Gordon Johnson On Trina Solar: 'Time To Press The Shorts'

Trina Solar Limited (ADR) TSL reported 1Q16 revenue and EPS of $816.9mn and $0.25, respectively, beating consensus expectations of $777.0mn and $0.23. Axiom’s Gordon Johnson maintained a Sell rating for the company, while reducing the price target from $6 to $4. The analyst expects China’s demand to weaken in 2H16.

Despite the strong 1Q results, Trina Solar’s shares could head south, analyst Gordon Johnson said. He commented that there was “acute risk to TSL,” while citing the reasons as:

• Decline in China demand – China’s demand is expected to soften in the back half of the year, versus the normal seasonal spike. Trina Solar indicated lower 2016 feed-in-tariffs, “suggesting the lynchpin behind global PV demand is folding,” Johnson said.
• Guidance Reduction Ahead - Trina Solar reduced its downstream shipment guidance for 2016, by 52 percent at the midpoint, from 500MW to 240MW. Yet, the company left its total shipment guidance unchanged.

This implies that the company raised its external shipment guidance by ~260MW, despite lower China demand expected in 2H, a sharp decline in California’s new PV applications and a slow start to Japan’s 2016 installations. Johnson believes there is a high probability of Trina Solar reducing its total shipment guidance later this year.

• Margins to Come Under Pressure - Margins seem to have peaked, given the company’s guided sales mix and ASPs continuing to trend lower.

“Thus, as solar industry fundamentals have never been clearer, we firmly believe now is the time to pile into short positions across the sector,” Johnson wrote.