Canadian Solar Revenue Down 27% To 2011, High Gross Margins Seen In Processing

Looking even further Canadian is seeking all-in-cost to be in area of $0.50 to $0.60 per watt, a number which is incredibly low versus today’s costs

---

Canadian Solar (CSIQ) delivered revenue of $325M, which was a 21.3% drop sequentially on shipments of 343MW, and also a 31% decrease from levels in Q4, a period which the company called a tough quarter. For the period Canadian has lost $0.49 per share, or $21M.

Financially, the company increased its debt in the quarter from the level of $833M to $951M, or a 14% increase due to the short-term borrowing.  The cash and cash equivalents level (not including restricted cash) went up to $393M from $343M shown in Q4, also a 14% increase. Canadian achieved the gross margin at 7.7% versus the sequential result of 8.7% and last year’s Q1 at 14.7%. Operating expenses included $17.4M of provisions made for the long-term contract with SolarWorld.

Inventory levels increased from $296M to $389M in Q1. Accounts and notes payable increased by $85M to $390M, while advances from customers dropped by $56M. Other payables dropped by $17M. The company increased the turnover cycle to 114 days for the accounts and notes payable, and as a result is holding on to more cash. The outflow in advances from customers may suggest fewer outstanding orders at this time. Accounts receivable days turnover increased to 78 days, while the net dropped to $250M from $290M. The reduction of the accounts receivable with increase of turnover days may suggest that allowance for doubtful accounts have also increased at this time.

The company highlighted its engagement in Canada-based EPC projects with TransCanada and SkyPower being worth a total of $1.3B to Canadian Solar. The company expects the EPC project segment to contribute 25% revenue to the bottom line in 2012 and around 40% in 2013. In addition, Canadian announced recently a construction loan from Bank of China for $120M for the development of the Canadian portfolio of solar plants. Based on the 20-F, the finalization of the SkyPower deal will incur $140M in costs by the end of May.

The company held its 2012 guidance for sales of 1.8 to 2GW of modules in 2012. Expectations for Q2 are at shipments of 430 to 450MW. Based on SPVI analysis, the company’s costs dropped by $0.11 per watt of shipments made in Q1 2012, while revenue generation dropped by $0.13 per watt for the same.  

The company has sold modules at $0.89 and Dr. Shawn Qu, CEO and Chairman of Canadian Solar, explained in the conference call that an average, blended production cost per watt was at $0.73, excluding warranty costs and the high cost of inventory from other quarters. This suggests that Canadian can produce modules at 18% gross margins, and 7.7% gross margin in overall results is the sum of high cost of inventory and various provisions on firm purchases and other costs associated with procurement of materials.  This is certainly a very optimistic scenario. Despite a need for periodical provisions for materials and market adjustments to the inventory, it is expected that market value for the value chain will stabilize with the ASP, and allow realization of those high margins.

Looking even further Canadian is seeking all-in-cost to be in area of $0.50 to $0.60 per watt, a number which is incredibly low versus today’s costs.  From the perspective of conversion efficiency monocrystalline ELPS cells in mass production reached averages of 19.5%, and 20.5% in the lab, yet high conversion modules are still on the low-production end. Referring again to the 20-F form, the company will have 280MW of ELPS lines in module and cell by the end of the 2012, which is roughly only 12% of the total capacity.

In summary, Canadian Solar is providing very aggressive targets for the operational schematic and one of the most robust EPC portfolios around. If the company can match its income statement with the dynamic of module processing, combined with what are expected to be even higher gross margins from project development, as described by management, Canadian can truly shape itself into an all-around leader for the future.