Trina Solar Downgraded By Roth Capital On China Concerns

“Heading into H2’16, we are cautious on our entire group of upstream manufacturers given the threat of overcapacity in Q3 as demand in China weakens,” ROTH Capital’s Philip Shen stated.

Shen downgraded the rating on Trina Solar Limited (ADR) TSL to Neutral, while lowering the price target from $12 to $8. The analyst believes Trina Solar might have some protection against this overcapacity, given its exposure to the U.S. market.

However, Shen also believes “ASP declines in H2 are likely to accelerate beyond what is priced into expectations.”

Given Trina Solar’s mid to high teens margin, Shen expects the company’s earnings power to be materially affected by ASP changes.

“Notably, TSL’s earnings are highly sensitive to a decline in ASPs as a 1c decline in pricing in the back half vs. our forecast could lower TSL's 2016 earnings by ~28c, all else equal,” Shen explained.

In addition, the analyst pointed to the challenges being faced by Trina Solar in its efforts to sell some of its projects.

Q1 Performance

Management indicated during the Q4 call that the company expects to sell projects worth 400-500 MW in 2016, although this goal wasn't reiterated on the Q1 call.

For Q1, the company reported revenue above the consensus and estimate, driven by higher than anticipated external module shipments. The EPS also beat expectations.

However, gross margins were below expectations due to lower contribution from downstream revenue, as well as a decline in module ASPs, which outpaced cost reductions.