S&P - 4-star - BUY (TSL)

QUALITATIVE RISK ASSESSMENT: HIGH
"Our risk assessment reflects our view of the
uncertainty of government subsidies that have
supported growth for solar technology; the
possibility of declines in module average selling
prices and consequent volatile revenue growth in
the long term; the highly competitive nature of the
solar industry; and possible production
constraints due to limited silicon supply."

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HIGHLIGHTS:

- We anticipate revenues to more than double in
2008, after nearly tripling in 2007, as global demand
for TSL's photovoltaic (PV) modules remain
strong. The company has contracted 95%
of its expected PV module production for 2008
and is shoring up next year's allotments, which
we believe supports our sales growth projection.
We expect average selling prices (ASPs)
for modules to decline only modestly over the
next few quarters, but we see pricing uncertainty
in 2009 posing risks.
- We project that gross margins will remain
around 23% in 2008, similar to levels in 2007.We
see modest module ASP declines and a continuing
reduction in non-silicon production expenses
helping to preserve gross margins as
TSL faces high silicon costs. The expected
sharp sales advance and modest increases in
operating expenses should lead to wider operating
margins of around 15%, compared to 12%
in 2007. However, we think TSL will need to
raise capital in order to finance its expansion.
- We expect non-GAAP earnings per ADS of
$3.18 in 2008, versus $1.46 in 2007, and we forecast
$4.27 for 2009.

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INVESTMENT RISK/RATIONALE

Our buy recommendation reflects our expectation
for strong earnings growth and what we
view as a low relative valuation.We believe
near-term demand remains strong, and anticipate
longer-term demand to increase as PV
product prices near grid parity costs.We see
the company's integrated production business
model and usage of recycled silicon helping to
reduce the negative impact of high silicon
costs, and supporting gross margin levels that
are relatively high compared to competitors. Although
we are modeling for declining ASPs and
margins, we think TSL will be able to grow
earnings at a healthy pace.We view the ADSs
as attractively valued given expected growth
rates.
- Risks to our recommendation and target price
include a more-than-anticipated reduction in
government subsidies related to solar energy,
sharp declines in ASPs, limited polysilicon
availability, and an inability to increase production
capacity.
- Our 12-month target price of $47 is based on
applying a P/E multiple of about 15X, below the
peer average to account for the risks we see, to
our 2008 EPS estimate of $3.18.