Trina Solar (NYSE: TSL) is one of the leaders in the Chinese solar industry, but now it looks like it's following the downward path of Suntech Power and LDK Solar, who have both defaulted on loans. Trina updated first-quarter guidance yesterday and said it shipped between 390 MW and 400 MW versus a previous guidance of 420 MW and 430 MW, another sign that Chinese solar is slowly going out of favor.
If Chinese manufacturers experience lower shipments it will translate to lower margins, which is their core financial problem right now. Trina Solar expects gross margin to be between 1% and 3%, which is about in line with expectations for low-single digits. But this level of gross margin isn't enough to make a profit or pay for billions of dollars in debt. The debt-fueled expansion of Chinese solar is being squeezed financially and more companies will have to fall if this continues.
Shipment and margin trends aren't usually isolated to one Chinese solar manufacturer so it's easy to assume that other companies will see disappointing numbers in the first quarter. The first two to watch are Yingli Green Energy (NYSE: YGE) and Canadian Solar (CSIQ -2.68%), who round out the top three Chinese solar module suppliers with Trina. All three have high debt, low margins, and massive losses.
Squeezing China
U.S. regulators put import tariffs on Chinese modules last year in an effort to fight subsidies and product dumping. European officials are considering similar measures and may implement tariffs so onerous that China is priced out of the market. The Wall Street Journal is reporting that tariffs of between 48% and 68% will be announced in June, which would make even cheap Chinese panels uncompetitive in the market. Trina, Yingli, Canadian Solar, and most Chinese competitors count on Europe for a large percentage of their demand, so if they're squeezed it would only exacerbate low shipments and unsustainable margins.
Contrast to U.S. suppliers
Take Trina's numbers and contrast them with recent reports from First Solar (FSLR -1.64%) and SunPower (SPWR -2.12%). Both stocks have jumped in 2013 because they're reporting higher profits than expected as their end markets stabilize. This is a stark contrast to what we're seeing in China.
I've been down on Chinese solar stocks for a long time now and this is only the latest reason why. The U.S. and Europe are trying to squeeze them out, margins remain unsustainably low, and debt levels continue to pile up. Eventually the Chinese government will have to let some of these companies fail and liquidate their assets. That's why I would stay away from all Chinese solar stocks right now.
