoledging that getting the finance for next years capex will not be as easy as before, we do believe Trina can tap Chinese credit much easier, it is an advantage that they are a Chinese company.

We think the selling is way overdone.

Trina did a financing end of July:

  • CHANGZHOU, China, July 24 /Xinhua-PRNewswire-FirstCall/ — Trina Solar Limited (NYSE: TSL – News; “Trina Solar” or the “Company”), a leading integrated manufacturer of photovoltaic products from the production of ingots, wafers and cells to the assembly of PV modules, founded in 1997, today announced the closing of its public offerings of $138 million aggregate principal amount of convertible senior notes due 2013 and 4,073,194 American depositary shares (“ADSs”), which were borrowed by an affiliate (the “ADS Borrower”) of Credit Suisse Securities (USA) LLC, one of the joint bookrunners of the notes offering. The notes sold include $18 million aggregate principal amount of notes issued due to the underwriters’ exercise in full of their over-allotment option.
  • The sale of the borrowed ADSs was intended to facilitate privately negotiated transactions or short sales by which investors in the notes will hedge their investment in the notes. The ADS Borrower will be required to return the borrowed ADSs pursuant to the ADS lending agreement by the scheduled maturity date of the notes in July 2013.
  • Trina Solar intends to use the net proceeds of the notes offering for the expansion of manufacturing lines for the production of silicon ingots, wafers, solar cells and solar modules, the purchase of raw materials, research and development and other general corporate purposes. The ADS Borrower received all of the proceeds from the sale of the borrowed ADSs. Trina Solar did not receive any proceeds from the sale of the borrowed ADSs, but received a nominal lending fee from the ADS Borrower.

4 thoughts on “Trina Solar and Goldman’s Solar Shock”

  1. Goldman Sachs has provide negative analysis on TSL over the last six months. They took a glass half empty approach to the available information that saw the share price drop $10. The information at hand that GS had to choose from was far more positive than negative. They listed all the negative issues, some of which such as polysilicon supply, have been remedied. Could it be possible that they do this for two reasons: firstly they know that when they put out a report like this the stock will drop significantly. Here is an opportunity for some shorting to spread money around where they have lost it for pals. Here is also an opportunity to drive the stock down knowing that when the market livens up a little they can come in with some of their expertise in a positive drift after buying up lots of shares cheap. After seeing what has gone on with these million dollar crooks this is what they are doing. Any arguments? Want to take a shot at defending Goldman Suchs.

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