Canadian Solar: Strong Growth Prospects With A Low Valuation

Summary

• Canadian Solar is a profitable and growing solar energy solutions provider with a low forward price-to-earnings ratio of 7.29.
• The company has strong growth prospects in both solar module manufacturing and utility-scale solar power projects, with a target to increase global market share from 9% to 13-15% in the next 3-5 years.
• Key risks include reliance on government subsidies and competition from other solar companies, but these are considered minimal for Canadian Solar, leading to a buy rating.

Pavel Babic

Introduction

Canadian Solar (NASDAQ:CSIQ) is a profitable and growing company that primarily focuses on the solar market. Over the past 5 years shares are up 118%, with 18% growth in the past year. Despite this growth, it still trades on a forward price-to-earnings ratio of 7.29. Although there are risks, as with all investments, Canadian Solar’s strong growth position and low valuation make this an attractive investment proposition.

Data by YCharts

Company Overview

Canadian Solar was founded in 2001 and is a leading global provider of solar energy solutions, specializing in the design, development, and manufacture of solar photovoltaic modules. In recent years, the company has branched out from purely producing solar modules to also providing battery storage systems and utility-scale solar power plants, with a total installed capacity of 574 MWp and 6 GWp of projects under construction. With a global presence in over 150 countries, the company offers a comprehensive range of solar energy solutions for residential, commercial, and utility-scale applications. Canadian Solar is split into two divisions: CSI Solar and Recurrent Energy (formerly Global Energy).

CSI Solar

CSI Solar is currently the largest division and focuses on the manufacture and sale of solar modules and battery storage solutions. In 2022 the company delivered 21.1 GW of solar modules and 1.79 GW of battery storage solutions for total revenue of $6.97 billion and income from operations of $344 million. For 2023, management sees this rising to 30-35 GW of solar modules and 2 GW of battery solutions, a 55% increase year-on-year. As such management in the latest earnings call guided that revenue would be $9 billion to $9.5 billion in 2023.

The key catalyst driving this growth in solar module sales, is the continuing energy transition, with solar power investment set to overtake oil investment in 2023. This is leading to a significant rise in solar installations:

Canadian Solar Investor Presentation April 2023

To ensure Canadian Solar continues to meet this demand they continue to invest in its manufacturing capability:

Canadian Solar Investor Presentation April 2023

With this investment in capacity and vertical integration, management hopes to better control costs and enhance pricing power to aid gains in market share and profit. As such management has the target to grow global market share from 9% in 2022 to 13-15% in the next 3-5 years.

This medium-term aim is aided by the fact that Canadian Solar has manufacturing plants in multiple countries across the world, enabling it to localize its costs, making it more competitive, and direct manufacturing capacity increases to where they are most needed. The continued vertical integration and focus on cost control should also result in gross margins increasing.

This division also includes battery storage which shipped 1.79 GWh in 2022. The total market for battery storage is set to grow +24% CAGR to 2026 and as such this part of the division is expected to show strong growth but remain small compared to solar module shipments.

Based on current energy transition policies we expect this division of Canadian Solar to show strong growth. Although solar module prices have started falling, this is largely due to a reduction in the price of polysilicon, a key input material, from a peak of 303 RMB/Kg to 152 RMB/Kg, and as such we believe this fall in selling price to not be an issue. In the Q1 2023 earnings call management expected this to improve margins this year:

We believe that module price will go down at a slower pace than the supply chain cost. So, we are confident that over the course of the year, our margin will continue to improve.

Recurrent Energy

Recurrent Energy currently represents only a tiny proportion of Canadian Solar’s revenue. This division is dedicated to the development, construction, and operation of utility-scale solar power projects worldwide. By focusing on large-scale solar installations, Canadian Solar aims to tap into the growing demand for clean energy solutions.

The Global Energy division takes a comprehensive approach to project development, starting from site identification and acquisition. Through rigorous assessments and evaluations, the division identifies suitable locations with optimal solar resources and grid interconnection capabilities. This careful selection process ensures the viability and efficiency of the projects. Financing is then arranged, and the plant is built.

Although this division only represented 10% of revenue in the financial year 2022, revenue is expected to grow rapidly with a strong project pipeline:

Canadian Solar Investor Presentation April 2023

Compared to the solar module manufacturing business, this division had higher gross margins of 36% vs 18.5% in Q1 2023. Canadian Solar operates a hybrid business model that combines the sale of solar projects with the strategic decision to retain certain projects for long-term operation. This approach allows the company to generate long-term predictable cash flows, whilst freeing up capital for further development expenditure

Valuation

Canadian Solar currently trades on a forward price-to-earnings ratio of 7.29. This is much lower than competitors such as First Solar (FSLR) at 27.85 and SunPower (SPWR) at 32.83, but slightly higher than JinkoSolar (JKS) at a forward PE ratio of 5.7.

Given Canadian Solar’s strong growth prospects combined with a solid strategy to increase market share, a price-to-earnings ratio of 7.29 seems too low.

Risks

As with any investment, there are some key company-specific risks:

Currently, the solar module market is largely dependent on government subsidies driving demand. If support is reduced, demand may reduce, leading to a fall in sales and damaging Canadian Solar’s pricing power. I believe this is unlikely to occur given the commitment of governments in Europe and North America to the energy transition from fossil fuels to renewable energy.

Another critical risk is competition. Canadian Solar faces competition from both established solar companies and emerging players in the industry. This competition is constantly trying to gain market share and, given that the solar industry is still undergoing rapid technological advancements, there is a risk new technology developed by competitors render Canadian Solar’s products uncompetitive. As such Canadian Solar should continue to invest in research and development to stay ahead of competitors.

Conclusion

Put simply Canadian Solar is a fast-growing and profitable company. Both divisions show strong growth with strong gross margins. At its low PE ratio of 7.29, the shares appear to be undervalued.

Although there are risks due to Canadian Solar’s reliance on government subsidies, and the competitive landscape, I believe these are minimal for Canadian Solar. As such I initiate coverage with a buy rating.

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

[earnmyturns]

The CSI component was IPOed on the Shanghai stock exchange on Jun 9th. The mother company retained some 60% of the shares. Even so I cannot see why and how existing shareholders were not compensated for this operation. I asked investor relations but they did not answer. Might you know?

[Fantasee_Investor]

Down at $36.00 or so on this press release!
Makes no sense... Buying.
seekingalpha.com/...

[Whognu53]

Any comment on the move onto the Shanghai market and it's effect on the nasdaq market shares?

[solarstorage]

When I read these reports no one makes a forward EPS estimate.
CSIQ EPS estimates keep rising. Probably in 2023 EPS could be $7.00 and in 2024 EPS could be $10. 2025? 10x$10=$100.

[engineeringeddie]

@solarstorage poly and wafer input costs have cratered and the top tier panel prices (TOPCon, HJT topologies) are holding near steady. Margins are getting fat again for downstream premium manufacturers. The more n-type panels a company produces the bigger the windfall is going to be. I expect Jinko’s FWD EPS to be at least double the current estimate. CSIQ should see similar benefits.

[daviry2367]

@engineeringeddie Thank you

[MB4302]

@engineeringeddie
Do you know of anybody who has modeled impact of changes in module price per Watt on overall LCOE of utility-scale solar?

For example, how much each cent/watt change in panel price changes end equation? How many watt/hours per watt are to be expected on average from a panel over its lifetime?

With declining costs across the mfg chain, I would think that the cost superiority of utility scale solar must be getting pretty extreme - without obviously negative impacts on margins, apart from polysilicon mfgs.

[Firebelly]

Informative article, but my question to you @@Mountain Valley Value Investments is what makes you think the market will all of a sudden finally give it its much deserved multiple expansion ? I’ve owned this stock for 4 years, and despite earnings growing substantially, it hasn’t done anything.

Besides the China connection, is there any other reason you can discern as to why this stock trades so cheaply?

[Mountain Valley Value Investments]

@Firebelly, One reason may be its debt load, with a net debt of $3 billion, while competitors such as First Solar are debt free. A large part of this debt has been taken on to expand manufacturing capacity, and as this capacity comes online should generate cash flow to help pay down this debt.

As debt gets paid down and cash flows increase, this should hopefully act as a catalyst to help with multiple expansion.

[MB4302]

@Mountain Valley Value Investments
Net debt in 1Q23 earnings stated as $2.151 bn.

Net debt/EBITDA ratio is below 3.

CAPEX/revenue ratio also holding pretty steady.

Source:
investors.canadiansolar.com/...

Slide 14

[leo212]

@Mountain Valley Value Investments Book value and shareholder equity are going up every quarter. It's not like they're buying legos with their profits.

[Karl Glazier]

The Chinese management gives itself stock based compensation of $10 -20 mill a year, and now that their CSI Solar subsidiary has gone public in China, they give themselves a bonus of $50 mill., all out of shareholder's pockets.

[Timothy J Hayden]

@Karl Glazier add in allegations of ‘slave labour’ in China and tariff dodging and you find there is very little that is ‘Canadian’ about this operation.

[Firebelly]

@Karl Glazier can you link a source to this comment about it coming out of shareholder’s profits and this news in general?

[MB4302]

Excellent points throughout.

However, I would beg to differ regarding dependence on government subsidies.

This fundamentally ignores the transformation of the solar (and wind) industries, due to the cost superiority of UNSUBSIDIZED utility scale solar. There is simply no cheaper option for establishing new utility scale capacity.

The true bottleneck for solar lies in permitting and regulation. Although the US has taken some steps to improve the efficiency of permitting and interconnection, it is still an inefficient system run by a tapestry of utility fifedoms.

Where utility infrastructure is more coordinated at the national and international level (EU, China), the rates of adoption are rising much faster than in the US.

However, subsidies in the US are now more attractive than anywhere else, so there is a natural focus on the US market, even though it comprises only a small fraction of the total global market. Obviously, even though solar is the most attractive option without subsidies, it becomes EVEN MORE attractive with subsidies. Take away the subsidies and solar still has the competitive advantage in terms of cost.

Given the fact that cheap energy equals competitive industry, we will likely see an increasing rush to adopt ahead of others. Especially once the rest of the world realizes just how rapidly China is upscaling its renewable energy capacity and grid infrastructure (HVDC).

In any case, the cheapest energy always wins, and CSIQ has proven to be one of the most adept companies at operating profitably in this capital-intensive manufacturing industry.

Definitely one of my best bets.

GLTA.