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Drew Cameron

TSL AT A GLANCE

P/E ► 15.2 AVG EV/EBITDA ► 19.4 AVG ROA ► 7.5% AVG ROE ► 9.4% AVG Debt to Equity ► 1.38 VERY HIGH Current Ratio ► 1.20 VERY LOW Interest Coverage Ratio ► 2.72 AVG

 

 

 

 

 

 

Trina Solar is a Chinese manufacturer of silicon solar panels. The company has primarily sold its panels to customers in Germany, Spain and Italy, and in March of 2008 received approval to sell its products in the US market. At the end of 2007, TSL had the facilities to produce 150 MW of solar panels per year, and says it plants to double its capacity in 2008 and again in 2009. This would give TSL an annual capacity of 600 MW.^[1] By the end of 2007, TSL had average conversion efficiencies that were slightly above the industy average of 15%.^[2] The company's solar cells had conversion efficiencies of 16.6% for its monocrystalline solar cells and 15.3% for those made from polycrystalline silicon.^[3]

With the growing concern over global warming, solar and other forms of renewable energy have received support in the form of government tax breaks and subsidies to make the technologies more competitive. Countries such as Germany and Spain pay a subsidy for every kWh of energy produced, while the US favors a system based on utility regulation and consumer tax incentives. The solar PV market has been hampered by silicon shortages as a majority of PV systems use purified silicon for their products - and Trina is no different. Despite thin-film technologies having an average conversion efficiency that is 9% lower than silicon PV, with the silicon crunch and lower production costs, they are a growing force in the PV market.^[4] Fortunately for Trina, silicon shortages look to be nearing an end with suppliers ramping up production and completing new facilities to supply the market. TSL has been an established provider in the international solar market, and with the approval from Underwriters Laboratories looks to compete with the established suppliers in the growing US market, First Solar, Suntech Power Holdings, and SunPower.

Business Financials

Trina Solar Limited is a China based manufacturer of silicon PV modules that range in output from 160 to 220 watts per panel. The company sells its solar modules across the globe, including countries such as the Germany, Spain and Italy. The company is expanding into the US market after receiving approval from Underwriters Laboratory(UL) in March of 2008. ^[5] UL is an independent not-for-profit testing organization that tests and certifies thousands of consumer products a year for compliance and safety. The National Electric Code requires that all PV panels sold in the United States meet UL standards for safety and operation.^[6]

The company markets a selection of generic silicon PV panels, but will also produce panels to meet specific customers’ needs. As of the first quarter of 2008, the company had eight manufacturing lines with an annual manufacturing capacity totaling 200 megawatts (MW) of solar PV panels.^[7] The company plans to expand its manufacturing in 2008 with the addition of six lines. These lines will increase its annual production capacity to 350 MW, with later additions increasing capacity to 600 MW by the end of 2009. As of December 31, 2007, TSL had average conversion efficiencies of 16.6% for its monocrystalline solar cells and 15.3% for its polycrystalline solar cells. The company hopes to achieve conversion efficiencies of approximately 17.0% for its monocrystalline solar cells and 15.6% for its polycrystalline solar cells by the end of 2008.^[8] For the first quarter of 2008, TSL produced its silicon panels at an average cost of $1.76 per watt.^[9]

TSL had its greatest revenue to date in 2007, at $301.2 million, and looks to surpass that in 2008 after recording a revenue of $120 million in just the first quarter. In 2007 the company had an operating income of $36.0 million, representing about 12% of its revenue. The operating income increased to 16.8% of revenue in the first quarter of 2008, totaling $20.2 million for the three month period.^[10] These numbers are in line with TSL’s operations in 2005 and 2006, where operating income represented 15.6% and 14.8% of the respective year’s revenue.

Trina Solar had an average selling price for its standard solar panels of $4.02 per watt in 2005. The sales price decreased to $3.98 per watt in 2006, and dropped further to $3.80 per watt in 2007. The lower prices reflect lower production costs in the competitive industry, and an increase in the supply of solar panels as existing manufacturers expand and new companies enter the market.^[11]

Trends & Forces

Emerging Solar Technologies are Cheaper and More Efficient than Trina's Solar Panels

Trina produces crystalline silicon panels that make up approximately 90% of the PV market.^[12] As of March 2007, the average thin-film cell had a conversion efficiency of merely 6%, while the average crystalline silicon cell had a conversion efficiency of 15%.^[13] Despite such a low average conversion efficiency, some thin-film manufacturers have shown promise with CIGS and Cadmium Telluride(CdTe) thin-films, as they have achieved cell conversion efficiencies approaching 20% in the lab.^[14] Conversion efficiencies at this level make CIGS and CdTe more efficient than the other thin-film technology, Amorphous Silicon, and even more efficient than many crystalline silicon panels.^[15] Although thin-film cells are becoming more efficient, the best thin-film modules still fall short of the best silicon cells, such as SunPower's, which have a conversion efficiency of 23.4%.^[16]

Although thin-film panels are on average less efficient than those made from crystalline silicon, they cost less per watt to produce. Many thin-film manufacturers, such as DSTI, hope to achieve production costs below a dollar per watt in 2009 and 2010.^[17] Whereas no manufacturer has produced panels at below a dollar per watt, TSL is still far from that benchmark. To reach a dollar per watt, the company would have to cut its manufacturing costs by more than 40% from its March of 2008 value, $1.76 per watt.^[18] Another manufacturer in the silicon PV market, Evergreen Solar (ESLR) plans to cut manufacturing costs from $2.25/watt to $1.50/watt by 2011 by reducing its silicon consumption from 5 to 2.5 grams/watt with its patented ribbon manufacturing technology.^[19] Some non-silicon manufacturers have already achieved production costs lower than Evergreen Solar's predictions, but even First Solar, which is able to produce cells at $1.12 per watt,^[20] has been unable to reach the dollar per watt level that manufacturers are aiming for.

Continued Worldwide Silicon Shortages Will Hurt TSL

The company uses monocrystalline and polycrystalline silicon in its solar cells, using 7.5 grams of silicon per watt.^[21] In the silicon PV industry, the cost of the silicon accounts for approximately 45% of each module’s manufacturing cost.^[22] This means that when silicon prices rise TSL is forced to either absorb the extra cost, or pass it on to consumers. The price of silicon has increased as a result of the rapid growth of the PV industry and the continued demand for processed silicon from electronics manufacturers. The average long-term contract price of polysilicon increased from $50-$55 per kilogram in 2006 to $60-$65 per kilogram delivered in 2007, with market prices sometimes spiking to as much as $400 per kilogram .^[23] The increased demand in the world market has caused severe shortages, but these shortages are being addressed by silicon manufacturers and likely will not last much longer. Hemlock Semiconductors began production from its new facility in June of 2008, a facility that is expected to produce 9,000 metric tons a year, and perhaps as much as 36,000 metric tons per year after improvements slated for 2011. This alone dwarfs worldwide silicon production in 2005 of only 26,000 metric tons.^[24] Although the demand for silicon is expected to stay quite strong, these and other additions are likely to ease the silicon shortage and soften prices.

Government Incentives Help TSL’s Customers Offset Costs

Solar is not an economic choice in today’s energy market due to the large initial investments that are required and the efficiency of available panels. The large initial installation costs and uncertainty about the panels’ longevity deter most electric generators from investing in solar power plants. Other, more conventional electric sources have proven to be more predictable and cost effective. As a result, commercial and private PV systems have become reliant on subsidies and other government incentives to make them economical. These incentinves have been spurred by rising energy prices, fears of climate change, and desires for energy independence. In Germany, one of Trina’s largest markets, the Feed-In-Law provides subsidies for solar generated electricity that began in 2004 at 45.7 euro cents/kWh for ground and 57.4 euro cents/kWh for building installations, set to decrease at a rate of 6.5% and 5% per year, respectively.^[25] In early June of 2008, the German government changed the 2004 law to have a 10% decrease in 2009, and a 7 and 8 percent decrease the following years. This sets the subsidy levels for 2009 installations at about 34.2 and 48.8 euro cents/kWh.^[26] Spain, which accounted for 40% of Trina’s revenue in 2007, is paying a similar Feed-In-Law with a 2008 maximum rate of 45 euro cents/kWh, regardless of installation location. The future of Spain’s subsidy rates remain uncertain, as proposals are being discussed to cut them by as much as 35%. The proposals also make them resemble Germany’s split subsidy system with rates of 29 euro cents/kWh for ground installations and 33 euro cents/kWh for building installations in 2009.^[27]

TSL is Entering the Expanding US Market

In March of 2008, Trina received Underwriters Laboratory(UL) approval to enter into the US PV market, and looks to benefit from government incentives in the US that differ significantly from those in Germany and Spain.^[28] For the 2008 tax year, the US government has a personal tax credit of up to $2000 for the installation of residential solar panels, and 30% of the cost of corporate installations go towards a tax credit.^[29] The future of the federal incentives beyond 2008 are in question, though; in June of 2008, the Senate failed to vote on HR 6049, the Renewable Energy and Job Creation Act of 2008. In order to encourage the development of renewable energy, the act would have extended the solar subsidies and raised limits to the personal and corporate tax credits.^[30] Many states have their own monetary incentives for private and commercial installations. One New York program offers as much as $1.5 million for the creation of a manufacturing facility and the production and sale of clean energy products.^[31] These and other subsidies will need to remain intact until solar power becomes competitive with incumbent energy generation if solar is to become an important part of our power supply. Many states have pressured utilities to invest in renewable energy sources with the creation of mandates that require a minimum percentage of the state’s energy to come from renewable sources. One example is California, which has mandated that 25% of its electricity will come from clean sources by 2020 and 75% by 2050.^[32] These mandates benefit renewable energy companies as they force utilities to expand their generation portfolios, regardless of subsidies, or purchase Renewable Energy Credits(RECs) from others that produce renewable energy.

Homes with Solar Panels Sell Faster

Despite falling housing values and a tough market for new homes, houses that are built with integrated solar systems are flying off the market - at twice the rate of grid-based houses.^[33] Couple the higher sales rates with legislative tax breaks for residential solar panels, like the California One Million Solar Homes initiative, and housing manufacturers have strong incentives to add solar panels to their construction plans. As Trina enters the US market, home builders and the private homeowner represent a significant new market for Trina's expanding production capacity.

Competition

Trina solar has estabilished itself as a competitive supplier in the European and Chinese solar panel markets. The company is also looking to enter the US market and compete with the established members First Solar (FSLR), Suntech Power Holdings, and SunPower (SPWR), as well as the expanding concentrated solar market. Other big players in the global PV market are relatively small segments of larger corporations like BP (BP), Kyocera (KYO) and Sharp Corporation (SHCAY).

• Ascent Solar Technologies (ASTI) is looking to create flexible thin-film modules using CIGS technology. The company's manufacturing process uses lasers to cut the layered substate and connect the individual PV cells. In 2007 the company had a revenue of $1 million and an operating loss of $7.9 million, as it is in the development stage and looks to begin production at its main facility in 2008.^[34]

• First Solar (FSLR) produces Cadmium Telluride thin film PV panels. The company is already established, with an operating income of about $137 million in 2007, and revenue of over $500 million. The company estimates its production costs at approximately $1.23 per watt, and hope that by 2010 it will be able to make solar panels that can produce electricity at a non-subsidized competitive level.^[35]

• Evergreen Solar (ESLR) produces silicon based PV panels using its proprietary String Ribbon technology. The panels made with the String Ribbon technology use about half the silicon of conventional silicon PV methods. In 2007 Evergreen had almost $70 million in revenue and an operating loss of $25.6 million, $20.6 million of which went to research and development.^[36]

• SunPower (SPWR) produces silicon-based PV panels for the commercial energy market. In 2007 the company's revenue was almost $775 million and had an operating income of $2.3 million. The company's revenue more than tripled from 2006 to 2007 due to the addtion of an installation segment. The extra revenue was not enough to offset the addition of $80 milion in expenses.^[37]

• Energy Conversion Devices (ENER) makes silicon based thin-film solar panels, as well as computer and battery technology. The company made $113.6 million in revenue and had an operating loss of $42.5 million in 2007. Despite the operating loss of the company, the solar segment had an operating income of $1.9 million in 2007. The operating income decreased from a value of $8.2 million in 2006, primarily due to additional investments made to increase its production of solar panels in 2008.^[38]

• EMCORE (EMKR) produces PV cells using Gallium Arsenide. The Gallium Arsenide panels have achieved efficiencies as high as 39% with concentrated light, which is well beyond even the best silicon cells that operate at efficiencies around 20%. The Gallium Arsenide panel, however, require direct sunlight and are usually accompanied with mirrors to direct additional sunlight upon the panels. In 2007 the PV segment of the company recorded a revenue of $59.2 million and an operating loss of $25.9 million.^[39]

References

1. ↑ TSL 20-F 2007 Pg. 7
2. ↑ Solar Buzz: Fast Solar Energy Facts
3. ↑ TSL 20-F 2007 Pg. 7
4. ↑ Solar Buzz: Fast Solar Energy Facts
5. ↑ Google Finance TSL
6. ↑ Underwriters Laboratories Opens Largest Commercial North American Photovoltaic Testing and Certification Facility in Silicon Valley
7. ↑ TSL 20-F 2007 Pg. 7
8. ↑ TSL 20-F 2007 Pg. 7
9. ↑ Trimming the Trina from Motley Fool
10. ↑ TSL 20-F 2007 Pg. 2
11. ↑ TSL 20-F 2007 Pg. 41
12. ↑ Solar Buzz: Fast Solar Energy Facts
13. ↑ Solar Buzz: Fast Solar Energy Facts
14. ↑ Ascent Solar gains funds from the Air Force
15. ↑ DSTI 10-k 2007 Pg. 5
16. ↑ First Solar Efficiency
17. ↑ DSTI 10-k 2007 Pg. 5
18. ↑ Trimming the Trina from Motley Fool
19. ↑ ESLR 2007 Earnings Call Transcript, Page 1
20. ↑ First Solar, Inc. Announces 2007 Fourth Quarter and Year-end Financial Results
21. ↑ TSL 20-F 2007 Pg. 41
22. ↑ Solar Buzz: Fast Solar Energy Facts
23. ↑ TSL 20-F 2007 Pg. 7
24. ↑ Clean Tech ‘What silicon shortage, asks Hemlock’ June 3, 2008
25. ↑ Fast Solar Energy Facts German PV Market
26. ↑ German Solar Subsidies to Fall Less Than Forecast, GreenTechMedia
27. ↑ Spain Could Reduce Solar Subsidies by 35%: GreenTechMedia
28. ↑ TSL 20-F 2007 Pg. 7
29. ↑ DSIRE Residential and Corporate Incentives
30. ↑ Renewable Energy Incentives Stalled in Senate
31. ↑ New York - NYSERDA - Renewable, Clean Energy, and Energy Efficient Product Manufacturing and Incentive Program
32. ↑ [http://www.newrules.org/electricity/rpsca.html California Mandate, Renewable Portfolio Standard]
33. ↑ SPWR 1Q08 Earnings Call, Page 1
34. ↑ Google Finance ASTI
35. ↑ First Solar 10-k 2007
36. ↑ Evergreen Solar 10-k 2007
37. ↑ SunPower 10k 2007
38. ↑ ENER Form 10-k 2007
39. ↑ EMCORE 10-k 2007
40. ↑ ^{40.0 40.1} [http://www.renewableenergyaccess.com/rea/news/story?id=46286
41. ↑ Forbes - Sun King; SunPower's New Solar Panel Is 22% Efficient
42. ↑ SharpUSA Product Brochure
43. ↑ Kyocera - Solar Timeline
44. ↑ Solarfun Website
45. ↑ http://jasolar.com/Web/products-en.asp
46. ↑ TSL 20-F 2007 Pg. 7
47. ↑ ESLR 2007 Earnings Call Transcript, Page 1
48. ↑ EMCORE.com: Terrestrial Solar Cells and Receivers"
49. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
50. ↑ DSTI 10-k 2007 Pg 1
51. ↑ Ascent First Quarter 2008 10-Q Pg 23