Trina Solar (TSL) – Business Issues

By its nature, Trina’s business is capital intensive and lofty growth projections makes it all the more critical that the company continues to have finances in place to fund growth. Capex for the next couple of years are expected to be in the range of $250-300M while cash-on-hand is about $158M. Consequently, the company will have to generate cash by issuing more debt or equity in the upcoming months. Following the recent convertible offering Trina’s total short-term borrowings should be down to about 140M at an average interest rate of 7.3%. The existing borrowings already amount to an annual cost of almost $1 per share - it is highly likely that the company will issue equity to fund expansion and debt repayment. Margin concerns along with uncertainties regarding solar subsidies have resulted in an extended slump in the share prices of integrated solar manufacturers. Hence, a better option may possibly be for the company to wait out for a better market environment and issue equity at an opportune price-point.

Dependence on government subsidies is a major business risk for Trina Solar and is predicted to persist until about 2015. This risk has augmented to some extent in the last year as European governments started introducing bills that trim down on subsidies. Germany, the biggest market in Europe recently slashed subsidies and Spain is anticipated to follow suit. The table below represents Trina’s revenue percentage across global markets over the last three years – making it evident, subsidy reduction in Europe will have an immense impact on Trina’s business. Trina’s response has been to diversify into other global markets, especially US, aggressively in the upcoming year. It is too premature to remark on how successful this policy will be:

Country	2005	2006	2007
Germany	86.5	42.8	31.4
Spain	None	37.9	40.0
Italy	None	None	18.1
Others-Europe	10.2	9.6	7.0
China	3.1	9.3	2.1
Others-Rest of the World	0.2	0.4	1.4

Trina had ambitious plans to complete construction of a $1B polysilicon plant by 2012 with a capacity of 10000MT. Even at that level of investment, only a fraction of the feedstock requirements was estimated to be met with production from the plant. No doubt, this plan was a major mistake on the part of Trina’s management. They were already late in the game as projections called for a polysilicon glut in the 2012 timeframe precisely when Trina’s new plant was predicted to come online. Trina took the right approach by reneging on these plans three months after they signed an agreement with Lianyungang Municipality in China's Jiangsu Province that included government support in respect of land and electric power supply. The polysilicon plant saga has resulted in a loss of trust in the company’s management among Wall Street analysts and shareholders – checks need to be in place to avoid such missteps in the future.

Trina’s business has low barriers to entry for competitors. Specifically, polysilicon based solar module manufacturing is labor intensive and requires limited technology. At the moment, supply chain management and financial strengths are the key barriers to entry. Should polysilicon feedstock prices go into freefall, the whole industry can become over saturated with mushrooming of solar module production facilities with low capital outlay. The counter argument is that when polysilicon prices decline drastically, demand should pick up at a very good rate in its turn and be able to absorb the excess solar module production. Trina is yet to adequately address this problem.

Trina is exposed to currency risks as most of their sales are denominated in Euros or US dollars with the rest in Renminbi (RMB) while most of their costs and expenses are denominated in US dollars and the rest in Renminbi. The risks are unhedged and affect the bottom line directly. In particular, during the 1st quarter of 2008, Trina reported $4M in such losses and for the 2nd quarter of 2008, the projection is for another $3Min the same category. The losses are primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. This is an ongoing business issue for Trina and hedging to neutralize such risks is the right strategy. They should implement such a plan as quickly as possible.

Trina Analysis:

1. Trina Solar (TSL) - Part 1 - Introduction.
2. Trina Solar (TSL) - Part 2 - Business Issues.
3. Trina Solar (TSL) - Part 3 - Outlook.

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