Canadian Solar: Outlook Is Enticing

Summary

• Canadian Solar is a highly profitable company.
• The business has a hidden catalyst, which is the IPO of its smaller segment, CSI Solar.
• Canadian Solar will benefit from substantial tailwinds affecting the sector as a whole.
• Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Learn More »

ArtistGNDphotography/E+ via Getty Images

Investment Thesis

Canadian Solar (NASDAQ:CSIQ) preannounced its preliminary Q4 results last Friday. Admittedly, its Q1 guidance didn't live up to analysts' expectations.

Also, there was no update on its carve-out IPO of the CSI Solar subsidiary.

But is this where the Canadian Solar story ends?

I don't believe that's the case. In fact, I continue to believe that there are two major tailwinds that will propel this company's prospects further, positive regulations and the need for rebuilding our modern grid infrastructure.

To be clear, the story is far from straightforward, but on balance, it's difficult not to be optimistic.

What's Happening Right Now?

Data by YCharts

The graphic above is a reminder that solar companies have not been bad places to hide in the past 3 months. Even without cherry-picking my data, all solar stocks have done just as well or better than S&P500 in the past 3 months. I'm sure you can add to this list two more names, that have done even better.

And indeed, as you know, First Solar (FSLR) has now reported its results and the one underperformer in the group is up at least 4% per market. Hence reinforcing the overall narrative, that there's ample demand for this sector.

Revenue Growth Rates, Tough Comparables Ahead

CSIQ revenue growth rates

The guidance provided on Friday shows that Q1 revenues will be up approximately 40% y/y. Given that when Canadian Solar guided for Q1 it was already two months into the quarter, I believe we can practically bank on this revenue growth rate.

Of course, the next question that investors have to form a view on, is what sort of growth rates will the rest of 2023 have? Particularly starting with the most challenging comparable period, Q2 2023.

But there's more.

Prospects for 2023, Can CSI Solar Gross Margins Improve

Canadian Solar manufactures solar power products, including solar panels and solar power systems for power generation. It has two business units.

CSIQ Q3 segments

Here I've used the figures Canadian Solar's Q3 results, which are now slightly outdated. The reason for using this data is that Canadian Solar hasn't yet published its full Q4 results. These results will come at the end of this month. But I believe that for our purposes these figures work.

The graphic above is a reminder that CSI Solar makes up nearly the totality of its full business. This segment is made up of solar module manufacturing.

Moreover, recall that Canadian Solar is in the process of having a carve-out IPO of CSI Solar. Leaving Canadian Solar only with its energy storage projects.

Simply put, the bull case here is that as Canadian Solar's energy storage solutions continue to take market share, Canadian Solar can grow its scale, and drive improved gross margins profitability. Which, incidentally, is the topic of the next section.

Crucial Aspect Bulls Should Focus On

In last year's Q1, Canadian Solar's gross margins stood at 14.5%. While this time around Canadian Solar guides for approximately 19% at the midpoint. In other words, the guidance for Canadian Solar's upcoming quarter points to approximately 450 basis points of gross profit margin expansion compared with the prior year.

In actuality, recall that Q1 of last year saw a meager $0.14 in EPS. And this time around, the business is presumed to report more than $0.90 of EPS; a massive jump in profitability compared with the same period a year ago.

The Bottom Line

Canadian Solar is rapidly growing and profitable. Also, its valuation makes a lot of sense. By my very rough estimates, the stock is priced at less than 9x EPS.

The one concern that investors should keep in mind is that government-sponsored programs are indirectly boosting demand for solar panels. Hence, if this financial support is scaled back, it would weaken consumer demand, which would hurt Canadian Solar's ability to set prices.

The other aspect to remember is that Canadian Solar does not have a moat. It's in competition with countless companies, all with similar offerings.

But all together, I'm bullish on CSIQ.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Comments

[leo212]

Worth noting that they are opening a US based manufacturing facility. Even though they did not formally announce it, if you look at their job posts, the Mesquite, TX jobs actually just flat out say that they are opening a factory there - The exact wording that they use on the job post is "Canadian Solar is excited to announce that we will begin manufacturing operations at a new facility located in the great State of Texas. This manufacturing facility is over 700,000 square feet and will produce our latest TopCon solar modules to be used around the world."

This will help them to get those coveted US tax credits from the IRA (i.e. you need to produce domestically). They will probably formally announce this during their earnings this tuesdsay.

[rppearson]

@leo212
Thank you for that updated information as I didn’t realize that.

[ilikebiscuits]

@leo212 A US factory would be great, but I could find no reference to it on their website or anywhere else. It seems unlikely they would be hiring for factory jobs at a factory they haven't begun construction of yet. Can you provide a link?

[leo212]

@ilikebiscuits Of course you haven't seen it, because like I said, they haven't formally announced it yet. Just google what I quoted, and you'll find it pretty easily.

[Ryan Parker]

Any ideas why this stock is down almost 20% in a little over a week? The rest of the solar sector is holding up well, as is tech in general.

[i_am_seeker_2]

@Ryan Parker The rest of the solar sector is not holding up well. ENPH is down to 182, JKS is down to 42.8, SPWR is down 12.4, DQ to 45--these are all sharply down from a week ago.

I wish I knew why.

[rppearson]

@i_am_seeker_2 It’s been brutal for most in the solar space. Maybe the SVB blowup & more expensive financing… i’ve been adding to Enphase energy but it’s been a tough market for alternative energy, except ENVX in the lithium ion battery space! Some recent insider buying.

[JOEBOG]

From a Valuation standpoint. I looked at the PEG ratio CSIQ and Enphase, First Solar. CSIQ is well under 1.0 perfect. The other two are thru the roof. This certainly helps with the buy decision and making sure your not over paying.

[rppearson]

@JOEBOG thank you for that important information and you’re right, it does make the decision easier. I’m waiting for a pullback.

[rppearson]

@JOEBOG Where did you find that information on the peg ratios? Thanks.

[Bittern]

CSIQ was at $41 in 2013!

[rppearson]

I learned a lot from your article.
Thank you!

[5ofDiamonds]

Is your investment thesis on this business for LT investors or for Buy-Low-Sell-High traders @Michael Wiggins De Oliveira ?

Thanks.

[Michael Wiggins De Oliveira]

@5ofDiamonds

Aren't those two the same?

Buying low and selling high is what LT investors are trying to do, right?

Or put another way, buying low and selling high is what traders are also trying to do?

[5ofDiamonds]

"Buying low and selling high is what LT investors are trying to do, right?" @Michael Wiggins De Oliveira

Wow. And you write 10 articles every month on SA.

What is the longest have you held a stock?

Thanks.

[MB4302]

Thanks for the write-up Michael.

Some loose thoughts and comments:

- Factual error here:
"Moreover, recall that Canadian Solar is in the process of having a carve-out IPO of CSI Solar. Leaving Canadian Solar only with its energy storage projects."

Canadian Solar (and thereby CSIQ shareholders) will maintain around 60% ownership of CSI Solar, plus the entirety of the Global Energy business. The carve-out is a means of tapping into the capital market of China, where they will likely raise north of $1bn dollars in growth capital in exchange for around 20% of the CSI Solar shares.

- “Admittedly, its Q1 guidance didn't live up to analysts' expectations.”
Q1 is always a relatively slow quarter. Nonetheless, they guided 6GW in sales. More importantly, they maintained full year 2023 guidance of 30-35GW. 30GW represents a 56% increase compared to 2022, and 300% over 2020 deliveries.

The most reliable analysts (e.g. Colin Rusch) are projecting CSIQ 2023 EPS at around $6.

I think that is definitely a low-end projection. I’ve got $8-$12 in my projections.

- “Also, there was no update on its carve-out IPO of the CSI Solar subsidiary.”
The whole point of the preannouncement was obviously so that they could use these figures in the roadshows they're running these days in the run-up to the IPO. All of the necessary approvals from the Shanghai STAR Market have been obtained.

- “And this time around, the business is presumed to report more than $0.90 of EPS”
Actually, they preannounced 4Q22 net profit attributable to CSIQ of $70 million. That’s $1.09 EPS.

Generally though, I don’t understand your fixation on quarterly figures. The industry is notoriously seasonal, and you’ll get much less noise in your data if you work at the annual level. Also, there is a very obvious explanation for the low margins in 2020-2022 – the black swan supply chain event caused shipping to spike 500% (and has now returned to prepandemic levels) and polysilicon to spike 300% (and still remains over 200% above prepandemic levels) – this had a huge impact on margins.

But over the past two quarters, CSIQ has returned to close to 4% net margin, which is where it was prepandemic. There is good reason to believe that CSIQ can sustain a 4-8% net margin.

- “The one concern that investors should keep in mind is that government-sponsored programs are indirectly boosting demand for solar panels. Hence, if this financial support is scaled back, it would weaken consumer demand, which would hurt Canadian Solar's ability to set prices.”

The whole foundation of the bull case for solar investment is that it is now the cheapest form of UNSUBSIDIZED utility scale electricity, i.e. it is no longer dependent on govt subsidies. But the subsidies are a “very nice to have”. Also, the US market is an increasingly marginal part of the overall global market. The drive to establish security of supply, cost certainty and independence from Russia are all political factors accelerating solar adoption, but it is only feasible and taking over because of the cost superiority.

- “The other aspect to remember is that Canadian Solar does not have a moat. It's in competition with countless companies, all with similar offerings.”

The “moat” that the top-5 manufacturers have is their ability to operate on massive scale at thin margins. Over the past 10 years, the top-5 manufacturers have gone from under 50% global market share to over 80%. They are facing less competition, not more. Also, for the large scale utility scale customers, “bankability” is an absolutely essential factor – and there are few companies with the level of bankability that CSIQ can offer. (for more, see: www.pv-tech.org/...

I’ve already written at length (and then some!) about CSIQ, so I’ll stop here. For more, see my comments here on SA, or my Twitter profile: twitter.com/...

[rppearson]

@MB4302 oh wow, thank you for your detailed contribution to this conversation. I assume that you’re an owner of Canadian solar? In any event, I appreciate your input. Best wishes.

[i_am_seeker_2]

@MB4302 Your link has CSIQ sixth, outside the top five. Longi, JKS, Trina, JASolar, and FSLR are the top five. At least in terms of "bankability". And the file is from Feb 2022, so it is a little old. That is, it is quite interesting, thank you for linking it.

[i_am_seeker_2]

@MB4302 Also--this is an interesting article linked in this issue--I thought silicon wafer prices were supposed to fall, not rise.

LONGi Green Energy announced the latest silicon wafer prices on 3 March, with p-type M10 150μm mono wafers (182/247mm) quoted at RMB6.5 (US$0.93) per piece, an increase of 4% from the previous quote, while quotes for p-type M6 150μm mono wafers (166/223mm) were up 3.9% to RMB5.61 (US$0.81) per piece.

continues www.pv-tech.org/...

[Greg2623]

ISUN also preannounced with revenue expected to be up around 65% year over year.

[grcinak]

Seriously? Neither the headline or the bottom line in the article detail the bull case for investment in this company.

[Michael Wiggins De Oliveira]

@grcinak

There's nuance to it

It's more than just headlines.

[MaxGould]

@Michael Wiggins De Oliveira DAMN YOU, NUANCE! I like my investment theses like my penguins - short, black and white ;)
I for one appreciate that investment decisions, like baby penguins, are often shades of grey. Keep the nuance coming!

[Michael Wiggins De Oliveira]

@MaxGould

Awesome 🙏