Trina Solar (NYSE: TSL) reported earnings this morning and became the third major Chinese solar manufacturer to report a profit. It reported net income of $9.9 million on the back of $548.4 million in revenue and a 15.2% gross margin.
This follows Canadian Solar (CSIQ +5.00%) and JinkoSolar (JKS +2.83%) both reporting small profits in the third quarter as well. Below you can see that Trina Solar has the highest revenue of the group but also the lowest gross margin, in large part because it doesn't have as much system development exposure.
|
Revenue |
Gross Margin |
Net Income |
Net Debt | |
|---|---|---|---|---|
|
Trina Solar |
$548.4 million |
15.2% |
$9.9 million |
$543.9 million |
|
Canadian Solar |
$490.9 million |
20.4% |
$33.4 million |
$900.3 million |
|
JinkoSolar |
$320.7 million |
22.3% |
$16.9 million |
$677.0 million |
Source: Company earnings releases
Is this finally the operational turnaround we've been looking for in China? For these three companies I think the answer is, yes ... for now.
Trina Solar, Canadian Solar, and JinkoSolar have all seen margins improve recently and have small enough debt loads that they'll be able to reduce debt if they continue to post a profit. They're also three of the high tier manufacturers in China, which makes their panels more desirable than high-debt manufacturers who may not be in business in a year or two. After Suntech Power's liquidation it's clear that China is going to let some companies fail so investors should be focused on the top tier companies, not on companies barely alive right now.
Strong margins should continue into 2014 as China and Japan install more solar. Basically, a bigger solar pie will keep these companies afloat.
Long-term there are still challenges
But there are still challenges ahead for even the best Chinese manufacturers. It's clear that Chinese state-run banks are no longer allowing money to flow freely to solar manufacturers, which means it will be hard to invest in the next generation of equipment. If operators in the U.S., Eastern Europe, and the Middle East build out new high efficiency capacity and these manufacturers are left with old equipment they'll be passed by.
I also see less ability to cut cost long-term. Trina Solar is already selling its modules for about $0.70 per watt and they'll have to lower costs to well below $0.40 per watt to remain profitable in 2-3 years. That's possible, it's just a risky bet, especially when you consider that higher efficiency competition is on the horizon.
Chinese solar is back, but for how long?
If you're going to bet on Chinese solar, these three are the stocks to do it with. But I still see long-term challenges that will keep my money in high quality U.S. manufacturers, who are posting even bigger profits. China competes well when cost is the driver of sales but quality and efficiency matter more than ever in solar. That makes China's strategic position tough long term.
