Short Sellers Disparage Trina Solar, But Our Man Tells a Different Story

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Short interest in Trina Solar (TSL) has climbed 44% in the last four months to approximately 18 million shares, or about 25.4% of total shares outstanding, on investor concerns of a looming liquidity crunch. To the contrary, the crystalline silicon (c-Si) module manufacturer has one of the better – and shortest -- cash conversion cycles among its peers.

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Driven by industry overcapacity throughout the supply chain and the slow transition from feed-in-tariff programs (subsidies) to power purchase agreement-based investment models, average selling prices (ASP) continue to decline, compressing margins at all the top tier producers, from Arizona-based thin-film PV producer First Solar (FSLR) to the top leaders in c-Si solar panel shipments, Yingli Green (YGE) and SunTech (STP). During 2012, thin-film module ASP declined 12.9% year-over-year to $0.74 per watt and Chinese-produced c-Si module prices plummeted 34.7% to $0.60 per watt, according to analytics firm ENF.

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This continued imbalance between market pricing and manufacturing costs resulted in Trina Solar posting a net loss of $57.5 million in the third quarter of 2012, compared to net loss of $31.5 million last year. Profit margin decline trebled to negative 19.3%, exacerbated by higher inventory carrying costs and write-downs.

Fears of an inevitable bankruptcy filing by Trina Solar are being catalyzed by the necessary refinancing of $778 million in short-term debt and irrational musings that $14 billion in off-balance sheet liabilities will need to be reclassified back on the balance sheet as debt.

Contrary to the hysteria being spread by Chicken Little and her bearish short-sellers, the sky is not falling in at Trina Solar, an examination of its reported finances suggests. As of September 30, the company’s capital structure was on sound footing, with the asset ledger holding some $600 million in unrestricted cash, a working capital surplus of $360.6 million, and only $13.8 million in interest-related servicing costs.

The company also has a relatively lower debt burden compared to most of its peers. Long-term borrowings of $431 million amounted to only 0.44 times shareholder equity – impressive leverage for a firm in a capital intensive industry like solar!

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Further, of the millions that will need to be refinanced, only $88.6 million would be classified as “offshore debt” (U.S.-denominated convertible notes) and ineligible for loans from PRC state-controlled banks.

And, with respect to allegations that management is obfuscating the actual health of its balance sheet by off-loading $14.1 billion in liabilities, generally accepted accounting principles do not require listing these future costs on the liability side of the ledger. Specifically, these obligations are for future raw material procurements – namely silicon. Many of these orders were contracted when spot prices for silicon were four or five times the current spot price of about $17 per kilogram; nonetheless, management has been re-negotiating these “take or pay” commitments (probably by reducing near-term supplies needed and extending life of contracts).

From a re-negotiation perspective, management has demonstrated successes in lowering its polysilicon overhead. Third-quarter silicon costs improved sequentially by about 13% to about $0.22 per kilogram, CFO Terry Wang told analysts on the last earnings call.

With respect to liquidity concerns and these procurement costs, a review of recent regulatory filings discloses only $1.4 billion in raw material billings owed this year. The bulk of these contractual obligations – more than $7 billion – are not payable until 2016 and beyond.

Unlike many of its peers, it’s worth noting, too, that Trina Solar has demonstratively lessened its dependence on Germany and Italy for sales: Combined shipments to both EU nations dropped below 50% of total volumes in 2012. Further, the company has established a presence throughout North America, Latin America, Australia, Japan, and in eastern China (FY 2012 orders more than doubled to 15% of total MW units shipped).

Massive overcapacity and utilization rates are predicted to reverse direction in second-half 2013, according to analytics provider IHS. When – and if – the global PV industry does return to profitability, contrary to the clucking of Henny Penny and her cocky friends, Trina Solar will likely be one of the survivors.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com.


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