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Solar Manufacturers Struggling at the Margins

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Chinese solar leader Trina Solar (NYSE: TSL  ) reported earnings yesterday and it continued a trend of weak -- albeit better than expected -- numbers from solar manufacturers.

Module shipments grew 14.8% sequentially, to 425 MW, easily topping the 320 MW to 350 MW the company expected to ship. Revenue fell 9.6% sequentially, to $435.7 million, showing how fast the price of solar modules has allen. Gross profit was just $31 million, a margin of 7.1%, and net loss more than doubled sequentially to $65.8 million or $0.93 per share.

Gross margins were in line with what Chinese leaders Suntech Power (NYSE: STP  ) and Canadian Solar have indicated and are above where Yingli Green Energy (NYSE: YGE  ) stands.

Trina's balance sheet remained one of the strongest among Chinese solar manufacturers (not that that's saying much). Total borrowings were $909.6 million, $520.2 million of that being long-term debt. The debt was offset by $896.4 million in cash and equivalents.

The cost picture
Trina Solar is one of the few companies who provides explicit price-per-watt numbers on a consistent basis. Since the second quarter of 2011, cost per watt has fallen from $1.16 to $0.94, driven by lower polysilicon costs. Over the same time average sale prices have fallen from $1.46 per watt to $1.01 per watt, leading to the rapidly deteriorating margins.

Polysilicon for around $0.30 per watt is what Canadian Solar and Trina Solar have now reported, and I'm not sure how much farther they can fall. LDK, Hanwha SolarOne (Nasdaq: HSOL  ) , and Renesola (NYSE: SOL  ) , who make polysilicon, wafers, and cells, are all reporting losses and even the bigger polysilicon suppliers can't beat $0.30 a watt by much. The pressure now falls on non-silicon costs, which will be much harder to cut because they include manufacturing equipment, labor, and other supplies.

Foolish bottom line
Trina Solar remains one of the strongest solar manufacturers in China and should emerge as a long-term winner once the industry reaches a more-steady state. In the short-term, margins will remain weak as the industry shakes out, and that means the company will continue reporting losses.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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  • Report this Comment On March 10, 2012, at 9:58 AM, hrametz wrote:

    Polysilicon at $30/kg should result in silicon costs of $0.15 per watt. Over the next few years, silicon should drop to $20/kg and panel efficiencies should increase by 20% resulting in silicon costs of $0.08 per watt. So another 70% drop in silicon costs is possible.

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