Implications of Canadian Solar's Personnel Changes, Q2 Shipment Guidance

| About: Canadian Solar (CSIQ)

Canadian Solar (NASDAQ:CSIQ) today announced that its CFO is leaving the company to pursue other interests. Normally such press releases are overlooked and viewed as insignificant events. For years China has been a very dynamic economy where many new opportunities have formed very frequently. As a result, skilled individuals such as high ranking corporate executives have been in high demand and thus top level personnel changes have not been unusual.

In recent stock market sentiment however, any news relating to China and finance has been viewed in a different light. Given the recent scare regarding fraud with Chinese companies, a high level finance related departure may raise red flags even if unjustified. Trina Solar (NYSE:TSL) recently saw its share price decline on heavy volume after it announced a change in one of its board of directors in charge of its audit committee. LDK Solar (NYSE:LDK) even asked the NYSE to temporary halt its stock prior to announcing similar board of director changes. With this in consideration, it’s not surprising CSIQ also added additional news in today’s press release.

Canadian Solar also announced it would increase the size of its board of directors from four to five with the addition of Dr. Harry E. Ruda. While normally an insignificant bit of corporate news, increasing the company’s independent board of directors may be viewed as increasing its corporate governance and credibility. Although very minor, it may be part of the company’s gesture to dilute how the market may view its change in CFO.

Additionally, CSIQ also raised its second quarter shipment guidance in the same press release. The company now expects Q2 shipments to be approximately 295MW, up from its prior 245-255MW range given in its Q1 earnings report. However CSIQ also expects gross margin to be at the low end of its prior 13-15% range which is not surprising given capacity constraints would force incremental shipments to be at a lower level of integration. It’s also unclear how much if any of this shipment guidance increase is related to revenue recognition of large shipment scheduled to be recognized in the third quarter. In any case, Q2 estimates should be beneficially affected even if only slightly.

While CSIQ’s higher shipment guidance, albeit at a lower margin range, should only increase the company’s gross profit potential slightly, the news is significant because it shows not everyone in the solar industry is experiencing negative business pressure. Large scale branded module manufacturers with low cost structures have been and apparently are still gaining tremendous market share away from higher cost or fragmented producers.

The broad negative brush stroke Wall Street analysts and often the media have painted on the entire industry may once again be proven incorrect if Canadian Solar’s business outlook is also shared by peers, many of whom are considered higher tier players within the sector.

As noted, CSIQ’s higher shipment guidance for Q2 will unlikely increase its gross profit potential by a large margin. As noted in a prior article, key earnings metrics have changed dramatically since early May that should alter original guidance made by Canadian Solar. It would be extremely unlikely for CSIQ’s Q2 module average selling price (“ASP”) guidance of 1.60-1.65/watt to hold.

Most likely its ASP range will be lowered to around 1.50/watt which is the range given by many peers that have commented after CSIQ’s guidance. As a result, revenue should fall lower than expected although the company’s higher shipment guidance should offset lower ASPs and thus keep revenues relatively inline with original forecasts.

While many industry commentators have noted declining ASPs as a negative, such views are often a half story. Lower module prices should increase demand according to the theory of price elasticity. Many high tier module manufacturers such as CSIQ have continued to reiterate high sequential and annual shipment growth despite many others within the industry suffering severe business compression.

In addition, companies are also lowering prices because costs are also heading lower. While the pricing dynamics should compress CSIQ’s gross margin slightly in Q2, it should also be a trough quarter as the lag period in cost procurement adjusts in the following quarter.

As a result of Canadian Solar’s recent announcement combined with the solar industry’s recent pricing dynamics, I have altered my prior guidance for CSIQ’s second quarter. While the earnings per share (EPS) is fairly constant, many of the earnings components have changed notably reductions in both costs as well as selling prices. In addition, a small net foreign exchange loss was included and based on the exchange rates of key currencies at the end of Q2 assuming the company’s hedging practices did not change from the prior quarter.

CSIQ revised Q2 earnings estimate:

  • Revenues: $442.5m
  • Shipments: 285MW module, 10MW system kits
  • Asps: 1.50/watt module
  • Unit Costs: 50 x 1.20 = $60m, 200 x 1.25 = $250m, 130 x 1.42 = $184.6m
  • Per Watt Unit Cost: $494.6m / 380MW = 1.30/watt
  • Gross Profit: 285MW x .20/watt = $57m module + $1.5m kit = $58.5m
  • Gross Margin: $58.5m / $442.5m = 13.2%
  • Operating Expenses: $30m
  • Net Interest Expense: $8.5m
  • Net Foreign Exchange Loss: $4m
  • Tax: $4m
  • Net Income: $12m
  • Diluted Share Count: 43.7m
  • EPS: 0.28

Disclosure: I am long TSL, LDK.