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Trina Solar (TSL) Could Be Insolvent Near-Term - Pearson

January 7, 2013 11:29 AM EST Send to a Friend
Shares of Trina Solar Ltd. (NYSE: TSL) are lower early Monday following a negative article by Richard Pearson in SeekingAlpha.

Pearson notes shares in the solar sector, including Trina Solar, surged last week amid Warren Buffett's investment in a SunPower (SPWR) plant. This provides a good entry point on the short side. Trina Solar faces the greatest challenges in the sector, he said, and it is headed toward near-term insolvency.

Challenges facing the company include:
  • Although Trina's balance sheet discloses total liabilities of only $1.9 billion, Trina also has over $14 billion of off-balance sheet liabilities.

  • These liabilities require Trina to purchase polysilicon at historic prices which will now preclude the company from making a profit on its sales, even to the extent that they are adjusted, delayed or renegotiated.

  • Although Trina had $599 million in cash as of September, it also has $1.2 billion of debt, with nearly $800 million coming due within just the next few weeks and months.
    Since September, the cash balance has almost certainly decreased substantially due to the sales below cost, while current maturities of long-term debt continue to increase.

  • Trina's credit facilities are specifically designated for the construction of manufacturing facilities and are secured by those facilities. This means that these credit facilities cannot be used to repay its short-term debts.

  • In explaining its financial results, Trina has explicitly acknowledged that it was in part due to "the presence of irrational pricing by our competitors, especially those at risk of financial insolvency." Trina appears to be following an insolvency pricing policy as well.

  • As of Q3, Trina's income statement showed that it was selling its products at cost with a gross margin of just 0.8%. However, even this result was only made possible due to a one-time accounting provision.

  • In fact, the real result (which is not readily visible) is that Trina is now selling its products at below cost - meaning that the ability to generate profits or cash to repay debt is highly questionable.

  • Trina has already given guidance that a negative gross margin is expected to continue going forward.

  • Trina has also just lowered guidance for total PV shipments by 20% from previous guidance.

  • Trina has historically realized the vast majority of its sales from the US and Europe such that Chinese government subsidies to the solar industry will not be able to provide a material boost to overall revenues.

  • Anti-dumping penalties in the US and Europe were only beginning to take effect recently, and the negative impact of these will only become visible when the 20F comes out in coming weeks, right as Trina's substantial debts are coming due.

    The company is unlikely to survive as a public company in its current form for more than six months, Pearson concludes.

    Link

    Shares of TSL last traded at $4.63, down 5.9 percent.




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