Wednesday, 11 September 2013 00:56

New Solar Investment Template Includes Canadian Solar

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The market has become quite passionate, lifting share prices across the board, but the old solar investment template could be in need of adjustment


Chinese solar companies have dominated the solar industry, but this year they have claimed complete superiority – beating the survivor’s run with the second-quarter results. 

The well-understood, common indicators are already there. Gross margins are once again in double digits and shipments are growing.

Mainstream media on occasion still publishes overcapacity warnings, but this week an old phenomenon has been witnessed. Taiwanese companies (which supply cells and, on a smaller scale, wafers) declared plans to expand capacity by the end of this year.

At first glance, conditions brought by the US tariffs and outsourcing for Japanese clients are behind the effort. Yet, Taiwanese quoted Chinese demand as a contributor, which means that “right” capacity in Mainland China is becoming scarce and those who use Taiwanese components require more of them.

China for the first time has become a hotbed of installations and some 19GW of approved projects have been summed up in Chinese media. The country has set a goal of 35GW by 2015; some of the latent capacity is being used by the tier-1 companies, but a shortage of modules is already being predicted. Utilization once again is at 100%, with some companies announcing sell outs for the quarter and at least one for the balance of the year. Solar is on, and it is on in a big way, a lot more than the EU boom of Germany and Italy from 2010 and 2011. This time around, solar demand is becoming a global sensation.

The market has become quite passionate, lifting share prices across the board, but the old solar investment template could be in need of adjustment.

Canadian Solar Inc. (NASDAQ:CSIQ) has never been a high flyer on gross margins. For the 2010 fiscal year, gross margins for Canadian were at 17%. Trina Solar Limited (ADR)(NYSE:TSL) had 31.44%, and Yingli Green Energy Hold. Co. Ltd. (ADR)(NYSE:YGE) was at 32.44%. In the first difficult year for solar players, 2011, the company did 9.6% while Trina and Yingli delivered 16.24% and 16.69%.

In the catastrophic year of 2012, which claimed most of the bankruptcies, Canadian Solar did 6.98% while Trina did 4.41%, and Yingli went negative 3.24%. Something has changed during this year, and Canadian became the first on gross margins among all peers.

The same leadership continued in the first quarter of 2013, and then the company had to give up its position to JinkoSolar Holding Co., Ltd. (NYSE:JKS) during the second one.  Due to the underutilization penalty of 1.2%, gross margin was only 12.8%.  It would still be close enough to reach profitability, only if the loss of $20M in foreign exchange did not make it impossible.

When it came to net income, Canadian had nothing to write home about with $50M made in 2010. It was toppled by $311M achieved by Trina Solar and $262M by Yingli.  When it came to losses in the 2011 fiscal year, Trina came out on top with a $37M loss. Yingli drifted to an unimaginable $510M loss, and Canadian was at a negative $90M, a mediocre middle of the road.

In 2012, Canadian managed to lose the least out of those in a comparable class.  After two quarters of 2013, the company shows a loss of $17M. JinkoSolar, including a net positive outcome in the second quarter, has a year-to-date loss of $13M. Those are the best two results by a mile when compared to the $100M loss for Trina and $156M for Yingli.

So what changed with Canadian?  A lot. The company found a method to capitalize on the EPC service for solar plant projects, started to build its own solar plants with the purpose to sell them, and started selling what it calls “total solution” kits for installation on residential and commercial rooftops. The company also improved module efficiency by producing ELPS modules using MWT technology. It fixed its weaknesses in processing costs by employing a combination of wafer procurement and automation of cell and module lines.  

The market has recognized the company by moving the stock price to levels from 2011, the only Chinese peer boasting a positive return based on closing prices from January 2, 2011. Yet, it has almost completely ignored Canadian’s solar plant portfolio and its financial potential. 

Canadian Solar’s portfolio of projects includes locations in Canada, USA, Japan and China. The company is the only Chinese company building solar farms on this scale globally. With 802MW in total, the Canadian backlog of projects alone has a revenue stream potential of $1.8B. Projects range from 15% to 25% in gross margins. The company’s expertise has landed a 130MW contract for modules and EPC from Samsung, with the prospect for a further 260MW in subsequent phases.  The financial impacts are certainly not as obvious, but they have a tremendous influence on the financial health. The $389M on the balance sheet under the current project assets represents some of the portfolio awaiting sales in the next 12 months.  When sold, the company will see not only a boost in cash with the gross margins, but an almost identical reduction of short-term liabilities, with remarkable improvement on debt levels.

In a recent presentation, Canadian highlighted further progress with prospects. Some 3GW, which may include over 1GW of activities in China, have been classified as long-term opportunities. Another lesser-known fact is the recent joint venture to build a 60MW module factory in Indonesia, an example of a unique local presence to receive benefits from the recently approved FiT, but also a supply of locally made modules for other South Asian markets.  Something similar was done before in another place: Canada.

In some ways lucky, since the Guelph plant in Ontario was built for domestic content rule at the time, Canadian is only the second Chinese company that can sell to the EU duty free, using its “Made in Canada” modules.  All the signs point out that if gross margin can be managed below the EU minimum price, it can create additional cash flows essentially contest free.

Moreover, since the company has held back from the European market in the first half of the year, sizable module allocation could be seen in the second half coming from China. Recent results of the China/EU negotiated solution, the already mentioned minimum EU pricing of 0.74 per watt, is anticipated to contribute to “good” ASP with large shipments to Japan and the US. Canadian would need to reach $0.70, to cover for its Q2 losses including $20M Forex, a $0.03 improvement.  The permutation of sold-out peers, the ability to pick sales with high ASP, and finally, the still underutilized value chain, offer a helpful mix to work toward it.

Another unseen factor is that Canadian was the second-largest shipper of wafers to Taiwan during July – an indicator that shipments to the US are intensifying. Unlike most of Canadian’s portfolio, projects in the US recognize revenue on a percentage of completion basis, something which is very unlikely to be picked up by a “between quarterly reports” market assessment, but can have huge add-on value in results.

Lastly, Canadian Solar did not guide sales of solar plants for Q3 2013. While the possibility almost immediately makes the company profitable, the aberration of value being recognized only at the sale and not having value as an asset, remains at large.  It is simple; the old investment template using gross margins and growing volumes has no room for this idea today. However, as the dynamic changes it may be part of the future template, starting with Canadian Solar. 

Disclosure: Long CSIQ

Disclosure: Long JKS
Disclosure: Long JKS
Read 1618 times Last modified on Tuesday, 22 October 2013 13:49
Robert Dydo

Robert is the founder and CEO of SolarPVInvestor and SPVInvestor Research, Inc. His career spans more than 20 years in supply chain, managing and planning operations for distribution centers. An ardent private investor, Robert found his niche in contesting misinformation about solar in general, and the Chinese solar industry in particular, while using his finance education matched with a lifelong ardor for the stock market

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