Sensible policy by Trina Solar (TSL) ensures survival

They just announced third quarer results, which were stellar, but guided downwards for the rest of the year and 2009. But the policy they are following as a result is to invest only their free cashflow into new capacity, and that seems to us to all but guarantee their survival. The current stock price doesn’t make any sense to us. They earned $1.17 in the quarter, after $0.51 and $0.68 for the first two quarters, that means that earnings for this year already stand at $2.36, with one quarter to go. Earnings this year could quite well reach $3 meaning they and the stockprice is at $7 per share, giving us a p/e of just over 2.

That doesn’t make sense to us. We think that the panic selling is caused by all kinds of disaster scenarios, like:

  1. Government subsidies would be greatly curtailed
  2. Trina won’t be able to get credit for expansion
  3. Prices of modules will be plunging, squeezing margins, and even:
  4. Considering the debt levels, Trina will go under.

Let’s discuss these:

  1. In fact, the opposite has happened with France, the US, and to a lesser extent Italy are all moving ahead instead of backwards
  2. Their sensible policy of only investing free cashflow is dealing with both the expected downturn in demand and preserves capital. It is noteworthy that this quarter was the first they managed to produce free cashflow and, much more important even, they expect to be able to continue to generate free cashflow in 2009 as well(!)
  3. Prices will be lower but we also see less investment in new capacity (not only by Trina, but by others as well), once again setting us up for a steep recovery in prices once the world economy recovers. Also, silicon prices (a crucial input) will also fall (this was supposed to happen anyway) which will have mitigating effect on margins
  4. Debt is indeed substantial, at $365M but a significant part is due only in 2013, and they also have significant amounts of cash; $136.3M in cash and cash equivalents, excluding the Company’s restricted cash balance of $48.5M and total approved credit facilities of approximately $450M, of which includes approximately $150M in available credit.

On top of that, the company’s market cap ($180M) is a third of book value ($486M).

Third Quarter 2008 Financial Highlights
  • Solar module shipments were 66.36 MW, up 213.7% from 21.15 MW in the third quarter of 2007 and 39.5% from 47.57 MW in the second quarter of 2008
  • Total net revenues increased to $290.7 million, up 252.1% year-over- year and 42.4% sequentially
  • Gross margin was 22.4%, compared to 20.1% in the third quarter of 2007 and 23.2% in the second quarter of 2008
  • Operating margin was 16.1%, compared to 8.4% in the third quarter of 2007 and 14.3% in the second quarter of 2008
  • Net income was $32.1 million, compared to $7.8 million in the third quarter of 2007 and $17.1 million in the second quarter of 2008
  • Net income includes a foreign currency exchange loss of $4.9 million
  • Earnings per fully diluted ADS were $1.17. The effect of the third quarter foreign currency exchange losses was approximately $0.17 per fully diluted ADS

For the full year of 2008, the Company updates its projections as follows:

  • Total net revenues to be in the range of $800 million to $850 million, compared to previous guidance of $850 million to $900 million.
  • Total PV module shipments between 200 MW to 206 MW, compared to previous guidance of 210 MW to 220 MW.
  • The Company believes gross margin to be in the range of 20% and 22% for the year, compared to previous guidance of 23% and 25%, and estimates operating margin will likely be in the range of 12% to 14% of total net revenues, compared to previous guidance of 15% and 17%.

Business Outlook

  • Given industry concerns related to changes in the global economic and credit environments, the Company reiterates its confidence in regards to its financial strength and operational strategies for fiscal year 2009.
  • “We are confident in our ability to successfully navigate our operations and related capital requirements despite recent and significant market environment changes,” stated Terry Wang, Chief Financial Officer. “We are fully aware of the risks and volatility of market conditions. After careful examination of various scenarios reflecting market demand, average selling price, and cost reductions of key material inputs, we reiterate expectations to preserve sufficient cash holdings and to maintain positive cashflows from operations initiated in the third quarter, which were over $20 million. These cashflows will drive the funding for future operations and capacity expansions, to be deployed prudently and effectively based on evolving market conditions.”

The upshot is, with their guidance of being able to maintain free cashflow into 2009 and only using free cashflow to increase capacity, they will be able to come through this, as on present matrices, their debt is high but certainly not unsustainable. They will come out of the recession not as big as hoped, but still profitable. We would say, much worse scenarios are priced in already, Trina is a screaming buy as far as we are concerned.

We have not factored in stuff at the CC yet, but we are considerably reassured by what they put out so far.