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  • Further Thoughts on Trina Solar and the Solar Space
    Too many people are too nearsighted to see the overall consequences of any capital raising tsl might and probably will do. It's not like the money is going down the toilet. If business is booming, then the required steps should be taken to ensure you get your share of that boom. Many other solars in the past 12 months have 'diluted' shareholders, only to have the stock price reward them almost immediately after by doubling or even more. The money is used to expand future revenue via capex or securing of other vital resources. That's a good thing. All you have to do is look at all the solar stocks in the past year, and realize that their stock prices has trended up after secondaries or convertible issues. A prime example is ener just last week, and what it did today.

    If tsl didn't need the money, and if tsl were to raise capital and have it sit idle, then yes, it would be a horrible move and thus the stock price would go down to reflect so. But this wouldn't be the case. tsl's business is booming, and they have tried their best to prevent dilution by using short term bank leverage instead. However, I'm going to argue right now, that it would have been better, if tsl actually did a secondary late last year, for example.

    Let's imagine if tsl raised 180m on 4m shares late last year, or roughly using a stock price in the mid to high 40s. Their share count would be 29m in this case. Obviously if earnings did not go up as a result, it would be dilutive, but now it's look at how earnings might have been impacted in Q1. With 180m, they could have eliminated their short term bank liabilities for all of Q1, since they have 165m in cash and restricted cash that is used to open those short term bank lines. In fact, they would have had about a 100m bank balance instead of over 100m in net bank liabilities during Q1. In Q1, tsl posted a net 2.2m in interest payments. This would have been wiped out, if not turned positive to a small degree, but for the sake of keeping things conservative and simple, let's assume there is no net positive for their interest income. Secondly, tsl posted a 4m in forex loses on their rmb bank liabilities, as the rmb rose 4% vs the usd during Q1. If they had no rmb based bank liabilities during Q1, they would have had no forex losses, and in fact, if they had rmb bank assets, which might have been the case if they raised money, they would have had forex gains. But again, to be conservative and to keep it simple, let's say forex issues are nil. What this means is, their net income would have been 2.2m + 4m HIGHER. Thus, their net income for Q1 would have been 12.9m + 6.2m, or 19.1m. Resulting from this, their Q1 eps would have been $19.1m / 29m, or .66 eps, HIGHER than the .51 eps they posted, even despite 'dilutive' shares.

    This is just a simple example, and it gets more complex looking forward, but raising capital to fuel booming growth has never been viewed as a negative. Any short term stock declines resulting from capital funding is usually very short lived, as evident if you look at recent solar stocks and how they performed after they raised capital. You could have argued tsl should have raised capital earlier, and I am arguing today tsl needs to raise capital asap. I would view any capital raising event tsl takes as a huge positive, and I hope the cfo was forthcoming in indicating it's coming very soon. Cleaning the balance sheet would be a huge boon on forward visibility.
    Jun 16 22:55 pm |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    Jack, I didn't really want to go deeper into debating what is still really a guessing game, but I want to stress one point. The way you have to look at tsl's business is by looking at each individual metric, then calculate margins from those. If you just estimate margins based on individual metric changes based on a percentage of revenues, you can get figures far off what they actually should be.

    Let me use one example, based on what you actually stated you expect.

    "I think ASP of $3.85 in second half-2008"

    "I believe poly costs will be between $230 and $200/kg in the rest of 2008"

    Both of these are actually perhaps conservative statements, since from your eps estimate of 3.90, you want to stay on the conservative side. However, using those asps, and just the mid-point of your silicon costs, you are actually saying the following, assuming processing costs do not improve any further from 1.17/watt.

    silicon costs per watt = 215/kg / 1000g/kg x 7g/watt = 1.505/watt

    unit cost = 1.505 + 1.17 = 2.675/watt

    gross margins = (3.85 - 2.675) / 3.85 = 30.5%

    Which also implies over 20% operating margins.

    Again, I don't want to debate numbers we don't actually know, since both of us can be right or wrong, but just based on what tsl said about asps, they said the overall range for second half is 3.85-3.95/watt, of which for the US will see slightly lower ranges of 3.75-3.85/watt, and US shipments will only be 6-8mw. According to tsl, these are at long term contracted prices, in usd, and since tsl uses usd as its functional currency, it will not be affected by forex changes (one of the benefits of their change as I noted in one of my above posts). So, just based on what tsl has said, I think it's very safe to say what you think asps will be like in the second half is, on the conservative side.

    Regarding silicon, this is really all guess work, so I won't discuss it any further. I still stick to my estimates, which I believe to be in line with what tsl has said, and from what other industry players have said. Just using the example above, we are only assuming silicon prices go to 215/kg.

    And again, if tsl can improve processing costs further, as they have guided, that will add at least 2.5% more in gross margins.
    Jun 13 10:35 am |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    Well since my post was reposted here and responded to, I'll just make a few comments. I really did not want to clutter up this article further so perhaps people can take discussions to a new venue.

    1) If you add up my revenue estimates, they add up to 800m, not 900m+.

    2) In tsl's conference call, they guided for 3.85-3.95 asps for second half 2008. Excluding Spain, they guided for 3.75-3.85 for second half 2009. These are extremely strong visibility and asp guidances for 2009, which apparently are based on their long term contracts.

    "Initiated deliveries to customers on a long-term contract basis to increase visibility on 2009 business such as Phoenix (Germany), Proinso (Spain), Pirelli (Italy) and Clipsol (France)"

    3) tsl has actually not guided for second half 2008 silicon costs. My estimates are assumptions based on what they have told us relating to silicon costs, which are:

    a) 50% of their silicon will come from long term contracts
    b) virgin silicon coming from long term contracts will be "lower than reclaimables today" (I corrected this to mean as of middle of Q1 2008 silicon costs vs Q4 2007, since tsl made this statement on Mar 4 2008, implying their reclaimable silicon costs were lower than 235/kg)

    Not until the second half of 2008, tsl has been getting silicon from short and medium term contracts fixed at a ratio of current silicon prices. tsl is not paying spot prices, but they are affected by spot pricing. Based on their 235/kg silicon costs in Q1 using a 80/20 reclaimable/virgin blend, this suggest their virgin silicon costs above 300/kg while reclaimable silicon costs a little below 235/kg. Based on what other industry players have said regarding long term contracts, I estimate tsl's long term contracted virgin silicon costs to be 150/kg or below. Thus what tsl might see sometime in the second half are virgin silicon costs actually below reclaimable silicon costs, which are still based on short and medium term contracts fixed at a ratio of still very high spot prices. If you want to be conservative then you can delay my quarterly silicon costs by one quarter, taking into account fifo silicon costs.

    4) I agree, 1.05/watt processing costs for Q4 is still in debate. I still believe there is much room for tsl to improve, based on metrics other industry players have proven. tsl's move into multicrystalline capacity will help, as they did not have this capacity last year. yge's 100% multicrystalline integrated capacity yields them .80/watt total processing costs. Also I believe tsl has generally been conservative on their operational metrics. A good example is their 7.8g/watt silicon usage guidance for 2008, made just a quarter prior. They then stated actual usage for Q1 was 7.5g/watt, and for Q2 it was reduced further to 7g/watt.

    5) I am just using the operating costs they guided for in 2008. I guess to many, they still doubt tsl will achieve this, perhaps because of what happened in Q3 of 2007.

    6) My gross margin estimates are just reflections of other metrics. While they might see crazy compared to tsl's guidance, if namely asps for the second half are at the midpoint of what tsl guided, and silicon costs drop by as much as I, perhaps aggressively, estimate, then those gross margins can be achieved. To give you an example on long term silicon pricing, here is what a large cell producer said lately.

    "E-ton Solar Tech, seeing a big boost in material sufficiency as a new polysilicon contract with M.Setek comes into effect from April, will see its overall material costs slashed by 40-45% in the second quarter of 2008, implying a powerful catalyst to company profitability."

    stp for example, said their silicon costs could drop by 10-20% in the second half of 2008, because a larger percentage of long term contracts will initiate starting Q3. For stp to even say this is aggressive, since over a third of their silicon cost structure is still based on short and medium term contracts fixed at a ratio to spot pricing. If you compare tsl's silicon cost structure during the past four quarters, you can conclude tsl has done perhaps the best job managing their silicon costs. I'm just an outsider looking in, so I could be as wrong as anyone.
    Jun 12 12:51 pm |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    I guess I'll also comment on their margin guidance for Q2. On their conference call, analysts asked why they were guiding so conservatively for Q2 when they posted such strong operational metrics for Q1. On the gross margin side, tsl said they expected lower margins due to higher silicon costs. On the operational margin side, tsl explained they conducted 10th anniversary celebrations which will add costs to their operating expenses. Analysts asked to what extent should they model this, and tsl responded 'not very material.' For all those who never listened to an aapl conference call, aapl always gives 'suspect' reasons for their conservative guidance, that analysts don't fully believe. tsl is probably doing the same here. How else do you explain tsl's Q1 guidance being 23-25% gross margins with 13.5-15.5% operating margins, with actual results being 25.8% gross margins and 16.7% operating margins?
    Jun 10 11:24 am |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    The reason for tsl's currency exchange loss for Q1 is not speculation on my part. tsl specifically explained it on their earnings release, and then again in their conference call.

    "During the first quarter of 2008, the Company recorded an exchange loss of $4.0 million, which was primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency."
    Jun 10 11:02 am |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    I don't think their decision to use usd was based on their entry into the US market, since the US will only account for 5% and 10% of their revenues for 2008 and 2009 respectively. By locking in long term contracts in usd for their EU customers, it eliminates asp risks, as they are ultimately reported in usd. This is why tsl was able to give very narrow asp ranges for this year, as well as for 2009. In contrast, solf, noted on their last earnings release, that if the euro declined vs the usd, it would put their asp assumption at risk. Not only that, it also eliminates currency exchange risk on their revenues. For example, for peers that receive revenues in euro, the amount in euro denominated bank accounts, as well as the amount of accounts receivable balance, are subject to euro/usd changes. If the euro appreciates against the usd, they would see currency exchange gains, as they did in Q1. If the usd gains vs the euro, they would report currency exchange losses, most likely. By using the usd, tsl eliminates both these risk (as well as possible rewards).

    Again, the drawback is it puts their liabilities in terms of rmb denominated bank loans at risk, since now those obligations have to be readjusted to the usd every quarter. The majority of any currency exchange gains or losses tsl might see in the future, should be tied to this, and not the euro. While the rmb will most likely continue to appreciate vs the usd, it's most likely going to do so at a 1-2% quarterly clip, as seen in the past. Q1's rmb 4% rise over the usd was unusually high, and thus, the magnitude in absolute dollar amounts for tsl's Q1 currency exchange loss, is probably near it's limit.

    tsl's move to the usd will most likely be seen as a smart move or not, will ultimately depend on how the usd reacts vs the euro. usd/euro exchange rates reached extreme levels at the end of Q1, and so far the usd has rallied 2% vs the euro in Q2. If the dollar can rally back to year end 2007 levels at some point in the future, tsl would then command the highest asps after peers translate their euro revenues back to usd. In addition, tsl would not be subject to any forex risks, while peers in the case I just mentioned, would most likely report forex losses on their euro amounts sitting in banks or in accounts receivables.

    In my opinion, while tsl's move is considered beneficial or harmful to earnings after currency exchange translations, is up in the air right now, what they did do was increase visibility and eliminate risks by many folds over their euro denominated peers. The extent on tsl's currency exchange losses in future quarters is most likely limited to the levels seen in Q1, unless the rmb appreciates more than 4% vs the usd on any given quarter. However, the currency exchange risks that their peers face as revenues increase much higher, will be a lot more. Of course, peers could always hedge currency risks to the value of their revenues, at added costs. In terms of the stock price, perhaps part of the reaction was due to the over all markets as well.
    Jun 10 10:35 am |Rating: 0 0 |Link to Comment |View article
  • Further Thoughts on Trina Solar and the Solar Space
    I believe tsl went to the usd as their functional currency to protect their revenues against foreign exchange risks. tsl noted that it decided to do this because "Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars."

    Why would the majority of tsl's business be in usd if they are selling almost exclusively to EU nations? In fact peers such as yge, solf, and csiq do their business with EU countries in euros, not dollars. This is evident by their asp increases in Q1, over Q4, which ranged in line with the euro appreciation vs the usd during that period. yge's asps went from 3.86 to 4.11/watt. csiq's asps went from 3.85 to around 4.15/watt. solf's asps went from 3.85 to 4.07/watt. If their contracts were based in euros, then the asps that they ultimately receive when converted back to usd, is increased by the degree the euro appreciated vs the usd. In contrast, tsl's asps stayed stable at 3.95/watt, up only .01/watt over Q4. tsl also noted that they are using long term fixed priced contracts, apparently based more on the usd, if not exclusively to the usd. This is why they have very good asp guidances for 2008 and even 2009, and it is also why, because if their contracts are in usd, they did not see any asp rise for Q1.

    Now many would argue why on earth would tsl want to make such a move when everyone is so negative on the usd and believes that it can only go down further against all other currencies. Maybe it's because tsl believes the usd has bottomed, I don't know, but this isn't likely the case. It's more likely that they wanted to keep their asp visibility stable by using the usd, instead of the euro which would have to be converted back to usd for reporting purposes, causing asps to bounce around wildly from quarter to quarter. In essense, I believe tsl removed any asp risks, as well as rewards. If the euro continues to appreciate vs the usd, tsl will not see any benefits, as they did not in Q1. If the euro declines vs the usd, tsl will not see their reported asps decline either, while peers still basing revenues in euros will could see their future asps decline by the degree the usd appreciates vs the euro. Unfortunately for them, Q1 was an unusual quarter where the dollar tanked 8% vs the euro. You could have argued that they should have made this change in functional currency at the start of Q2, but it's probably more logical to do so at the start of a fiscal year instead of in the middle of one.

    Thus I also believe most of their currency exchange loss is more tied to the relation of the rmb vs the usd. Their bank loan liabilities are based in rmb, and logically, if the usd declines vs the rmb, their liabilities, in usd, would increase, causing charges. Unfortunately again, the rmb went up 4% vs the usd in Q1, much higher than the usual 1-2% of late.

    In the end, while the impact of this change was relatively large in Q1, as revenues continue to increase to much higher levels, the currency exchange risks on revenues will be much higher than the currency exchange risks on their liabilities, which cannot increase much more on an absolute value basis. So from a longer term business prospect, this move makes a lot of sense, although it can have negative effects in the near term. Without access to their books, this is the best rationalization I can come up with.
    Jun 10 09:12 am |Rating: 0 0 |Link to Comment |View article

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