Wednesday, May 21, 2008

Bookkeeping: Cutting some Trina Solar (TSL) on Solarfun (SOLF) beat and Suntech (STP) Earnings Tomorrow

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Former fund holding Solarfun Power (SOLF) has had an enormous run here capped off by an impressive earnings report this AM. While I thought they would beat, their ability to increase MW shipped was far better than I expected (40% sequential) so revenue exploded higher, driving EPS way past analysts expectations. Average Selling Price also continues to surpass my expectations for the entire sector. Gross margins were "weak" (in my book) at only 16.5% but most solar investors could care less - they only look at the earnings beat.
  • Net revenue was RMB 1.20 billion (US$ 171.0 million), an increase of 529% from the fourth quarter of 2007.
  • PV module shipments showed good momentum, reaching 40.3MW, which represented 40% growth over 4Q2007 and 517% from the first quarter last year.
  • Average selling price (ASP) was strong at $4.07 and was significantly higher than the ASP of $3.85 in the fourth quarter of 2007. Spain and Germany saw particular pricing strength and the Company also benefited from the strong Euro during the period.
  • The geographic breakdown of net revenue was as follows: Spain 46%, Germany 36%, France 8%, Italy 6%, and Switzerland 4%. The companys customer base remained diversified with only two customers accounting for over 10% of sales.
  • As the Company had guided, gross margins softened slightly to 16.5% due primarily to higher polysilicon and wafer costs.
  • Earnings per basic ADS were RMB 2.21 (US$ 0.32). (vs analysts .16)
A main takeaways - just imagine if this company had similar gross margins to peers, i.e. 22-24%. When the polysilicon shortage reverses we could have some very impressive quarters from a few of these players - looks like it will be 2009 though, more than 2008.



With Suntech Power (STP) reporting tomorrow, and my caution towards that name, and the fact Trina Solar (TSL) now looks like it will report next week instead of this week - combined with the fact the solar sector is way overextended I am going to cull Trina Solar (TSL) here near $52. Again to put it into perspective, Trina should report gross margins in 23-24% range (they did 27% last quarter) - so if they can expand their production (still a question) they should easily beat their number as well. But if the sector sells off (which it is well overdue to do) it will fall with the rest of them. So I am cutting back now back to a (still overweight) 4.9% stake.

Again, I expect a very good report, but Trina is reporting at the tail end of a major move in the sector - unfortunately timing is everything and the clock is striking near midnight for the solar sector for this run... that is the only reason I am culling this position a bit (lock in profits) I created most of my Trina Solar position early last week in the low to mid $40s range, adding 3-4% once it broke over resistance at $46 [May 14: Been Building Trina Solar this Week], so this is a tidy profit for a week's work. Of course I wish Trina had run like Solarfun but I can only go with what I perceive as the best fundamentals, we can never predict whom gets the hype and daytraders piling in. I'll look to add more to Trina if we get a pullback to $46.

Long Trina Solar in fund and personal account


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