Demand Fuels China's Solar IPOs

"Most business plans and models for this sector include assumptions about volume, price and margins that are unrealistically low," the report said. "With demand outstripping supply, prices will remain firm and revenue will expand quickly."

But if the problem facing the solar-panel industry for the next few years isn't demand, it's a shortage of the silicon used to make solar cells. Trina, citing data from research firm Solarbuzz, said the average long-term contracts for polysilicon rose to between $45 and $50 per kilogram last year from a range of $28 to $32 per kilogram two years earlier.

Trina's prospectus outlines the company's strategy to acquire the silicon it needs at a low cost. It buys polysilicon through short-term contracts on the spot market as well as lower-cost monocrystalline silicon in the form of "tops and tails of discarded portions of silicon ingots, pot scraps and broken silicon wafers" bought from chip companies.

But the silicon shortage is getting so severe that even Trina's resourceful approach is getting more expensive. "Prices of reclaimable silicon raw materials are also increasing due to growing demand," the company said in its prospectus.

Trina did see its gross margins dip during its third quarter to 15.3% from 27.5% in the second quarter and 23.3% in the third quarter of 2005. But the higher cost of materials was offset by a drop in research-and-development costs.

If higher silicon costs continue to eat into margins in future quarters, however, there will be less wriggle room on the operating expense level.

That could darken the outlook this year for Trina and other up-and-coming solar companies.