Trina Solar (NYSE: TSL) reported earnings on November 19. Like JinkoSolar (JKS +2.83%) and Canadian Solar (CSIQ +4.69%), Trina Solar earnings showed improving fundamentals and increasing demand. With most stocks in the sector up triple-digits in percentage terms year to date, there is a sense of a sectorwide recovery.
The quarterly earnings
For the quarter, Trina Solar earned $0.14 per share on revenues of $548.4 million. Revenue increased 24.4% sequentially and 84% year over year.
The company shipped 775 megawatts, which was a 19.8% increase from Q2 and 100 megawatts higher than the upper range of the company's own expectations.
Gross margins increased due to lower manufacturing costs and increasing average selling prices, which were $0.54/watt and $0.64/watt respectively.
The 2013 module shipment guidance is now 2.58GW-2.62GW from the previous guidance of 2.3GW-2.4GW.
Some takeaways from the conference call
- For Q3, the higher margin Japanese market contributed 11% of revenues, a 5% increase from Q2. Trina Solar established a foothold in China, deriving 2% of quarterly revenue from the region. Trina Solar is making it a priority to grow Chinese market share.
- Trina Solar is making some progress in the higher-margin downstream business of distributed power and utility-scale power plants. The company connected a 50 MW wafer product to the Chinese grid in September. Management has a goal of attaining 15% of revenue next year and 25% in 2016 from downstream projects. If management should succeed, the increasing downstream profile of Trina Solar portends better margins.
- Management continues to see production cost per watt trending lower, but at a mid to low single digit pace per quarter. It believes average selling prices will be stable for next quarter, so Trina Solar will most likely see a modest sequential improvement in margins for Q4.
- Trina Solar is also looking to expand capacity. Management has said that they are looking into existing capacity in the market and considering M&A because they believe that the company will see better sales next year.
The bottom line
I like how Trina Solar is expanding in China and Japan.
Japan is currently the largest solar market in the world in terms of value because of a lucrative $0.43/kWh feed-in tariff instituted by the government after Fukushima.
The feed-in tariff was instituted because solar energy is cheaper than generating electricity from natural gas or oil. Currently, 48 out of the 50 Japanese reactors are still suspended, but analysts believe that Japan may restart 25 reactors next year. After those reactors start, solar demand from Japan may stall.
Demand from China is much more sustainable than demand from Japan. China has a lot of pollution. Its growing economy needs more energy. It imports a substantial amount of oil from unstable countries across the globe. Using solar energy to generate clean electricity domestically is a win on all three counts.
I also like how management is putting more attention on downstream projects. While 50 MW connected may not be large, it is likely to be the first of many.
In a recent note, Deutsche Bank predicted that Trina Solar will see substantial progress in the downstream sector as the internal rate of return for utility-scale projects in China reaches the low to mid teens due to new feed-in tariffs. The bank believes that Trina Solar has the necessary government connections to make it work.
Hearing that Trina Solar made progress in China and Japan and is preparing to grow downstream is an extremely positive sign. I believe the long thesis for Trina Solar is still on track.
