Chinese Solar a Long Way From Making a Profit

By some measures, Chinese solar manufacturers are improving. Yesterday, Canadian Solar (NASDAQ: CSIQ  ) reported higher-than-expected revenue, a lower loss, and a respectable gross margin of 9.7%. But by others, the market is deteriorating, like Trina Solar's  (NYSE: TSL  ) first quarter, when net loss more than doubled from a year ago to $63.7 million.

The big questions investors need to ask are: Where are the trends and when might companies be profitable?

The trends aren't good for Chinese solar
Every company in China is a little bit different, but at their core, they make a very similar product and follow very similar trends. So, despite a better quarterly earnings report, Canadian Solar is experiencing a sequential decline in shipments just like Trina Solar. The margin difference you see below comes from Canadian Solar selling 24.5% of its modules into Japan -- where margins are high -- while Trina Solar only sold 9% of modules into Japan and 19% into the low-margin German market.  

 

Q4 2012 Shipments

Q1 2013 Shipments

Q4 2012 Gross Margin

Q1 2013 Gross Margin

Canadian Solar

404 MW

340 MW

5%

9.7%

Trina Solar

415 MW

393 MW

1.9%

1.7%

Source: Company earnings releases.

The largest manufacturer in China, Yingli Green Energy (NYSE: YGE  ) , expects similar trends in the first quarter, with shipments falling 6% to 7% and gross margin between 4% and 4.2%. So, every company follows the same general trends on both the top and bottom lines.

In the second quarter, the two companies that have reported earnings are expecting demand to pick up, with Canadian Solar guiding 380 MW to 420 MW of shipments and Trina Solar sees 500 MW to 530 MW.

So, overall the general shipment trend is down across Chinese solar in Q1, but there is an expected boom in the remainder of 2013. Any improvement is projecting, not based on an overarching trend in reported numbers. 

Can they ever be profitable?
If we overlay the negative trends above with expected improvement during the rest of the year, we need to ask if these companies can ever be profitable again.

Canadian Solar is carrying $1.7 billion of debt (including notes payable) and Trina Solar had $1.3 billion of debt. To pay for this debt alone, they must make about $60 million annually based on first-quarter interest payments, which are still at extremely low rates. If we annualize interest and operating expenses based on the first quarter and use each company's shipment guidance, we can estimate the needed gross margin per watt of solar.

 

Canadian Solar

Trina Solar

Annual Operating Expenses

$150 million

$178 million

Annual Interest Expense

$60 million

$60 million

Breakeven Gross Profit

$210 million

$238 million

Shipment Guidance (top end)

1.8 GW

2.1 GW

Gross Profit Needed per Watt

$0.117

$0.113

Based on these numbers and an average sale price of about $0.65 per watt for the industry, these companies would need to make a gross margin of at least 17% just to break even. And this doesn't include taxes or rising interest costs from growing debt loads.

Canadian Solar and Trina Solar are two of the better companies in Chinese solar and it's difficult to see either company generating a profit in the next year based on the numbers above. Until I see reported margins move close to breakeven, Chinese solar is a guessing game of might win and when they'll begin to make money. 

A far better bet for investors would be a company who has generated a profit even as the industry has shown major losses. That company is First Solar and if you're looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must-know side of this stock. To get started, simply click here now.


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  • Report this Comment On May 30, 2013, at 9:59 AM, never2dull4u wrote:

    Long way from making a profit? So what?

    Smart investors buy NOW. Stocks usually run up 6 months before full recovery (being profitable).

    Place your bets now or wait till the stocks have already increased 10 folds. By then, I will have dumped the solars when MFs start pumping up the solars. (tsk tsk: just like the refiners: VLO/TSO)

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