Canadian Solar Plunges After Reporting 4th Quarter Earnings

| About: Canadian Solar (CSIQ)
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Summary

The company reported disappointing revenue in 4Q2016, at the lower end of the guidance range.

Earnings results were skewed by a $44.1 million import charge from the U.S. Department of Commerce.

Canadian Solar also reported strong growth in its operating portfolio and a deleveraging of its balance sheet.

Shares of Canadian Solar (NASDAQ:CSIQ) plunged more than 17% this week after announcing 4Q2016 financial results Tuesday that underwhelmed investors' expectations. The company reported net revenue of $668.4 million, compared to $657.3 million in the third quarter of 2016, and fourth quarter 2016 guidance in the range of $600-750 million. Gross margin came in at 7.3%, which was negatively impacted by an anti-dumping and countervailing duties true-up provision of $44.1 million associated with a U.S. Department of Commerce ruling related to 2015 module sales. Excluding this charge, the gross margin was 13.9%, compared to 17.8% in the third quarter of 2016, and fourth quarter guidance in the range of 11.0-16.0%.

As a result of the anti-dumping and countervailing duties charge, Canadian Solar reported a net loss of $13.3 million, or $0.23 per diluted share. The company also announced it has ramped up its production facilities in South Eastern Asia and has not imported solar products from China to the U.S., or used Taiwanese solar cells in its solar products shipped into the U.S. since February 2017. Excluding the anti-dumping and countervailing duties charge of $44.1 million, its net income would have been $14.2 million, or $0.24 per diluted share, in the fourth quarter of 2016 - a slight decrease compared to net income of $15.6 million, or $0.27 per diluted share, in the third quarter of 2016.

The report included some positive signs of growth; however, as the company reported, its portfolio of operating solar power plants totaled 1,195.5 MWp as of February 28, 2017, with an estimated total resale value of approximately $1.6 billion. This represents an increase of approximately 26.1% over the 3Q2016 operating power plant capacity of 948 MWp, with an estimated total resale value of approximately $1.4 billion. Short-term borrowings at the end of 4Q2016 were $1.60 billion, compared to $1.51 billion at the end of the third quarter of 2016. Long-term borrowings at the end of the fourth quarter of 2016 were $493.5 million, compared to $615.8 million at the end of the third quarter of 2016. Combined, total debt decreased by approximately $113.3 million quarter over quarter.

Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked:

"We are actively monetizing our operating solar power plant assets. This includes the recent sale of five operating solar power plants in Canada for over $310 million. In addition, we closed the sales of two operating solar power plants in China in the fourth quarter of 2016 for over $32 million. We are also well underway in the sale process of our operating solar power plants in the U.S. and are targeting closure in the coming months. We plan to continue to execute on our strategy in the downstream energy business of developing solar power projects for sale to end customers, so as to deleverage our balance sheet and redeploy our capital to support the profitable growth of our business."

In the United States, four projects totaling 715 MWp commenced commercial operation in the fourth quarter of 2016. In addition, a new late-stage 92 MWp project acquired during the quarter is in construction and expected to reach commercial operation by the end of 2017. Two other projects are currently under development and expected to reach commercial operation before the end of December 2018.

Meanwhile, Canadian Solar is rapidly increasing its manufacturing capacity to meet demand. The company plans to increase its ingot manufacturing capacity to 1.7 GW by the end of 2017 in order to reduce its module manufacturing costs. Further, its wafer manufacturing capacity is expected to reach 2.0 GW by June 2017 and double to 4.0 GW by the end of 2017, all of which will use diamond wire-saw technology. Diamond wire-saw technology works with Canadian Solar's proprietary black silicon multi-crystalline solar cell technology, which reduces silicon usage and, therefore, manufacturing cost. The company's solar cell manufacturing capacity as of December 31, 2016, was 2.44 GW.

Canadian Solar restored two cell production lines with a total capacity of 240 MW at its Funing cell factory in December 2016. The company expects to restore an additional 480 MW and 720 MW cell capacity at its Funing cell factory in March and June 2017, respectively. Construction of its new 850 MW cell plant in Southeast Asia was completed in February 2017, and production started to ramp up in March 2017.

Despite the recent headwinds from the U.S. Department of Commerce, the company is poised to take advantage of increasing solar demand and effectively counter-dropping solar prices globally through improvement in its manufacturing capacity and efficiency.

Disclosure: I am/we are long CSIQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.