Trina Solar's very understanding banks...

Trina Solar is fast becoming a test-piece about just how understanding a Chinese bank can become.

They have just produced some pretty ordinary numbers (as pre-announced) but it the massive changes in their balance sheet that are really interesting.

Trina Solar Limited
Unaudited Consolidated Balance Sheet
(US dollars in thousands)
			June 30		March 31		June 30
			2011		2011		2010
ASSETS
Current assets:
Cash and cash equivalents			$            630,978		$        489,820		$          639,517
Restricted cash			53,260		64,813		45,758
Marketable Securities			315		426		443
Inventories			226,303		179,780		96,395
Project assets			43,472		42,110		23,877
Accounts receivable, net			584,046		542,967		313,042
Current portion of advances to suppliers			64,049		82,370		42,895
Prepaid expenses and other current assets, net			101,948		90,297		53,256
Total current assets			1,704,371		1,492,583		1,215,183
Property, plant and equipment			751,480		663,851		533,795
Project assets- long term			2,614		-		-
Prepaid land use right			36,661		36,854		27,139
Advances to suppliers - long-term			129,138		94,807		87,205
Investment in affiliates			320		319		-
Deferred tax assets			14,667		15,405		10,481
Other noncurrent assets			28		196		1,352
TOTAL ASSETS			$         2,639,279		$     2,304,015		$       1,875,155
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings, including current portion of long-term debt			$            342,953		$        153,286		$          161,557
Accounts payable			315,004		253,223		197,789
Convertible note payable			137,870		137,065
Income tax payable			20,139		46,656		9,436
Accrued expenses and other current liabilities			130,305		132,487		60,220
Total current liabilities			946,271		722,717		429,002
Long-term bank borrowings			382,631		295,652		331,152
Convertible note payable			-		-		134,644
Accrued warranty costs			50,205		44,194		27,508
Other noncurrent liabilities			17,223		18,454		14,740
Total liabilities			1,396,330		1,081,017		937,046
Ordinary shares			40		40		40
Additional paid-in capital			646,925		644,628		638,457
Retained earnings			579,183		567,423		291,572
Other comprehensive income			16,601		10,707		8,040
Total shareholders' equity			1,242,749		1,222,798		938,109
Non-controlling interest			200		200		-
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			$         2,639,279		$     2,304,015		$       1,875,155

Cash went up from $490 million to $631 million - an increase of $141 million.

But that was the end of the balance sheet good news.

Short term debt went up from $153 to $343 million. They borrowed $190 million short term.

And long term debt went up from $296 to $383 million. They borrowed another $87 million.

So another way to look at it is that the company chewed through a net (190+87-141=) 136 million despite their (much lower) stated profit.

What gives? Its a widget company with stated profit but cash burn.

Actually we know what gives - the company still can't sell their product to customers that actually pay.

Inventory went up from $180 to $226 million. This company is still shipping to warehouses...

Receivables went up from $543 to $584 million. So they are selling to people who are slow to pay (but who have probably already received irrevocable delivery of solar panels and installed them into levered solar parks. (The project financier almost certainly has the collateral now!)

The rest of the cash burn wasn't really burn - it was (another) large increase in capacity. These increases are happening despite the obvious problems this company has in selling its inventories.

As I said - the banks are very understanding.

And they will need to be because the company has contracted to buy lots more silicon and it needs to increase its output substantially. They tell us that the silicon price will be lowered in accordance with the contract. That is great: they are going to need it.

Today at my office in Sydney I was cold-called by a solar panel installer. Business is quiet so they were drumming up business. They want to sell me panels at an installed price (with inverters etc).  The panel price was $1.35 per watt. Not kidding - way below where Trina is currently booking sales.

The brand was Alex Panel - another company which the salesman assured me was "planning to list on the New York Stock exchange".

Trina say next quarter will be better. At $1.35 per watt sold by retail-cold-call in Sydney I don't quite see it.



John

Software eats part of the world

Marc Andreessen's WSJ article about software eating the world caused debate amongst my colleagues at Bronte Capital. It's a view that informs a fair bit of Bronte's portfolio.*

You see I wouldn't want to make guitar tuners.

After all there is a guitar tuner app on my Android phone and it works well enough. Can't plug it into my son's electric guitar and tune it whilst he is jamming out some Deep Purple covers at the local pub. (Actually he isn't doing that... he is only 11 but I think he wishes he was doing that...)

But that sort of expresses the problem. For most purposes the hardware (the guitar tuner) becomes "appified" - that is it just becomes another app on your mobile phone. A software guitar tuner replaces a hardware one except for specialist uses.

And many things have become appified. The list of devices in a mobile phone is extensive (guitar tuner, satellite navigation, alarm clock, filofax, digital voice recorder, camera, my HP15c calculator etc).

But phones are just the start. Look at this:

Cyberhotel on FreePBX

OK - for the uninitiated I will explain what this is. Its a virtual computer download. After all you can run a computer on Virtual Box (or a Vmware player) and it will virtualize a computer - that is run a computer on software that looks, feels and operates like the box you purchased online from Dell. The computer you are virtualizing with this download is (and you need to breathe deeply to get the significance of this) a hotel administration system which will manage billing for telephones, wifi hotspots, the porno movie you watched at 10.30pm because you were lonely and in a strange town and the mini-bar.

And because it is a virtual machine you can house it in any nondescript linux running box provided you run Vmware on it and plug a few nondescript switches into the back of it.

The expensive hotel PABX has been virtualized: eaten by software. This "virtual machine" the product of some French company that assembled it from publicly available bits of software just wants to sell and install a few trivial phones.

Routing systems - even quite complicated ones - have been virtualized.

Which neatly describes the problem for Cisco. Cisco you see makes complicated integrated hardware-software devices - and their product set - like most hardware-software devices - is being appified.

What is happened to guitar tuners is happening to Cisco which is the real problem with the stock - the reason it trades at such low multiples.

And you can see this in their results: we are in the middle of one of the biggest routing booms you could imagine - as we go from a world where a few devices are connected to one where every device, every tablet is connected to the web. Cisco talk about 50 billion devices but you can't see it in their revenue line.

Instead in the middle of the biggest imaginable boom they had that dreadful conference call where they talked about government spending being weak. Hey isn't this a private sector routing boom? Well it is but the private sector is appifying really fast. The government sector are all paranoid about Chinese government hacking and terrorist vulnerabilities and so are wanting the tried-and-proven hardware-software integrated device (which they think is harder to hack). Government paranoia is stopping the software eating the hardware and them guys at the Department of Homeland Security are sitting there safely in their (antiquated Cisco) box...

But whilst the government holds back the tide of history the lesson holds true: if you make hardware-software integrated devices your risk is you are going to get appified and unless you do the appification someone will do it for you.

Marc Andreessen is right: software will eat the world or at least part of it.

If you are a pure hardware maker its going to be really diabolical. I should illustrate by example. A financial firm I know (one office, two floors) runs about 70 desktop computers running Windows. They used to have a computer on each desk, a series of centralized servers and a backup of the servers (minute by minute) stored off-site and the desktops backed up once a week. You were told not to store stuff on the client computer - only the server.

There were a bunch of security risks with this. For example the client computers all had USB ports so you could plug in a USB key and steal data. So the USB ports were disabled. The client computers still had hard-drives. A staff member could steal data by downloading stuff to their hard drive and then walking out with the hard-drive in their bag. I guess you could lock up the client computers and put alarms on them.

It ain't run that way anymore. The computers are now virtualized.

I need to explain that. With a linux system you can run five computers on one box (you run linux and on that box you run a virtualization software like Vmware or Citrix or Virtual Box). Each of those computers can be different. One could be Ubuntu (a flavor of Linux which I kind of like). Another could be Windows 7. Another two could be Vista. If you are prepared to stretch the law one could even be Apple OSX. In other words one box makes five computers. Or sixty-five provided the box is powerful enough. And they share the same processing power and the same RAM which means if one person is not using it another person can.

But also Linux boxes can be used a different way. You can run ten boxes linked together and pretend they are one computer - and from the perspective of the user they are one computer. Indeed you can run a million computers together that way and they will behave like a single integrated supercomputer. We have an example - its the Googleplex in which it looks like you are sending your request to a single super-computer but the whole thing is run on desktop computers racked in huge storage barns. The beauty of the linked computers is massive redundancy. If 1000 computers went out simultaneously in the Googleplex you would not even notice. The other computers - Borg like - will just take up the slack.

Now you can do this in combo - you could run 70 Microsoft machines on two linux boxes each box being redundant. That is pretty much bombproof because linux machines barely crash and virtual machines barely crash (for reasons explained in this post).

And that is what this financial institution does. It has two largish linux boxes linked and running 70 virtualized Microsoft boxes.

And because it is a financial firm the two linux boxes are backed up second-by-second at a remote site 70km away.

The staff have their old computer sitting under their desk. They see it. They just have no idea that it is non-functional - a dumb terminal for their virtual machines with only the graphics card doing anything. (For some reason graphics cards don't yet virtualize well though that is changing...)

Given the boxes under the desk do nothing they are never going to be upgraded. The linux machines will be upgraded - but that is little more than throwing in another server blade.

Its OK for Microsoft: Microsoft is still renting 70 software licenses to run on 70 virtual machines. It is still renting office and the whole suite of other Microsoft products. But it is diabolical for Hewlett Packard who like Dell are highly dependent on corporate computing businesses for their margin.

Those businesses are stuffed. They don't exist in ten years. And the only fast-growth section is going to be server blades (see above) and those only need to run commodity linux so they will be commoditized.

Hewlett Packard is right to think there is no future in the PC business. The people who are whining at HP's actions are wrong. They should have realized there was no future in that business and sold HP stock. I never owned it (as I noted once in this post**).

Andreessen in on the board of Hewlett Packard. He thinks software will eat the world but in this case it is his company that is being eaten. He desperately wants to salvage it but salvaging it is expensive if you start from the platter Mr Hurd left him.

Anyway if pure hardware businesses are stuffed (and I think they are) then what happens to hardware-software integrated devices? If they can be replaced by software only they are stuffed (example Cisco). But it is not always that clear. Andreessen's article gives the example of military drones - pilot-less planes which can kill. The pilot is being not replaced by software but turned into a jockey with a joystick who may go to war someone in the Continental USA - killing people with drones before going back to be with his wife and kids. But the plane still exists and they still needs guns. It is a software-hardware device and it is not getting eaten. It may be getting better but the bullets are real bullets and they can't be virtualized. So they look safe enough from being eaten by software and it is the fact that the drones are lethal which makes them safe.

The point here is that software does not eat the world - it changes the world but the drone business doesn't get eaten in the way guitar tuners or Cisco routers get eaten.

So lets change the title of Andreessen's piece: software eats a good part of the world but supplements other parts - and as an investor in existing technology you need to know whether you are eaten or not.

I think I have a ready answer for this: every time you look at a piece of kit (a hardware device) you have to ask yourself whether the output of your hardware device is information or the manipulation of information or whether it is something else.

If the output of your hardware is information or the manipulation of information then you are going to get eaten. If the output is something else then you are not.

So lets do the division.

Guitar tuner: information. What is the pitch of the guitar? Doomed.

Alarm clock: What is the time? Do I need to wake up? All information. Doomed.

Military drone: Output is violent death. That is not information, it is a brutal physical reality and hence it is not eaten by software.

Cisco router: manipulation of information. Doomed.

Other items in Andreessen's article

Telephone companies. That is pure information manipulation. Ultimately doomed except for linking all this together. Certainly the old analog phone network is problematic.

Walmart distribution systems. Well the output is shopping for physical goods. Not doomed. Information is just an input.

Oil and gas exploration where computers drive drills etc: not doomed - the output is oil and gas.

Additional ones:

Libraries. Doomed.

Traffic lights. Doomed - but that will take time to get the controlled cars up.

You can go on.

For thought.






John

*We are - despite appearances on this blog - primarily long investors and we spend a lot of time thinking about our longs.

**Disclosure: I once shorted HP but made no money. The analysis was right. Our timing and execution left a lot to be desired.

The SEC should do a secondary suspension of Longtop Financial Technology

Puda Coal is a Chinese company already suspended by the Nasdaq and then relegated to the Pink Sheets. Whilst on the Pink Sheets unsupportable and probably false promotion material was circulated about them.

The SEC suspended them again - a secondary suspension from the gray market.

The SEC should do the same with Longtop Financial Technology. The company can't make payroll. The independent directors have all resigned as has the auditor. There are no independent directors and no auditor.

The company raised well over $100 million in cash. The auditor could not find it.

But we still have Weizhou Lian (the man who probably knows the location of that $100 million) running around telling everyone he has something to sell.

This is - at best - a breach of regulations on fair disclosure.

The information is either true - in which case it should be made public more generally - or it is false. In both cases the stock should be suspended - preferably before trading on Monday morning.




John

PS. I meant it when I said I no longer have a financial interest in this.

I have no position left in the stock. I write this as a public service.

Trina Solar and the meaning of "strategic partnership"

A couple of days ago Trina Solar announced a "strategic partnership" with the well managed Australian company Origin Energy*.

I think Origin is one of the best managed companies in that space in the world (but it is not exactly cheap...)

Origin also has an Investor Relations department that in my (fairly considerable) experience is dead straight: they tell the unvarnished truth and I like them.

Anyway here is the announcement:

CHANGZHOU, China Aug. 17, 2011 /PRNewswire-Asia-FirstCall/ -- Trina Solar Limited (TSL) ("Trina Solar" or the "Company"), a leading integrated manufacturer of solar photovoltaic (PV) products from ingots to modules, today announced that through its subsidiary, Trina Solar Australia Pty Ltd, it has signed a strategic partnership with Origin Energy Australia ("Origin"), the leading Australian integrated energy company. 

Under the terms of the agreement, Trina Solar is expected to supply Origin with approximately 22 MW of PV modules over the next twelve months starting from the third quarter of 2011.   

"We are delighted to initiate our relationship with Origin, Australia's leading energy retailer and the country's largest green energy retailer with significant investments in renewable energy technologies," said John Susa, Trina Solar's Country Manager of Australia and New Zealand. "We are confident that this long-term partnership with Origin will bolster our ability to expand and strengthen our market position in the residential segment." 

"Origin, which is one of Australia's leading solar retailers, has closely reviewed the capability and quality of a number of solar module suppliers in recent months in order to offer its customers quality solar solutions. The high efficiency, scale and long term strategic positioning of Trina Solar has impressed us and we look forward to a long term relationship," said Mr. Dominic Drenen, Origin's Solar and Home Products Retail Executive.

The first thing that jumped out at me was the small-scale of this relationship. 22 MWs of panels over twelve months is about 1 percent of Trina's output - and they are selling that to a major distributor in a country where the sun almost always shines, solar subsidies are still common (albeit reduced) and where the only local factory has just closed.

In other words it is not much of a "strategic partnership".

But just to make sure I wrote to the Investor Relations department of Origin.

Hi John,

Origin has not put out a release as it is simply part of our ongoing supply arrangements and not material in its own right.  Trina is one of a number of suppliers we use.

Cheers,
Angus


Angus Guthrie
Group Manager, Investor Relations

Now we can rephrase the Trina Solar press release more accurately: Trina has sold some solar panels to Australia's Origin Energy. No details as to price were announced. Trina is one of a number of suppliers used by Origin Energy. This deal is material to neither party.

Chinese Companies and Strategic Partnerships

The phrase "strategic partnership" has come to mean customer - often small customer. But it is genuinely confusing as it sounds important.

When I was looking at Longtop Financial Technology (a company now trading on the pink sheets in pennies) I came to the conclusion that much of the company did not exist. Certainly there were large claimed businesses that just could not be found.

But we were confused by Microsoft (on their website no less) listing Longtop as a "partner". You can still find the listing here. This relationship was of course hyped by Longtop but when I checked "partner" just meant "customer".

And I write this only as a warning: be very wary of any Chinese company claiming to have a "strategic partnership" when what they mean is small commercial sale. It is yet another sign of an over-promotional management team.




John

*In my past career I purchased (for clients) almost 5 percent of Origin Energy at under $2 a share. It was cheap. I sold it for just under $4 a share and thought I was clever. The stock price is now $13.72. That was not my best decision and I had full understanding of how good this company was.

Radio National program on failures of the audit profession

Radio National is the earnest national public radio service in Australia. They recently ran an hour program on the audit profession and this blog and my views particularly on China got a mention.

You can find the program here - and it is worthwhile listening.

Of course if you think that an hour talking about accountants is marginally less interesting that listening to paint dry then you might skip it along with the rest of this post.

Whatever you can find a reasonable review at Francine McKenna's excellent if polemical blog.

I appear after Carson Block just after 41 minutes... I am there as much as anything because I offer a (limited) defense of the auditors which Francine McKenna (who was given the last word) dismisses pretty harshly. The limits were edited out of the show in part because I named certain institutions as corrupt and Radio National did not want to be sued and in part because it was useful for the show to have someone (anyone) on it willing to defend what looks to be indefensible.

Here without the editing is my limited defense of auditors.

Audit is a process which is designed to catch fraud. Any defense that says that audit is not meant to catch fraud is of course nonsense.

The process involves among other things checking that a sample of transactions actually occurred and are accounted for correctly. So you look at individual transactions flowing in-and-out of the bank and check them against bank statements. You check the end balance of key items (receivables, inventory and especially cash).

If an audit is done properly (and that usually involves a competent partner and a group of competent juniors following boring rule-driven process) it will detect almost all major frauds. Competent audit may miss small scale embezzlement but will not miss wholesale fictional accounts.

The bulk of major frauds and almost all of the Chinese frauds would have been detected by proper process.

However now and again you find a really sophisticated fraud which fools that process. In China the main way of fooling the process is to have the bank in the the fraud and have the bank provide accounting statements that match the fraudulent transactions. Of course the criminal firm will also need the customers to be in on the fraud (and say to verify receivables in random checks).

In other words a fraud that fools the process needs to embed itself into a well-controlled fraudulent network. It needs to be elaborate and well constructed.

In that case - and only in that case - I am willing to offer the auditor a free pass. The auditor might have done their job properly and not detected fraud.

I think there are two Chinese frauds that meet this test. The first is China Media Express where I think it entirely possible that Deloitte did their job properly and did not detect the fraud. The other is Longtop (which was also audited by Deloitte). In both cases the customers (advertising agencies and banks) were in on the scam and the banks provided false statements to verify cash flows and cash balances.

And that is the extent of my limited defense of the auditors.




John

Google and proprietary formats

Day-to-day I use an Ubuntu computer. The problem with open source is that every now and again you need a particular codec (say a way of encoding sound) or some other proprietary piece of software protected by a patent and you just can't do something. 

This is a big problem for people distributing open source systems such as Android. Access to patents is the stated reason why Google has just purchased Motorola mobility.

But hey - as an Ubuntu user - I am getting used to this.

You see I have (now infrequent) trouble with proprietary formats with conference calls and investor presentations. Microsoft is the worst offender (but I can't expect them to change). BofA can be surprisingly hard. But most things for most companies are fairly easily accessible.

Then I tried to listen to the Google conference call for the Motorola mobility purchase using an Ubuntu 11.04 and Google Chrome. 

I can do it but I am amused by their choice of format:

Yes you do see this right. I get the choice of Flash or Windows.

Both proprietary.

John