Energy

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Investors in the world's biggest solar-panel manufacturer, Trina Solar, have grown used to its rollercoaster performance. The stock has fallen, often dramatically, in five of the eight full years that it's been traded in the U.S. An anemic recovery this year looks likely to leave it well below the levels of two years ago.

Profit and Loss
Annual share price performance of Trina Solar
Source: Bloomberg data

Those left giddy by this switchback may feel it's the perfect time to accept the take-private offer from the founder, Jifan Gao. A group led by Gao plans to pay $11.60 for each American depositary receipt in the Changzhou, China-based company, Trina said Monday.

Shareholders should ask for more.

The solar industry has been a victim of its own success. The average price of panels has dropped by two-thirds over the past five years because of rapid technological improvements and a wave of oversupply.

That's not necessarily a problem. As the semiconductor industry learned over five decades, declining prices don't wipe out profits. The cost of the panel makers' key ingredient, polysilicon, has fallen by 81 percent over the same period. Most of the manufacturers had operating margins in the region of 20 percent in the June quarter, according to Bloomberg New Energy Finance.

Above the Horizon
Production costs and selling prices of major solar manufacturers, U.S. cents per watt
Source: Bloomberg New Energy Finance

Those falling prices have stimulated demand: About 68 gigawatts of solar cells will be installed next year, according to BNEF -- greater than Mexico's electricity generation capacity and almost four times the level of installations seen in 2010. Utility-scale solar generators in the U.S. are already cheaper over their operating lives than most coal and gas plants, according to Lazard. Those numbers don't even include the $16.5 trillion in renewables investment the International Energy Agency estimates will be necessary to meet the pledges made at last week's United Nations climate talks in Paris.
 
It's not enough to have an attractive demand outlook. As befits an industry awash with capacity and debt-financed capital investment, Trina Solar is a pretty low-margin business. After three years of losses, net income came in at just 2.6 percent of revenue last year, and analysts don't see it rising much any time soon.

Incoming and Outgoing
Trina Solar's working capital turned negative this year
Source: Bloomberg data

There's also the question of how the company is handling its growth. Working capital has turned negative over the last three quarters, driven mainly by the value of bills owed to Trina's suppliers jumping ahead of its own invoices and inventories of solar modules. Third-quarter interest payments of $13.5 million also ran well ahead of the $5.8 million in operating income received.

Working capital is always challenging to read, but a negative number is by no means always a bad thing. BMW, Airbus, Nestle, AB Inbev and L'Oreal all have more short-term liabilities than assets. The question is whether the number is due to operational efficiency, or strained liquidity. Trina looks to be a case of the former: its revenue rose 28 percent in the third quarter from a year earlier, while the company took just 18 days to convert its own spending into cash from its customers.

Finely Honed
Trina Solar's sales are rising and it's getting better at raising cash from its sales
Source: Bloomberg data

Gao's buyout offer comes at a 21.5 percent premium to the shares' previous close, below the average 27 percent premium for takeovers on U.S. exchanges this year. Compared with the stock's 30-day volume-weighted average price, it's an even less generous 16 percent, and values the company at about 5.6 times its 2016 Ebitda, well below the median for the industry.

As the founder, chairman and chief executive officer, it's unlikely Gao thinks he's overpaying, so shareholders should be asking themselves what he knows that they don't. A company growing as fast and efficiently as Trina demands a better price.

Rising Sun
Trina Solar's buyout offer looks cheap relative to other module manufacturers
Source: Bloomberg data

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net