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Discussion on Top Chinese Solar Stocks

I see that you keep CSIQ high, but bump JASO over the other two CN4. For Q3 ER I think the allocation match how they'll improve over Q2, except I think CSIQ is dominating all and JKS will be worst.

I'm curious about your CSIQ view now. I know you spent time working on Nano's modelling of CSIQ's future quarterly profits. Do you still do this and do you like what you see? When I look at 2013 and 2014 they show very consistent annual pattern with profit top in Q3 and bottom in Q1. It looks like the market played this pattern and that would mean that a sell after Q3 ER buy after Q1 ER scheme might be applied to CSIQ.

The other thing I think about when I compare CSIQ and Trina from a "who will lead perspective" is how Trina seems to be the 800-pound gorilla waking up now. They'll expand to 5 GW module capacity in 2015 and have built an 8 GW pipeline. Most of the pipeline is focused in China, which has a sustainable FiT and still double digit IRR for those with in-house panel supply. Although Ontario and Japan have very attractive FiT causing boom inducing IRR levels those markets feel unsustainable, i.e. government will have to do like Germany and slash FiT annually to not overheat and then IRR and developer margins will plummet and utility market segment will diminish.

I would not care too much about these worries that Trina might reclaim leader position in 2015+ if it weren't for the fact that they are around half the market cap of CSIQ and about the same as Jinko, but double that of JASO. Can these market cap relations remain for what's going to unfold coming 3 years? For now I've taken the less assuming bet of JASO only claiming a market value of 375m, but for diversification with long-term sustainable flavor I'm looking mainly at TSL although CSIQ looks very juicy (if Q3 performance is a sustainable repeat model a 3 times higher market cap would be warranted). TSL doesn't look very attractive on current performance and CSIQ looks dirt cheap now on Q3 delivery and is current leader as well, but I'm trying to understand the dynamics of progression for the different names coming years. It's not easy and I don't have a good view of CSIQ, which is the main reason I avoid it not that I don't like the view.

I also wonder a bit what will happen with supply-chain. Right now wafers and cells are cheap and CSIQ are light on such capacity and heavy on the module side and thus benefit greatly from this situation now, but as mentioned on their conference call all are adding module capacity only (Jinko goes for 4 GW in 2015, Trina for 5 GW and JASO added 1 GW this year) and wait with the expensive wafer and cell capacity (especially cell capacity as they don't want to add expensive capacity while trade picture is unclear, an expensive overseas factory overseas than will not be needed a year after built would be a huge loss of capital). Right now CSIQ can buy a CN or TW cell for $0.34, flip it to module for $0.16 and sell it with their Q3 ASP of $0.69 (although they said that ASP will be $0.64 in Q4). That's incredible margin on that module processing, beat even their Ontario plants. So for CSIQ right now everything is so perfect it is scary. To CSIQ's defence I've been saying this for 2 years and it just kept getting better for them and if we enter the next glut again they will be in best position to handle/exploit it.

I think for JKS we are on the same page here. It's a sound business, good execution but short term risk of shrinking gross margin due to uneven expansion of value chain. Also for the new deal with private investment for downstream business, it seems they need this to push for Yieldco IPO but have to share half of their precious pipeline. Note that most of their pipeline is high quality projects with good location, FiT and solar irradiation. Therefore, I don't really like them give up half precious pipeline potential to the partners. So for JKS, I am not eager to jump in now. Price need to fair enough for me to take a bite again on the riskier balance sheet.

CSIQ is the important main holding and diversification in my portfolio since its ability to execute on Non-China projects is non-comparable. And at this stage, every player has some kind of pipeline in China so quality of the pipeline and access to capital determines whether firms can benefits from those projects quickly. I know CSIQ is consuming their high margin projects in the next couple of years but 2015 will be another good year for them with remaining Canadian projects, Samsung EPC and part of Japan's projects. I see no major GM risk for 2016 as well since majority of the Japan projects will be completed by then. That's how I see 2-3 years visibility of high quality and high margin for downstream business for CSIQ. After this, there will be about a billion own capital released from these projects for CSIQ ($4-$5 EPS from 2014 to 2015 plus CF from depreciation) and that's a very valuable asset no peers has. They can either chase other higher margin projects in the project universe (as they said in CC, this universe is pretty big and good player can always find some better projects), or worst case is to dump those money into China's project pipeline (good for 2.5GW to 3GW). Holding these massive China's projects will enable $2-$3 annual sustainable EPS for them. Generally speaking, EPS from holding projects should be assigned greater PE than manufacturing EPS since the former is more stable and has less risk.

We can argue TSL could do the same with their huge China's pipeline (6GW+) but they need capital to do that. They don't have the luxury to use the capital freed from other lucrative projects and put it into holding projects. They either needs to find partnership like JKS to share their projects or they need to do more secondaries to raise own capital. I do see JASO as a mini-TSL but on a more efficient way operational wise. So I chose JASO over TSL in my holdings and CSIQ remains a main holding as ability to develop high margin projects in at least two years and freeing capital to dump into China's holding projects after that. Of course they might find better ways to use their capital and they will have most flexible balance sheet at that time. It's like a FSLR (great balance sheet, lots of capital to invest) with tier 1 manufacturing ability as well. After the drop, CSIQ is greatly undervalued from a static point of view. Dynamically, I see visibility for two years and as I stated they can always start using their China's project pipeline after two years.

The Execution of Canadian Solar on the day of T...

I guess prudent company that manages its capital by essentially replacing its growth spending from project to project only, is not an attractive model to WS. The model of SUNE, with MWs booked, spending and the catastrophic balance sheet,income statement is misunderstood by masses conveniently, that model is worth $5B alone and it is better.
We all seen recommendations for SUNE, not a single downgrade. CSIQ is a short sale according to Axiom's finest, Gordon Johnson, but GS took literally at $1B and removed yesterday from a market cap on exactly the same Microsoft Presentation as the day before. If you take that presentation from August and add news releases from both, Q2 and Q3, you will see that the same schedule exists for Japan. In ,fact it got enhanced by few MW, no difference in timelines. Same can be said for Canada, of course less what was sold.
So what was the shock Frank experienced when he did the $1B chop? Margins, as of course He (last name) ignored 200MW as too much of the concept.
The margins going from 17 to 19% has cost the company this. A drop of 3.9% from 22.9% to 19% on 975M is 38M, If I fully apply this amount to the bottom line that is the more than $0.50 per share. If this was moved, Q4 would be a $1.75 quarter and Q3 would be a $1.25 quarter as they planned (analysts did). Then Q1 would look like a cheap cousin on Christmas, and the same, but perhaps worse as the expectations would be poor fro sales of plants for Q1, would happen.
You see Frank needed to come out, because he had his comments scripted, this is why the whole thing does not make much sense. Johnson came out because it was scripted to come out. Nothing Johnson knew day before was different day later, he bent the facts a bit to make the splash but no new information was provided. This was a conspiracy. They knew they were going to sell this stock yesterday, no matter what the company has done.
Why so little focus on 200MW of new projects? Why did they not ask about GCL situation? Makes sense and their wafer. The principle business of CSIQ was in jeopardy not because of projects but wafer supply issues. This did not matter. Somehow selling for profit, made analysts realize that good projects are scare regardless as Uchsteve pointed out Potter saying Japan is up on ASP as I mentioned due to grid connection value.

So why selling this equity so hard? Two things only. No short and fees from money on secondary and no money from IPO yieldco. Companies, which are hinting not to go to a disastrous financial schemes, are being stripped of value. You do not pay them for fees, you do not allow them to short stock like TSL did. You do not provide them with easy money. They taken a 12% killing of FSLR and moved it to CSIQ yesterday. It did not matter than CSIQ was a better company, which made almost three times per share FSLR did. SPWR will do yieldco and it made 0.20 and they left it alone. Bankers have managed to beat the management of these companies to servant state of reaching their objectives. I think WS forced TSL to do secondary, so they can sell her short and close early short. They managed to destroy the stock now trading at $9 to achieve their trading objectives.

CSIQ 2014 Q4 EPS Estimate

Snake is definitely wrong on Q4 result. I just plugged in CSIQ's guidance (taking the upper range) to my model. Here is what I got:

Gross Revenue: $975,000 (Module = $454,400 and project = $516,750)
Gross Profit: $186,926
GM: 19.17% (Module GM = 17.19% with cost=0.53 and ASP=0.64, project GM = 21%.
Q3 was 23.19% and 23% respectively)

Shipping: $39,008
G&A: $15,000
R&D: $ 3,000
Opex: $57,008
Income from Ops: $129,918

Interest expense: -$12,000
Interest income: $3,800
FX Loss: -$4,000
Other gains: $400
Income before tax: $118,118

Tax: $29,529
Net Income: $88,588

Less Non-controlling: $85,588

# of shares: 60,239
EPS: $1.42


Even if we take into the worst case of guidance and factor in other negatives, EPS should be comfortably above $1.00


For 2015, on the other hand, we need more visibility into the source of project revenues and guidance from the management.

Thoughts on recent price pressure of US listed...

Here's my two cents on the recent PPS slump:

• Demand issues (e.g. from big China, Japan, EU and US markets)? No. Though some markets need to deflate FiT levels to sustain PV growth. The panel ASP are not inflated in those markets. This means attractive IRR can be maintained and panel demand won't have an elastic response to FiT cuts. Projects can still be highly profitable in those markets, but not insanely profitable like now. CN11(*) have almost no exposure to those insanely profitable segments in terms of existing revenue streams (only example is CSIQ who have been tapping Ontario at unsustainable plant ASP levels). Japan project market hasn't been tapped yet.
• Strong USD? Yes and this affected general market too (pressuring high beta stocks further). US listed stocks lost less value per share in other currencies.
• Strong RMB? Yes this keeps costs high relative to revenue bases in weaker Yen and Euro.

Now what? What the extreme currency moves have done lately and further amplified with demand pull in China, pressure in Japan from deflating FiT level and lowered MIP in EU is that the profitability of different markets are aligning, especially the China market's relative profitability is improving. From an industry perspective this coming "place to be" status of China market should benefit the CN names as they have great access to that market.

When Trina management speaks the industry listens. They just said that they need to expand panel capacity to 5 GW in 2015. That's what I listen to. Profits are always going to swing with currency moves for import and export exposed companies. More than we want to admit it is "All 'bout the currencies", but the strong ones stay and collect more in favourable currency times and lose less in the non-favorable ones.

How does downstream play into this? This is the insulation to all moving parts. All PV plants have 20 years revenue and cost visibility. It's known and fixed profits at high margins for 20 years. The CN11 now channelling profits from pushing panels into creating those stable and insulated revenue streams instead of just expanding production capacity is the start of a much healthier life-style for these dominating companies and the foundation for an overall healthier industry. They have a new healthy target to invest their surplus in to break out of the pathological capacity expansion cycles that has plagued the industry. The days of vigour and strength for this group (at least the structurally well set up CN4(**)) are ahead, but the train is still stopping to pick up some VIPs. Patience. This time it will be different.

(*) CN11 = US listed Chinese solar stocks
(**) CN4 = The CSIQ, TSL, JKS, JASO subset of CN11 who turned around to consistent profit reporting around 2H13

The Suspension of Application Review by Japanes...

Based on the fragment I quoted , CSIQ has 195MW of projects, which are approved for gird. Out of those, construction permits are required for 150MW and constructing already started on 43MW.
http://www.mynextfon...rom-h40988.html
Utility is not responding to new applications but all accepted ones are in place as per quote below

The utility, which supplies power to the southern island of Kyushu, said the restriction begins tomorrow, according to a statement posted on its website. The decision doesn’t affect agreements already in place.

More on Kyocera, which does not have an approval and have not started building the project.

Kyushu Electric’s decision may also affect a 430-megawatt solar station under development on Ukujima, an island off Kyushu in southern Japan. The project, touted by developer Kyocera Corp. and its partners as the largest in the world to be built on agricultural land, has yet to secure grid access from Kyushu Electric.

Canadian looks to me like a winner here. Businessweek and Bloomberg does not mention Canadian. As far as I know, only Trina is interested in Japan on a larger scale, beside Canadian.
Some facts about Japan
Only 15% of 71GW or 11GW are operating. Out of 71GW of applications 96% are solar. The law of six months apply and around 4.5GW have, or will, be cancelled. There are 6 utility companies and some of them followed the move, but not all.
Why there is no honest reporting in media?

CSIQ Q3 Results

CSIQ Q3 Estimate

Module Revenue: $435,500
Project Revenue: $372,600
Other: $ 1,900
Total Revenue: $810,000

Module GM: 20.90% (cost = 0.53 ASP = 0.67)
Project GM: 21.00%
Blended GM: 20.91% (guidance 19%-21%)

Cost of Revenue: $640,602
Gross Profit: $169,398

Selling: $31,826
G&A: $23,571
R&D: $ 3,000
Total Opex: $58,398

Income from Ops: $111,000
Ops Margin: 13.70%

Interest & Adjustments: $ 6,425 (Including $2 M FX gain and $0.8 M other gain)
Income before Tax: $104,575

Tax: $ 13,591
Net Income: $ 90,984
Net Margin: 11.23%

Less non-controlling: 800
CSIQ Net Income: $ 91,784

Share count (K): 60,058

EPS: $1.53


Note: No gain/loss from CBs is included in the estimate.

Canadian Solar Partners with Sichuan Developmen...

To me this looks like a good deal. I think they know that China will become a very crowded place to do projects, so I think now they try to get as many feet into doors as possible. Partnering with an investment vehicle that is co-owned by the Sichuan government, it is clear which vehicle will get preferential treatment in this region for future opportunities (sometime ago it was written here that projects mostly get easier permitted to government owned companies). Also, I understand 800m they mean the equity of the fund (??), so leveraging it up you can do a few GW and I assume all EPC will be done by Canadian Solar Inc.
(NASDAQ:CSIQ). So the contribution CSIQ makes is not only for an owned project pie and the FIT income that comes with it, but opens the door for the EPC revenue for the whole pool.

Now is just the time to make the maximum use of capital available through smart capital allocation as for all CNs it is still rather scarce.

CSIQ Investment Thesis

I won't go into all the details as I have in the past (I've debated explo on this many times), but a few of bullet points;

1) Location (Ontario...right place at right time with domestic content and lucrative FIT's)

2) Location (Japan...established themselves there very early on before tsunami)

3) Location....(US...that's just obvious)

It takes money to make money. CSIQ got a huge head start in very profitable FIT regions. They decided to invest their capital on this, instead of on manufacturing like many others were, which turned in to be a big anchor for some as prices subsequently tumbled. The tumbling prices that also hurt CSIQ, ironically also helped fuel their project success as solar became more affordable and grew.

Construction is a totally different animal than manufacturing. There's engineering of all disciplines, qualified trades people, managers, etc. And they deal with a whole different slew of issues (permitting, utility coordinations, etc.). It takes time to go thru the process and become efficient at it, and every region has its different challenges. The Ontario projects with their very nice margins supported their learning curve. Yes, anyone can probably throw up a solar plant...but to do it successfully is a different thing (Qu used to comment that some plant owners would go the cheap route initially, but the next time would come to them because they wanted it to work). Just like all industries...there are good quality players and then there is the rest. I think CSIQ's portfolio speaks for itself, and since projects are so costly, this is great leverage for getting even more work (especially outside China).

You don't just wake up one day and decide you're going into that part of the business and hit the ground running. There are relationships in every region with multiple entities that must be forged. There are bidding processes, applications and permitting with multiple agencies, etc. that all take a lot of time to go thru...much more time than to build in many cases (Ontario was like that, especially early on...and look at Japan...etc.). You can build and man a manufacturing plant pretty quickly with the latest equipment, but building a successful global project business takes many years.

Will others catch up some day...maybe...will other values of the month outperform long term...maybe/probably. But they're much more a gamble imo due to CSIQ's very visible and very profitable pipeline extending out many years. And based on what they have achieved in the past, I expect them to continue to be successful in their global build-out, as they'll certainly have the financial resources to do so. It's a risk-reward ratio I can truly embrace, and because of the visibility I sleep very well at night regardless of a day to day stock performance, or whatever doom and gloom of the month Gordo and some others may throw out there.

And if I didn't mention it before...location...location...location. A westernized company with cheap CN manufacturing capabilities, with excellent margins and cash flow/ bankability fueling future global growth.

2014 Earnings and Price Targets

I did the 14H2 estimate for JASO, the last of the CN4. I also revised my TSL model by reducing interest expenses. I'm posting all the results here for your reference. To be consistent with my first post on this topic with results for CSIQ and TSL, I'm using the closing prices on Aug 26th for the calculation of returns.


CSIQ TSL JKS JASO
2014 EPS $4.16 (H1=$1.02) $1.35 (H1=$0.51) $2.98 (H1=1.00) $1.14 (H1=$0.33)
PE Used 15 15 15 12
2014 PT $62 $22 $45 $14
Projected Return 76% 80% 53% 49%

Notes

• PT is based on stated PE on 12-month trailing EPS. Different PEs may be used to suit your own view.
• CSIQ and maybe surprisingly along with TSL (with the assumption of some plant sales) have the momentum going to the end of 2014. JKS and JASO, on the other hand, may be stories for 2015 when China demand picks up and accelerates, JKS's yieldco goes for IPO, and JASO's transformation gets close to the finish line.
• Lastly, the above is just my personal view based on assumptions which may not be correct or come to fruition.