Axiom: Sell Trina Solar, Its Leveraged Risk Is 'Scary'

• Trina Solar Limited (ADR) TSL shares are down 33 percent in the last three months, trading at about half of their 52 week high of $15.15.
• Axiom’s Gordon Johnson initiated coverage of the company with a Sell rating and a price target of $6.
• Despite the recent decline in the share price, the sell rating reflected the “scary” picture painted by leveraged risk and expectations of negative EPS re-emerging in 2016.

Trina Solar had achieved an 11.8 percent premium in its ASP, or average selling price, to the market ASP in 2Q15. Analyst Gordon Johnson said, however, that this premium is not sustainable and “will imminently revert to the l-term mean (i.e., parity).”

Trina Solar is likely benefiting from selling modules to itself, with the aim of selling these projects at a later date in the open market. Johnson pointed out that this is “a trend that, by definition, is on borrowed time.”

In the report Axiom noted, “TSL’s gearing ratio currently sits at 55%, yet the company plans to take on an additional roughly $1bn in debt in C15 on its already burdened BS to build projects that will not likely generate real cash flows for at least 12- 18 months – by Mgmt’s own admission (we do not believe there is currently equity market demand for TSL to spin-off its devco. to fund project purchases).”

Johnson expects the company to miss the consensus EPS estimate for 2015, and to report a negative EPS of -$1.08 in 2016, as compared to the current consensus expectation of $1.38.