Trina Solar (TSL) - Where Do I Start?

Trina Solar (TSL) continues to post negative "1x" hits that continue to cloud operational strength. We'll get into operations next, but let's start with the 1x hits. First is their venture into changing from Chinese RMB to USD as their functional currency. This came unannounced (i.e. "surprise!) last quarter and ruined to the tune of $4M what was an otherwise exceptional earnings report. [Jun 6: Stellar Trina Solar Earnings Masked by Currency Adjustment] So $0.67 EPS turned into $0.51 EPS (vs analysts $0.48)

Now here is the kicker, they reported very late in the earnings season and they were in the 10th week of a 13 week quarter ... so if their internal controls had any... well let me refrain from speaking my mind. Let's just say 10 weeks into the quarter you should have a pretty darn good idea of how your quarter will end up. Trina guided to a $3M forex loss in this quarter. What did they end up with? Double - $6M. How you miss by a magnitude of 100% that late into a quarter is beyond my comprehension.

So that has wiped out $0.24 of EPS. On top of that a polysilicon plant project, which I just shook my head when announced (again as a surprise in 2007) and then was cancelled within 2 quarters, was another $0.08 EPS hit this quarter for charges related to cancellation. While that is over and above my expectation I at least know that is a 1x hit. The forex issues are beyond me at this point and the "management credibility" multiple persists.

With all that said, despite a sagging gross margins, which we expected for this quarter - their operations were excellent and they increased future guidance. I am hoping this offsets the sting of the 1x hits and while the magnitude of the forex hit was huge, at least we knew "some bad news" was coming this time around, as opposed to last quarter when they sprung the change out of the blue. I'll be blunt, if this stock was not so cheap I'd be out of this name - this company reminds me of Zoltek (ZOLT) management who is a "sexy" wind power play but in the years I've followed it the management constantly springs surprises on investors and also has a major credibility gap. And a stock price to show for it. I don't know what to say anymore about this company or its internal controls and decision making. At least the operations guys seem to do their thing... one can only hope the earnings prowess in 2009 (low share count) will finally push Trina to an area in stock price it should be, but we might have another long detour. Again, the operations continue to accelerate and with the low share share, earnings PER share should explode in 09. I am just hoping the market gives this management team a PE multiple somewhere higher than the current 50% discount to peers. But let's just say management has "earned" their multiple with the constant blindsiding of analysts and investors with new and innovative surprises the past 5 quarters.

On the positive side, the expectations of this company are extremely low and instead of trading in the low $50s as it did heading into last quarter, its trading in the low $30s. At some point the earnings power for 09 (ex forex machinations) has to drive the stock up. Consensus analysts estimates of $198M revenue and $0.81 EPS.

• Trina Solar's net revenues in the second quarter of 2008 were $204.2 million, an increase of 69.2% sequentially and 171.1% year-over-year. Total shipments in the second quarter of 2008 increased to 47.57 MW, up from 29.49 MW in the first quarter of 2008 and 20.33 MW in the second quarter of 2007. Average sales price ("ASP") was $4.03 in the second quarter of 2008, compared to $3.95 in the first quarter of 2008 and $3.70 in the second quarter of 2007.
• Gross profit in the second quarter of 2008 was $47.4 million, an increase of 52.4% sequentially and 233.3% year-over-year. Gross margin was 23.2% in the second quarter of 2008, a decrease from 25.8% in the first quarter of 2008 and an increase from 18.9% in the second quarter of 2007. The sequential decrease in gross margin was predominantly due to higher cost of silicon raw materials while the year-over-year increase was primarily due to higher module ASP and cost efficiencies from an increased degree of vertical integration, including in-house cell production.
• Operating expenses in the second quarter of 2008 were $18.2 million, or 8.9% of net revenues, representing the third straight quarterly improvement as a net revenue percentage. Operating expenses in the second quarter of 2008 included approximately $1.0 million of share-based compensation expenses and a one-time loss of $2.0 million associated with the discontinuance of the Lianyungang polysilicon project.
• Operating income in the second quarter of 2008 was $29.1 million, an increase of 44.2% sequentially and 260.2% year-over-year.
• Operating margin, including the one-time loss of $2.0 million, was 14.3% in the second quarter of 2008, compared to 16.7% in the first quarter of 2008 and 10.7% in the second quarter of 2007. The sequential decline was due to lower gross margin related to the higher cost of silicon raw materials while the year-over-year increase was due to greater degree of vertical integration. (if you exclude the 1x poly plant discontinuation it was a 15.2% operating margin)
• Net income was $17.1 million in the second quarter of 2008, compared to $12.9 million in the first quarter of 2008 and $7.4 million a year ago. Net Income of $17.1 million includes the one-time loss of $2.0 million associated with the discontinuance of the Lianyungang polysilicon project announced in April 2008. Net Income also includes a foreign currency exchange loss of $6.1 million.
• Net margin was 8.4% in the second quarter of 2008, compared to 10.7% in the first quarter of 2008 and 9.8% in the second quarter of 2007. The effect of the second quarter foreign currency exchange losses and the one-time loss due to the Lianyungang project discontinuance, net of tax effect, were approximately $0.24 and $0.08, respectively, per fully diluted ADS. (well at least they spelled it out in clear detail)
  

• Foreign currency exchange loss was $6.1 million in the second quarter of 2008. This was primarily due to the appreciation of the Renminbi against the U.S. dollar which resulted in a loss upon the remeasurement at the end of the quarter of short term borrowings partially offset by a gain from remeasurement of raw material prepayments.

• The Company has contracted 90% of its targeted module production for the second half of 2008, or approximately 95% of its 2008 targeted module production.
• The Company currently has sales in twelve countries, including the Czech Republic, South Korea, Mongolia, China, and Australia.
• Based on anticipated lower polysilicon feedstock cost secured through long-term supply contracts, the Company expects that its 2009 gross margins should increase from that in the second quarter of 2008, despite an anticipated decline in module average selling prices. Improved cell efficiencies and lower manufacturing costs are also expected to contribute to the Company's gross margin improvements in 2009. (I should hope so, this quarters 23.2% gross margins was the lowest in a while)

• For the third quarter of 2008, the Company expects to ship between 62 MW and 66 MW of PV modules and has expectations of total net revenues in the range of $250 million to $265 million. The Company believes gross margin for the second quarter will likely be between 23% and 25% and estimates operating margin to range between 15% and 17% of total net revenues. (analysts in at $225M so this is a nice bump; hopefully operating margin is closer to 17% than 15%)

• Total net revenues to be in the range of $850 million to $900 million, compared to previous guidance of $770 million to $808 million. (analysts in at $795M)
  
• Total PV module shipments between 210 MW to 220 MW, compared to previous guidance of 200 MW to 210 MW.
• The Company believes gross margin to be in the range of 23% and 25% for the year and estimates operating margin will likely be in the range of 15% to 17% of total net revenues. The gross margin and operating margin estimates remain unchanged from previous guidance.