Solar panel prices continue to fall

Guidance from Trina and other solar manufacturers was for a wholesale price to be above $1 per watt.

So I got this email from my local supplier today suggesting retail prices far below that:

Dear Client:

Just a quick note that Powerark Solar is promoting a Christmas sale on BLD solar panels, the brochure and specs are attached.

BLD panel pricelist:

190w: 95cents for 1 pallet (58pcs), 93cents for 2 pallets (116pcs)

250w (60cells): 99cent for 1 pallet (40pcs).

We are also supplying Alex Solar panel, and various brands of inverter including Ever-Solar, SMA, Afore (double MPP Trackers), JFY and APS Micro-Inverter, please feel free to contact us if interested.

Best Regards,

 

Will Li

 

Powerark Solar Pty Ltd

Add: 26 James Street, Lidcombe, NSW 2141

Tel: 1300 887 ***; (02) 9460 ***

Fax :(02) 9437 ***

Website: www.powerarksolar.com.au

Mob: 0422266***

Email: wil@pow***.com

Senseless Chinese capital expenditure: Trina Solar edition

The one thing we know about the solar panel industry is that it is glutted. Solar panel prices are collapsing as has been observed many times on this blog.

Trina Solar reported yesterday. Bad numbers as expected. To quote them as to the glut:

Despite this achievement [which in Trina's case was increased sales], growth in worldwide module capacity and peaked channel inventory resulted in significantly lower product prices which adversely affected our bottom line results, whereby our cost reduction was not sufficient to offset lower ASPs [ie average selling prices].

I promise you I am not telling anyone anything new here. If you are an investor in the solar-panel industry and have not noticed a supply glut then you are completely non-observant.

What is strange though is that despite the supply glut the capital expenditure in this business - that is building new plant and machinery - goes on regardless.

Here is a line from the balance sheet:

Trina Solar Limited
Unaudited Consolidated Balance Sheets
(US dollars in thousands)
		December 31,		September 30,		December 31,
		2011		2011		2010
Property, plant and equipment		919,727		783,328		571,467

Property plant and equipment at Trina went from 571 million to 920 million in one year. And in the year when the industry became hopelessly oversupplied.

Moreover the rate of increase accelerated in the fourth quarter when the oversupply was obvious to anyone to see - when anti-dumping cases against loss-making Chinese solar panel makers became vogue.

There are lots of things that might be going on here. The company might have a great new technology which is worth investing in even though the industry is glutted (indeed the company points to its "honey" technology). Or the company might be insane. I have my thoughts but I do not have enough knowledge to be certain.

But one friend suggested that this is just an analogue for all of China. Who cares if office buildings are glutted? Just build more. Who cares that the high-speed-rail between two cities you have never heard of, a railway line that consumed valuable steel and concrete by the millions of tonnes is mostly run at a third capacity with empty trains? Build more.

"Build it and they will come" may be the Chinese mantra. Usually only works in Hollywood films.



John

PS. I should disclose that Bronte still has a short-biased straddle on Trina - but it is a much smaller position. We closed a fair bit for profit - but traded that bit not so well. I should have covered the short end more aggressively when the stock was $6.

Bronte Capital enters strategic partnership with Diageo - maker of Guinness beer. Oh and a comment on Trina Solar

Bronte Capital have entered into a strategic partnership with Diageo - the maker of Guineess. But we haven't really. We are in a pub in London knocking back a pint of the black liquid. Guinness tastes better in the old country. [It is the old country to an Australian...]

We now have a commercial arrangement with Diageo - albeit a temporary (though tasty) one. But that has not stopped us writing a press-release trumpeting this "strategic partnership". I may send a copy to the news wires to see if they will run it.

In all seriousness they probably would. They ran this:

CHANGZHOU, China, Aug. 17, 2011 /PRNewswire via COMTEX/ --
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."

Being a cynical sort of guy - and knowing that Origin Energy are reputable I checked this release. Here is what Origin said.

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

I blogged this response here.

I almost did not need to check. When a party announces a "strategic partnership" and the press release offers contacts from only one side of the deal then you should be skeptical. Indeed it can hardly be strategic if only one side comments.

There are other strategic partnerships announced by Trina. In all cases there is no contact given for the "strategic partner", for they once announced a strategic partnership in Italy.

I am going to be blunt. The Origin press release has as much substance as Bronte's "strategic partnership" with Guinness. I have no idea about the other strategic arrangements but Trina says some strange things about Italy. For instance in the last conference call the chief operating officer said:

I have been waiting for Italy since I got here. So, we are actually seeing some good activity finally. And we have some pickup in activity. We see it. Obviously, our historic Italian account is at the utilities. We also see Spanish accounts that a lot of them actually served projects there. So, after much waiting and unclarity, we are seeing some pickup in demand. There is – we still have a mix of utility projects in commercial rooftop there. And so what we are seeing moved quicker was the stuff that was utility that was finishing off and now it’s blending into commercial rooftop.

It is possible that Italy was taking off just as he said this - but it seemed unlikely to us. After all the banks in Southern Europe were under sharply increasing financial stress at precisely the time of this conference call and funding for long term projects (like solar) was drying up. I did not believe the statement. Maybe it was true - but there is a problem with statements about insignificant "strategic partnerships". Those statements predispose you to not believe further statements.

So here is what I believe. I believe Trina is burning cash increasingly fast. So fast that it is in deep trouble.

Trina, through operating cash burn and capital expenditure chewed through $136 million last quarter. I blogged the calculation here. Chinese banks funded this.


The average selling price during the quarter was $1.46 per watt (reference given here).

The prices per watt have fallen to $1.10 or below when priced wholesale.

So revenue per watt is running 36c lower than during the quarter.

The costs per watt have dropped too. Polysilicon has dropped from say $48 to $38 per kilogram - but exact numbers are hard to find.  At 6 grams per watt the costs per watt thus dropped 6c. Efficiency gains add another 2c reduction in costs per watt.

Nonetheless margin per watt will be 28c per watt lower than last quarter.

Production is going to be (at least) 450 million watts - so aggregate margin is going to be $112 million lower than last quarter.

There won't be any tax paid - or anything like that - but the company looks like it will burn through $136 million plus $112 million in cash - more if stuff keeps accumulating in warehouses - less if the hard-selling they are doing actually works.

$248 million per quarter - or roughly a billion dollars a year is a little bit much for Trina to bear.

Unless there is something dramatically wrong with my calculation Trina is doomed. Not even a Chinese bank comes at a billion a year funding requirement just to stay in business.


Now of course all of this is my estimates. I can only go on public information and my own inquiry and my own analysis. I wish I could just use Trina's statements but - and it might just be the PR people who have done this - Trina has devalued its statements with overblown puff pieces about "strategic partnerships".

But I have trouble trusting Trina. And you should have trouble trusting me. I am effectively short the stock. Besides, I have just entered into a very enjoyable "strategic partnership" with Diageo.

And I might just have another Guinness.


John

Are prospective expenditure matching funds in Trina Solar's debt covenants?

Trina Solar buys polysilicon and sometimes wafers and sells finished solar panels. They used to talk about polysilicon processing costs and do their manufacturing at a large and impressive factory.

You can get an idea of the processes involved (but not the scale of the factory) with this YouTube promotional video:



They aim to be the largest maker of solar panels in the world.

This is a high profile company. It sponsors Formula 1 and Indy Car which gives the executives the chance to be filmed in front of fast cars surrounded by pretty young women.

My problem is that the more I look at the accounts the less I understand them.

To this end I wrote a letter to management suggesting that they were in (seemingly unnecessary) breach of their debt covenants and they wrote back assuring me they were not.

This post makes public my letter and their response. Some commentary is provided on their response.

--------

First my letter:


Attention Terry Wang, Chief Financial Officer, Trina Solar 
by email: ***@trinasolar.com


Copied: 


Thomas Young, Senior Director of Investor Relations
by email: ir@trinasolar.com 


***


Puzzling over Trina's debt covenants


Dear Sirs


I am a hedge fund investor based in Australia. I am also the writer of the popular Bronte Capital blog. The blog has been associated with exposing Chinese accounting scandals but the companies discussed on the blog differ substantially from Trina Solar. Substantially they did not exist. Trina Solar clearly exists and Trina Solar panels are distributed widely.


I am increasingly puzzled over Trina Solar's accounts. The issue that puzzles me most is the high cash balance combined with strange debt covenants.


I intend on writing a blog post about this – and I seek your comments because it is almost certain there is a simple and innocent explanation of what I see and I am happy to include your response in my blog post. It is more an education in how a competent hedge fund manager reads accounts. 


Anyway the issue I am raising is how Trina funds its capital expansion.


The last 20F filing contained the following investing cash flow section:

[Click for full detail...]


The columns are for 2008, 2009 and 2010 respectively. Purchase of property plant and equipment was 165, 136 and 144 million dollars for the three years respectively.


The 20F also contains this section about a debt facility to purchase the property, plant and equipment.

In September 2009, Trina China entered into a five-year credit facility of approximately $303.3 million, consisting of RMB1,524.6 million Renminbi denominated loan and $80.0 million U.S. dollar denominated loan, with a syndicate of five PRC banks led by the Agricultural Bank of China and Bank of China. Approximately $269.2 million of the facility are designated solely for the expansion of our production capacity, with the remaining to be used to supplement working capital requirements once the capacity expansion is completed. The facility can be drawn down either in Renminbi or U.S. dollars. As of December 31, 2010, we had drawn down approximately $275.1 million under the facility. The remaining facility to supplement working capital requirements can only be drawn on or after the date of completion of capacity expansion. The weighted average interest rate for borrowings under the facility was 5.53% for the year ended December 31, 2010. Interest is payable quarterly or biannually in arrears for loans denominated in Renminbi and U.S. Dollars, respectively. Interest rate applied for Renminbi-denominated borrowings is the same interest rate stipulated by Chinese central bank plus 10%. U.S.-dollar denominated borrowings are subject to the six-month London Interbank Offered Rate plus 3%. The facility is guaranteed by Trina and Mr. Jifan Gao, our chairman and chief executive officer, and his wife, Ms. Chunyan Wu, and is collateralized by the property, plant and equipment of the project and the related land-use right. Borrowings outstanding as of December 31, 2010 are payable on a biannual basis, commencing on October 27, 2011. For purposes of the expansion, we are required to match draw-downs from the facility with an equal amount of cash from sources other than the facility. The terms of facility also contain financial covenants which, among other things, require us to maintain a debt-asset ratio of no more than 0.60, a net profit ratio of not less than zero percent and an interest coverage ratio of greater than 2. 

At first reading this is very puzzling.  This facility is “designated solely for the expansion of our production capacity, with the remaining to be used to supplement working capital requirements once the capacity expansion is completed.” However we know that Trina's purchases of property, plant and equipment were 144 million in 2010 and 136 million in the WHOLE of 2009. 


They facility is drawn to 275 million.  So it appears Trina has funded their entire 2009 and 2010 capex with this facility.  However the terms state that Trina must  “match draw-downs from the facility with an equal amount of cash from sources other than the facility”. It doesn't look possible that Trina has done that and it appears that Trina has drawn their bank facilities in excess of what the covenants would allow.


I have puzzled further over this – maybe some old property, plant and equipment debt was rolled into this facility.  But according to the latest 20F filing the long-term borrowings outstanding at the end of 2008 were only $14.6 million so the strangely-large draw-down of this facility cannot be the result of long-term debt rollover.


So unless I am mistaken (and I would appreciate you telling me where I am mistaken) Trina has drawn this facility far in excess of what is allowed under the facility terms and is currently in breach of its debt covenants.


This is peculiar because Trina showed free cash in excess of $750 million on their balance sheet as per December 2010. There would appear no reason why Trina would be in breach of the debt covenant. Moreover it is a pretty harsh covenant – it involves a pledge of most the property of Trina and personal guarantees by Mr Jifan Gao and his wife.


Anywhere but China I would consider this as an innocent mistake – one easily fixed by taking cash from the balance sheet and making good on the 50 percent rule. In China you have to question cash balances. I have spotted other companies with fake cash balances. But those were substantially fake companies and Trina is clearly a very large manufacturing concern.


So – I am writing to ask (a) whether my analysis is fundamentally wrong and if it is not (b) why are you in breach of your debt covenants, (c) how much of the cash on-balance-sheet will be used to make good that breach, (d) have you sought a waiver of those covenants and (e) whether that waiver has been made good.


I hope to hear your answer.


I intend on blogging on this in about five days – and I will incorporate your answers in the blog post.


Thanks in advance.






John Hempton


Now their response:

Dear John,

Thank you for opportunity to address debt covenant inquiries centering on the statement:

For purposes of the expansion, we are required to match draw-downs from the facility with an equal amount of cash from sources other than the facility.

First and foremost, and in contrast to your comments received, Trina Solar is not in breach of its facility debt covenants.

Related to this fact, at a high level:

I.  Some capex in 2008 and 2011 are also under (matched) capacity project financing

II. We matched the project financing under agreement through our equity offerings and some contribution from two-year positive operating cash flows.

More specifically,

1. Timing of matching funds:

The Company made significant disbursements for subject expansion project prior to 2009, the year in which the loan facility was finalized. Such payments are common and can be linked to both project infrastructure development (engineering design and construction) as well advanced payments for technology hardware (facility EHS and production line related).  Such ‘early disbursements’ should be included as matching funds.

2. Project completion status:

Though initial phase was commissioned in late 2009, this ultra-large scale facility has yet to be 100% completed in terms of capacity additions. As such, related 2011 expenditures would also qualify as matching funds.

3. Source of our matching funds:

Fund sources include proceeds from our 2008-issued senior convertible notes, our 2009 and 2010 follow-on offerings, and a portion of our operating cashflows.

We trust you find the above helpful and thank you in advance to confirm receipt.

Best Regards,

Thomas W Young
Senior Director, Investor Relations

Commentary:

I showed both the letter and the response to one of my better friends (someone highly familiar with the nuance of debt covenants) and he drolly replied that "prospective expenditures are not exactly matching funds".

The usual notion of "matching funds" is that if you spend $100 on plant and equipment the loan may be drawn to $50 and the other $50 has to come from somewhere else.

According to the company the loan is drawn to $275.1 million as of year end and Mr Young tells me the project is not finished.  $275.1 million is way in excess of half of capital expenditure in 2009 and 2010.

Trina Solar say that some 2008 capital expenditures should also be included. The total investment in property, plant and equipment in three years 2008, 2009 and 2010 was (165 plus 136 plus 144 million equal to) 445 million. If they had only drawn the loan to 50 percent of the last three year's capex they would have only drawn 222.5 million rather than the above-mentioned 275.1 million.

Trina tell us that they can match funds with future expenditures. I find that unusual but as this blog is a fan of Fox News I will answer with the usual rejoinder: I report. You decide.




John

Post script: I think Jeffrey Rothstein's comment below - and my reply to it - are important parts of this story - so I encourage reading of the comments. I am not sure the 20F filing disclosure accurately reflects terms of the loan agreement.

Hanergy: let there be no doubt

Background: Hanergy is a large cap solar cell manufacturer that has been suspended on the Hong Kong market. The biggest shareholder supposedly lost USD14 billion in one day. 

Now that Hanergy has been suspended I can let these out.

I went to visit Hanergy's main factory in China about a six weeks ago. It was almost entirely silent. There was essentially no production of solar cells at all and the accounts that suggest significant production and sales are entirely fraudulent.

There was some evidence that someone was exploring starting production - and I will get to that - but the factory was almost entirely idle.

Here are a few photos.

This is the plant. There were almost no cars despite a vast car park. All gates except one were locked.

There was a single truck being loaded with solar cells - so there was *some* production. However this truck was being loaded when we arrived and still there when we left two hours later. This plant if it had any production at all had it only a trial basis. The accounts that suggest substantial production are false.

This is another photograph of the main drive to the plant. One car was parked. There was no movement.

This I found particularly bizarre. There were solar cells set up around the plant Some of them were set up in triangle-patterns. This is the only place I have ever seen solar cells set up so that they are not orientated towards the sun.

I walked around the enormous plant. Not a truck went by and the only people we saw except at the side were the gardeners. (There were several of them - and we asked them if it ever got any busier. They confirmed it did not.)

However on the side there was a shaded area with some motorbikes parked - which suggest that the plant is not entirely idle. Just almost.

Strangely two white guys walked out of the plant. I think they were Americans trying to sell some technology - maybe sales guys from AMAT - but I am only guessing. I tried to signal for them to come over but they did not.

There has been much press that compares Hanergy to other solar companies and suggests there may be disruptions in the market for panels. Garbage I say. The right comparison is Sino Forest or Longtop Financial Technology.

Hanergy barely existed.




John

Disclosure that will annoy my clients. Despite sitting on these we were not short Hanergy. Too much squeeze risk for my liking.