Monday, April 14, 2008

Trina Solar (TSL) Drops Plans for Polysilicon Plant

Very bullish news from my perspective out this morning on Trina Solar (TSL) - a major overhang has been removed with the decision to scrap their planned polysilicon plant. Trina was attempting to become the first fully integrated solar panel maker by owning the whole supply chain from polysilicon to end panel... ambitious - and when it was announced a few quarters ago it came as a surprise to everyone. Further, they never announced how they were going to fully fund the project, and this created an overhang over the stock due to fears of stock dilution. It was also a major distraction from their core business. Last, in the long run, polysilicon production will be a very commoditized (sp?) low margin business, and better to simply contract with the bevy of producers that will be online in 2010+. Getting their own plant up and running would take years, so the most likely scenario is they'd be launching their plant into a supply equilibrium (versus current shortage) or in fact, glut. And eventually this polysilicon market will glut... so the inherent advantage of having your own plant will diminish over time.

This news makes me much more positive on the near term fate of the stock; and I applaud management for rethinking the decision instead of being stubborn and not reacting to market realities.
  • Trina Solar announced its decision to discontinue the development of its previously announced 10,000MT polysilicon production facility having a total estimated cost of $1 billion.
  • "We have made this strategic decision after careful assessment of our raw material requirements, in conjunction with recent and favorable long term polysilicon market and supply condition developments." said Jifan Gao, Trina Solar's Chairman and CEO. "Furthermore, we wish to reaffirm our strong working relationship with our partner GT Solar, which continues to provide us with advanced multicrystalline technology platforms to support our target of 350MW of annualized module capacity by the end of 2008."
  • As a result of recent favorable changes in the polysilicon supply environment, Trina Solar now believes it has greater access to polysilicon feedstock to support its growth objectives. To address its forward polysilicon requirements, the Company will continue to sign long term contracts as a means to meet its strategic supply needs. Additionally, Trina Solar will consider strategic investment options in future polysilicon projects which offer attractive economics and involve smaller investment requirements, although no projects are currently under consideration.
From company website:

The Company’s decision to discontinue the development of a polysilicon production facility at Lianyungang, Jiangsu province was due primary to changes in market conditions. The Company’s strategy will continue to focus on three areas: lowering of module manufacturing costs, development and advancement of our of core technologies, and further development of a strong brand in the marketplace.

Supply-demand conditions in the polysilicon market have changed considerably. The Company believes that it now has greater access to long-term contracts with improved delivery and payment terms for polysilicon to meet its planned capacity expansion requirements in the next several years.

The average price of polysilicon, though remaining high in the short term, is expected to decrease in the long term as a significant portion of polysilicon manufacturing capacity currently under construction becomes available. Long-term contracts now generally have prices that will decline over time. These contracts will allow the Company to reduce its per watt polysilicon costs over time and to expand its margins in the long term.

As a result, the Company does not see the need to commit capital to building its internal capacity for polysilicon production, but will still evaluate investing in other projects opportunistically where attractive economics are offered and that involve notably smaller investment scale.

I'll be adding to my position in Trina Solar (TSL) this morning pending after watching how the early trading plays out. The sector is a bit overbought is the main issue into rushing in at this point...

Long Trina Solar in fund, no current position in premarket but could change during today's session

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