If anyone was wishing for Chinese solar-panel companies for Christmas, boy were they not disappointed. Trina Solar ( TSL) was one of two China-based solar-panel companies that squeaked into the public markets before the gates closed for the year. Like the other, Solarfun Power Holdings ( SOLF), Trina hit the U.S. markets only a few short weeks after the initial prospectus was filed with the Securities and Exchange Commission, an accelerated schedule that normally takes a few months. Trina filed on Dec. 6 and was priced on Dec. 18. That left institutional investors with less than two weeks to appraise a foreign-based start-up -- a risky move, in that buyers could shy away unless they had time to digest the new offering. In Trina's case, it didn't make much difference. The offering was oversubscribed. Last month, Trina's stock was priced at $18.50 per American depositary share, above the anticipated range of $15.30 to $15.50. On its first day of trading, Dec. 19, the ADS, equal to 100 common shares, moved even higher. It debuted at $26 and then popped up as high as $26.75 before dropping back to about $20 a share at the end of the day. Things have been relatively stable since then, as Trina's shares hovered around their offering price, an apparently tacit market consensus that the offering price, although raised at the last minute, is an appropriate value for the stock while the company proves itself.
Trina closed at $19.01 Thursday after losing 4%. The company has been profitable for three of the last four years, even as it grows. Trina's revenue grew nearly sevenfold in the first nine months of 2006 to $76 million from the year-ago figure of $11 million. Gross profit grew at an even faster rate, 666%, to $21 million, while operating profit grew 587% to $11 million. Even with that growth, Trina's gross margin rose to 28% for the first nine months of last year from 24% a year earlier, as prices of its products grew faster than what it pays for supplies. Operating profit has grown from 13% from 11%. The company plans to use the $128 million in proceeds from the offering to cover the costs of raw materials and to build new production lines to meet rising worldwide demand for solar panels. According to Photon Consulting, which is affiliated with the trade journal Photon Magazine, revenue in the solar-power sector grew 50%, and profit grew 149% in 2005 -- the most recent year with complete data available -- compared with a year earlier. Citing interviews with hundreds of solar companies, Photon estimates that revenue grew 51% in 2006, from $12 billion to $19 billion. Because of "incremental efficiency gains and manufacturing improvements ... industry average pretax margins are expanding from 22% in 2005 to 30% in 2006 and 33% in 2007," a Photon report said, adding that the growth in both revenue and margins isn't yet factored into many estimates.
"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.