Canadian Solar Could be Leading Chinese Solar Companies in 2013

Whenever Shawn Qu speaks, he seems to speak about differentiation a lot. It appears that the development business has been identified as 50% of revenue for 2013, and this is one of the major contributors to feel that way about the company

There seem to be three factors that will decide a successful future for any Chinese solar company hoping for a global presence in 2013. First, it would be to accept that manufacturing solar products alone is going to make you bankrupt.  Second, you must be willing, and certainly financially able, to expand that manufacturing base outside Mainland China. Finally, you must create conditions to reverse losses and produce profit.  Canadian Solar Inc. (NASDAQ: CSIQ) seems to have checked off all of those objectives.

There is no doubt that struggles continue for the Chinese companies. A full year has passed and Canadian lost a cent less than last year at the same time, when it lost $1.02 per share. With $325M in revenue, and 384MW sold, at least the company came close to guidance in its Q3 results. Modules seemed to be sold at $0.72 per watt, so ASP continues to drop. The Q4 guidance from Q2 for 825MW of sales is out of the window. The company is guiding now 380 to 420MW of sales in Q4, and dropping the guidance for the year to the range of 1.5 to 1.6GW from the previous 1.8 to 2.0GW. For the critics, this is simply a confirmation that solar is a dead end, but from another take, despite ASP destruction, the company stood up to it and managed it fairly well. There is adding of the debt ($50M) and reduction of the cash account ($2M). The money goes into projects and that seems to be a good investment these days.

Canadian has the largest portfolio of solar plant projects among all the Chinese tier-1 companies.  Dr. Shawn Qu, Chairman and CEO, did something smart here, too. Instead of concentrating on a promise of solar energy generation in China, which did not get much traction thus far, he focused on building solar plants in Canada and the US.

The US part of the portfolio had grown from 140MW to 243MW. The Canadian portfolio started to deplete with the construction of some of the projects, but the majority of the original 300MW in projects is still on the agenda.  The company seems so ahead that many followers of the leaders, Trina Solar Limited (NYSE: TSL) and Yingli Green Energy Hold. Co. Ltd. (ADR) (NYSE: YGE) are asking the question if the two are holding on to the name for nothing.  The market since last week had certainly put the doubt into Trina Solar, by dropping the company’s stock price by almost 50%. A short interest increase of 13% during last month already suggested clouds on the horizon. In fact, a condition where the company cannot tell what they sell for four quarters in a row generates enough scepticism, to question the leading role of that company, yet somehow becoming a sure bet for short sellers.

Unlike Canadian, Trina woke up fairly late to the concept of the solar EPC. The revival program was put in place in the middle of Q3.  It seems that low to guidance 375MW of shipments, almost a 20% drop, had nothing or very little of China sales. There is a speculation that Trina’s sales for October are also down sequentially, and Trina’s stock market decline is a reflection of what it seems indifference of the company`s sales, technology and the brand name.  

It seems that efficiency is also driving Canadian results toward the top. In our SPVI Solar Reports we show who is in the game of high performance wafers and how GCL has been hitting high notes on theirs, averaging over 17.6%. We also discuss the processing to lead to those results. Today, Canadian is the main buyer from GCL, right along with Hanwha SolarOne Co Ltd (NASDAQ:HSOL). Unlike the distended Yingli, with high costs of long-term poly contracts showing up last quarter, Canadian can pull average cost per watt below $0.60, which happened to be at $0.64 from selling inventory produced in earlier periods.  Buying a wafer at or below $.20 per watt with the piece having 4.3W output would not be that difficult in the Mainland right now. To produce cells at $0.14 and module at $0.22 processing is very reasonable, so the objective of getting to $0.50 per watt is within reach or has been reached already by the company.

To top it all, Canadian also has a factory in Canada. Combining this with buying cells in Thailand, the company can serve Canadian and particularly American markets without further worry about the levies.  Canadian is one of two Chinese companies, after Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP), with meaningful volumes in Japan (18MW in Q3), another very lucrative, but closely guarded market after the US.

Even domestic opportunities are on the agenda, though for now this is just town hall talk. The company has 60MW from the Golden Sun project and another 100MW of ground-mounted projects in different stages of approval. Reading between the lines and knowing the difficult cash conditions in China, the market has very little funding to embark on them currently, despite encouragement from political leadership and various provincial and national edicts to support it; at this point, hopes for the China market to lift Q3 results seem unfulfilled.

Whenever Shawn Qu speaks, he seems to speak about differentiation a lot. It appears that the development business has been identified as 50% of revenue for 2013, and this is one of the major contributors to feel that way about the company. Those projects have high margins, perhaps as much as 25%. One of the most successful companies in solar, American First Solar, Inc. (NASDAQ:FSLR), seems to be weathering the crisis with a mix of profitability dominating over the losses, using that very factor. 

In the end, we suspect that Canadian will be among the three largest module sellers in the world, for the calendar year 2012.  Judging from their ability to comply with factors making a Chinese company a success, they may be perhaps the only one profitable, looking into 2013.