Investor's Business Daily, March 8th, 2007
The recent tremors from the Chinese stock market have shaken down many Chinese companies trading here in the U.S., including the fast-growing group that makes solar power components. One such was Trina Solar, which corrected to the tune of 25%.
Yet analysts aren't too worried about these companies' prospects. Demand for solar power is set for the foreseeable future.
"I don't think Trina fell because it's a company that produces in China, because almost everything it makes is for export," said Robert Stone, analyst with Cowen & Co. "I believe that as the market got into a correction, it's only natural that the stocks that have gone up the most in the last few months are the first ones investors want to take their chips off the table with."
Trina TSL certainly has gone up. The stock debuted on the NYSE at 18.50 on Dec. 19, and soared above 50 by Feb. 26. The successful IPO (for which Cowen was an underwriter) was one of five solar deals that have come onto the U.S. markets since October, with more still in the pipeline.
Meeting Demand
The solar companies are racing to meet the demand from the West as governments in Europe and North America are getting behind solar power. The Department of Energy expects worldwide electricity consumption to double by 2030, and the energy's got to come from somewhere. Solar demand has been growing at an annual rate of 43% over the last five years, reaching 1.5 gigawatts in 2005. Projections for 2010 range from 3.2 gigawatts to 10.4 gigawatts. Even with that growth, solar power amounts to an infinitesimal percentage of global demand.
The big variation in forecasts comes from the fact that solar power still depends on government support. A bill now working its way through Congress, H.R. 550, would boost subsidies for solar and affect global demand. Other countries such as Italy and Spain are just beginning to promote the solar alternative.
But the ultimate goal of every solar company is to make it on its own. The question is, how do you cut production costs enough to compete with fossil fuels?
Trina's strategy takes two approaches. One is to use recycled silicon. Both the rise of solar power and a resurgent tech sector have driven up silicon prices, so everybody's looking for ways to buy less of it.
Trina boasts that it can make ingots with up to 80% reclaimed silicon. Most of it is scrap from the tech sector, such as broken wafers. It's already secured 80% of its silicon needs for 2007 and about half for 2008.
Still, supplies are so tight that that alone doesn't guarantee success.
"It's not the only company that does that," said Sam Snyder, analyst with Renaissance Capital. "And I know that of late, prices have been pretty high, even on (reclaimed silicon)."
Another strategy is vertical integration. The process of making a photovoltaic panel entails putting together a number of progressively larger parts. Silicon turns into ingots, ingots are sliced into wafers, wafers go into cells and cells into modules. Since it started manufacturing in 2002, Trina has been working to get as many steps as possible together at its facilities in Changzhou.
Right now, it's not quite there yet. There are still several facilities yet to go online. Snyder says the most important of these is in the cell-making business.
"I would say that the most margin is in the cell and module side, not in wafering," he said. "The company is going to be positioned better once it does have those production lines up and running."
On March 5, Trina announced that it had successfully tested its new cell line and that it should start operating in April. Stone expects the margins to start improving in 2008.
Still, Snyder thinks a solar company can't boast full vertical integration unless it makes its own silicon. So long as it doesn't, it is still subject to silicon's premium prices.
"Unless you have an actual plant that makes the stuff, it's really expensive," he said.
Still, even at this early stage Trina is ramping up at an impressive rate. Fourth-quarter earnings more than doubled over the prior year to 21 cents a share. Sales gained 144% to $38.8 million.
The fourth-quarter numbers were especially reassuring to analysts because late last year a rumored supply glut in Germany shook solar stocks. Thanks to new regulations, Germany is the fastest-growing solar market in the world and is absorbing most of the new business. About 87% of Trina's revenue comes from that country.
"It looks like market conditions are OK in Germany -- not declining," Stone said. "We've always believed that when you put solar power in the German context, what you're getting is a guaranteed payout for 20 years. It looks a lot like a 20-year bond."
Supply
Stone says that because supply is so far behind demand in this market, there isn't a real competition yet for market share. Instead, a lot of companies are experimenting with different ways to cut costs, and they might be able to co-exist for quite a while yet.
For instance, First Solar FSLR makes modules using "thin film" technology instead of silicon, bypassing the whole silicon shortage altogether. Stone expects thin-film will reach 20% market share by 2010. But it also takes up more space than conventional technology, so it does not seem on the verge of totally replacing it.
Analysts polled by First Call expect Trina's profit to jump 73% this year to $1.66 a share. Next year they see growth accelerating to 116%, reaching $3.59.
Copyright 2007 Investor's Business Daily, Inc.
